Mayer Brown has published a new edition of Licensing Link, a periodic publication that will keep you informed on hot topics and new developments in state licensing laws, and provide practice tips and primers on important issues related to state licensing across the spectrum of asset classes and financial services activities.

In this issue, we discuss the application of state licensing laws and recent licensing developments related to other innovative non-recourse financial products: income share agreements (“ISAs”) and home equity option agreements, and provide an update on work-from-home regulations issued by the Oregon Department of Financial Regulation. Check it out and subscribe to receive future issues directly.

On September 8, 2023, a federal court struck down the Consumer Financial Protection Bureau’s (CFPB) attempts to supervise institutions for so-called “unfairness discrimination.” The CFPB had previously announced the view that the statutory prohibition on unfairness encompasses a broad-based prohibition on discrimination in an update to its examination manual in March 2022, eliciting substantial objections and pushback from the financial services industry. Importantly, in addition to declaring the CFPB’s interpretation to be beyond the CFPB’s statutory authority, the court also enjoined the CFPB from “any examination, supervision, or enforcement action … based on the [CFPB’s] interpretation of its UDAAP authority announced in the March 2022 update to its Supervision and Examination Manual” with respect to any member of the plaintiff organizations in the case. If upheld on appeal, the ruling would be a significant blow to the CFPB’s efforts to enforce anti-discrimination principles based on the statutory prohibition on unfairness.

As we have previously discussed, in March 2022, the CFPB updated the UDAAP section of its examination manual to include a review for discriminatory conduct in all aspects of the offering or provision of consumer financial products or services, regardless of whether a company extends any credit or would otherwise be subject to the Equal Credit Opportunity Act (ECOA), including activities such as advertising, pricing, servicing, collections, consumer reporting, payments, remittances, deposits and algorithms. The CFPB’s announcement also suggested that the CFPB may be expecting supervised entities to perform testing to identify and correct unfair discrimination outside of the credit context. Specifically, the CFPB stated that it will “require supervised companies to show their processes for assessing risks and discriminatory outcomes” and that the CFPB will review “how companies test and monitor their decision-making processes for unfair discrimination.”

Several industry trade associations sued the CFPB, alleging, among other things, that the CFPB’s interpretation of “unfairness” to encompass discrimination untethered from any legislatively identified protected classes or activities stretched the notion of unfairness too far. In its ruling, the district court agreed. The court first held that the “major questions” doctrine applies because the question of whether unfairness encompasses discrimination “is a question of major economic and political significance” given the impact it would have on the financial services industry. The court went on: “Given that context, the CFPB faces a high burden in arguing that Congress conferred a sweeping antidiscrimination authority without defining protected classes or defenses, without using the words ‘discrimination’ or ‘disparate impact,’ and while separately giving the agency authority to police ‘discrimination’ only in specific areas.” Although noting that the CFPB’s interpretation “has a certain appeal given the facial breadth of [the statutory] language” defining unfairness, the court ultimately determined that that the “text and structure of the Act … make its definition of ‘unfairness’ at least vague as to the topic of discrimination” and thus “is not the sort of ‘exceedingly clear language’ that the major-questions doctrine demands.” (The court separately ruled against the CFPB based on its funding structure, an issue that the Supreme Court will be ruling upon this term. Unless it is overturned on appeal, the substantive ruling about the CFPB’s statutory authority will survive even if the Supreme Court upholds the CFPB’s structure.)            

As a remedy, the court not only vacated the update to the examination manual but went further and enjoined the CFPB from pursuing any examination, supervision or enforcement action against any member of any of the plaintiff organizations. (The plaintiffs in the case are: the U.S. Chamber of Commerce, the Longview Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, the Independent Bankers Association of Texas, the Texas Association of Business, and the Texas Bankers Association). Any institution that is a member of these organizations need only inform the CFPB of that membership to trigger the protections of the injunction. We expect that additional trade associations may seek to intervene in the case to obtain the benefits of the injunction for their members, which is what has happened in the separate lawsuit challenging the CFPB’s small business data collection rule. Any company that is the subject of a UDAAP examination (or enforcement investigation) in which the CFPB seems to be exploring possible claims of UDAAP discrimination should consider whether it wishes to take steps to avail itself of the protections of the injunction. The CFPB is likely to appeal this decision and we will continue to monitor this case.

Transactions involving the purchase and sale of residential mortgage loans and mortgage servicing rights (“MSRs”) frequently raise the question of whether they require submitting premerger notification filings to the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino (“HSR”) Act. This Legal Update provides an overview of how residential mortgage loans, MSRs and related assets are treated for HSR purposes in the context of asset or servicing platform sales and equity transactions pertaining to entities that hold mortgage loans or MSRs, including residential mortgage servicers.

While residential mortgage lenders are facing tough headwinds driven by rising interest rates and low housing volume, the current market presents opportunities for savvy investors looking at mortgage servicing rights (“MSRs”). The current mortgage market is supported by non-bank mortgage originators and servicers who lack the same access to capital and liquidity as traditional banks. To continue growing, non-bank entities have had to be creative with respect to capital sources.

Non-bank owners of MSRs are seeking asset-specific alternative private capital vehicles to fund MSR portfolios. However, unlike whole mortgage loans, MSRs cannot be easily created and sold to investors. Fortunately, through creative thinking and structuring, investors are able to use non-bank, non-servicer, alternative capital sources to participate in the economics of MSRs. This article provides an overview of the phases and areas of consideration related to private capital vehicles that offer investment opportunities in MSRs.

It has been more than five years since the Consumer Financial Protection Bureau (“CFPB”) has issued a consent order based on alleged violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”).  On August 17, 2023, the CFPB announced a consent order with a non-bank mortgage lender and a consent order with a real estate brokerage company—totaling nearly $2 million in combined penalties—based on allegations that the mortgage company provided things of value and the real estate brokerage company received things of value in violation of Section 8 of RESPA.  Perhaps it should come as no surprise that the activities at issue in the consent orders are promotional events and marketing services agreements, two arrangements about which the CFPB provided guidance in its Frequently Asked Questions in October 2020. 

Continue Reading RESPA Enforcement is Back! The CFPB Takes Aim at Marketing and Promotional Activities

Mayer Brown has published a new edition of Licensing Link, a periodic publication that will keep you informed on hot topics and new developments in state licensing laws, and provide practice tips and primers on important issues related to state licensing across the spectrum of asset classes and financial services activities.

In this issue, we discuss the first-of-their-kind earned wage access provider registration and licensing laws that Missouri and Nevada recently enacted, and discuss Maine’s move to transition its licenses for debt collectors and money transmitters to the Nationwide Multistate Licensing System (“NMLS”) later this year.  Check it out and subscribe to receive future issues directly.

Following closely on the heels of a Georgia law enacted in May, Connecticut and Florida have become the latest states to enact laws requiring providers of small business financing to provide disclosures to recipients—and in Connecticut’s case, to require certain commercial finance providers to register with the state. We examine the unique and interesting provisions in these laws, and what the new laws might signal for the regulatory landscape in coming years, in Mayer Brown’s Legal Update.

In the CFPB’s new Supervisory Highlights, the agency concludes that paying individual mortgage loan originators differently for loan products that are brokered out to another lender, as compared to loans that are originated in-house, is a violation of Regulation Z’s Loan Originator Compensation Rule.

The CFPB’s Highlights describe a lender that makes certain mortgage loan products (like cash-out refinancing loans), but does not make others (like reverse mortgages). If a consumer wants a reverse mortgage loan, the lender would broker that loan to another lender, and the loan originator would receive a different level of compensation for that work. The CFPB has stated previously that compensating loan originators differently for different mortgage products is prohibited, because a mortgage product is a bundle of loan terms. The CFPB relies on that reasoning here and concludes that paying a loan originator differently for brokered-out versus in-house loan products is prohibited.

The CFPB does not explain why that compensation factor – brokered-out versus originated in-house – is per se prohibited as loan term-based compensation, and not subject to the Rule’s next-level proxy analysis. Under the Rule, a compensation factor that is not based on loan terms is nonetheless prohibited if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction. An example in the Rule’s Commentary is a creditor that pays differently for transactions that will be held in portfolio than for transactions to be sold into the secondary market. In the example, the creditor holds fixed-rate, 5-year balloon loans in portfolio, and sells all other products (including 30-year fixed-rate loans). The Commentary explains that since there is a correlation with loan terms, and the loan originator has the ability to advise the consumer to choose a 5-year balloon loan versus a 30-year loan, the compensation is based on a proxy for loan terms and is prohibited.

By contrast, the CFPB now treats a distinction for brokered-out loans as prohibited loan term-based compensation in the first instance, and as such does not allow a consideration of whether the loan originator can influence the consumer’s choice. One can imagine, for example, circumstances in which a consumer simply does not want or does not qualify for a loan offered in-house, and the loan originator’s only option is to broker out the loan (or to simply send the consumer away). According to the CFPB’s Highlights, that fact would be irrelevant to the analysis.

The Supervisory Highlights also do not address the fact that many reverse mortgage loans are open-end credit, and as such are not subject to the Loan Originator Compensation Rule. Accordingly, it is unclear from the Highlights how the CFPB analyzes a lender’s decision to pay differently on brokered-out open-end loans.

The CFPB notes that in response to its findings, the lenders have revised their loan originator compensation plans to comply with Regulation Z. It is clear, then, that although the CFPB has not brought a public enforcement action under the Loan Originator Compensation Rule in quite a while, its supervisory staff is not dormant on the issue.

On June 28, 2023, the New York Department of Financial Services (“NYDFS”) published updated proposed amendments to its cybersecurity regulation (the “2023 Proposal”) applicable to “covered entities.” These updated amendments come after comments from industry groups and other stakeholders to the NYDFS’s proposed revisions that were published on November 9, 2022. In Mayer Brown’s Legal Update, we provide a section-by-section analysis of new requirements in the 2023 Proposal, which is extensive and would significantly expand requirements for covered entities. 

NYDFS Expands Cybersecurity Requirements for Licensed Financial Services Companies | Perspectives & Events | Mayer Brown

Last Thursday, the CFPB announced in a blog post that it is considering revising its mortgage servicing rules.  This development follows a request for information from the CFPB last fall seeking public input on, among other things, streamlined loss mitigation options.  The CFPB’s current mortgage servicing rules were promulgated in the wake of the foreclosure crisis and took effect in 2014.  Among other things, the rules create a framework for default servicing under which servicers must evaluate loss mitigation applications according to a prescribed process with deadlines and notice requirements.  The COVID-19 pandemic put this loss mitigation framework to the test as the number of borrowers who had trouble paying their mortgages skyrocketed.

Continue Reading CFPB Announces Plans to Streamline Mortgage Servicing Rules