Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens To Upset Secondary Credit Markets

Two months ago we issued a Special Alert regarding the decision of the Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. We explained that the Second Circuit’s reasoning in Madden ignored long-standing precedent upholding an assignee’s right to charge and collect interest in accordance with an assigned credit contract that was valid when made. And, because the entire secondary market for credit relies on this Valid-When-Made Doctrine to enforce credit agreements pursuant to their terms, the decision potentially carries far-reaching ramifications for securitization vehicles, hedge funds, other purchasers of whole loans, including those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to marketplace lending industries and various types of on-line consumer credit.

After the decision, Midland Funding, the assignee of the loan at issue, petitioned the Second Circuit to rehear the case either by the panel or en banc – a petition that was broadly supported by banking and securities industry trade associations in amicus briefs.  On August 12, the court denied that petition.

Click Here to View the Full Special Alert

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

 

 

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Special Alert: CFPB Reports On The Findings From Its “Know Before You Owe” eClosing Pilot Project

In 2014, the Consumer Financial Protection Bureau (“CFPB”) initiated an eClosing pilot program. The eClosing pilot was intended to assist the CFPB in evaluating the use of electronic records and signatures in the residential mortgage closing process. The pilot program has now been completed and on August 5, 2015 the Consumer Financial Protection Bureau (“CFPB”) released a report detailing its findings (“Report”). In the Report, the CFPB indicates that eClosings present a significant opportunity to enhance the closing process for both consumers and the mortgage industry.

The pilot program focused on the mortgage closing process and measured borrowers’ (i) understanding (both perceived and actual) of the process, (ii) perception of efficiency, and (iii) feelings of empowerment. The program also sought to quantify objective measures of process efficiency. The program was conducted over four months in 2014 with seven lenders, four technology companies, settlement agents, and real estate professionals. About 3000 borrowers participated in the study – roughly 1200 completed the CFPB’s survey.

The CFPB sought to determine if an electronic closing process improved the borrowers’ (i) understanding of the transaction, (ii) perception of efficiency, and (iii) feeling of empowerment. These three criteria were measured in multiple ways. To gauge understanding, the borrower was asked about their perceived understanding of the terms and fees, costs, and their rights and responsibilities. To determine the borrower’s actual understanding of their mortgage, they were given an eight question quiz. Five questions were about mortgages generally and three about their mortgage, specifically. To evaluate the efficiency of the transaction, the CFPB measured the difference between eClosings and paper closings in terms of delays, errors in documents, and the time required between steps in the process. Borrowers were also asked about their perceptions concerning efficiency. Finally, in order to gauge the borrower’s feeling of empowerment, the CFPB asked about the borrower’s feelings of control, his or her role, and the role(s) of others in the process. Read more…

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Special Alert: CFPB Officially Delays TRID Rule Until October 3

The CFPB finalized a rule today that delays the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. This is consistent with the proposed rule issued last month, which we wrote about here.

The CFPB considered implementing a “dual compliance period” that would have permitted creditors to voluntarily comply with the TRID rule early, but it ultimately declined to do so, citing concerns that “dual compliance could be confusing to consumers and complicated for industry, including vendors, the secondary market, and institutions who act both as correspondent lenders and originators.”

In addition, although the CFPB declined to create a “hold harmless” or “safe harbor” period following the effective date, it stated that it “continues to believe that the approach expressed in Director Cordray’s letter to members of Congress on June 3, 2015,” which we wrote about here, remains fitting:

[O]ur oversight of the implementation of the Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time. My statement . . . is consistent with the approach we took to implementation of the Title XIV mortgage rules in the early months after the effective dates in January 2014, which has worked out well. Read more…

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POSTED IN: Mortgages, Special Alerts

Special Alert: CFPB Launches First Monthly Complaint Report Providing Snapshot of Consumer Trends

On July 16, 2015, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) launched the first in a new series of monthly complaint reports highlighting key trends from consumer complaints submitted to the CFPB. Importantly, its monthly report provides significant detail on the complaints the CFPB has received, including the names of the companies that received the largest number of complaints.

Currently, the most-complained-about companies are also the largest bank and nonbank financial institutions in the country. Since these institutions have the highest numbers of customers, it is only natural that they have received the highest number of complaints. On the same day as the monthly report’s release, CFPB Director Richard Cordray provided remarks at an Americans for Financial Reform event in Washington, D.C. Director Cordray noted that in future monthly reports, the CFPB hopes to “normalize” its consumer complaint data by accounting for financial institutions’ respective size and volume. To that end, the CFPB issued a Request for Information seeking input on ways to enable the public to more easily understand company-level complaint information and make comparisons. The comment period closes August 31, 2015. Read more…

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Special Alert: Disparate Impact Under the Equal Credit Opportunity Act After Inclusive Communities

On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.

Applicability to ECOA

When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA. Read more…

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Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims

Today, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”

The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . .” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.” Read more…

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Special Alert: CFPB Issues Proposal to Delay TRID Rule Until October 3

The CFPB issued a proposed rule today to delay the effective date of the TILA-RESPA Integrated Disclosure (“TRID”) rule, including all amendments, from August 1 to October 3, 2015. The proposed delayed effective date is two days later than the date announced last week so that the effective date falls on a Saturday. The CFPB chose Saturday because it “may allow for smoother implementation by affording industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the Saturday August 1 effective date.”

The proposed rule explains that, due to “an administrative error on the Bureau’s part in complying with the [Congressional Review Act]…, the [TRID] Rule cannot take effect until at the earliest August 15, 2015.” Because “some delay in the effective date is now required, the Bureau believes that a brief additional delay may benefit both consumers and industry more than would allowing the new rules to take effect on [August 15].” The Bureau stated that the additional delay is being proposed to avoid challenges associated with a mid-month effective date and to allow more time to implement the rule in light of recent information the CFPB received that “delays in the delivery of system updates have left creditors and others with limited time to fully test all of their systems and system components to ensure that each system works with the others in an effective manner.”

The proposed rule does not include any substantive changes to the TRID rule, other than changes to reflect the new proposed effective date. Despite requests by many in industry, the Bureau did not propose to allow lenders to begin complying with the rule before the effective date.

Comments must be received on or before July 7, 2015.

For additional information and resources on the TRID rule, please visit our TRID Resource Center.

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: CFPB Will Propose to Delay TRID Rule Until October 1

Two weeks after declining requests from industry and members of Congress for delayed enforcement of the TILA-RESPA Integrated Disclosure (“TRID”) rule, the CFPB announced today that it will be issuing a proposed amendment to delay the rule’s effective date from August 1 to October 1, 2015.  CFPB Director Richard Cordray stated:

We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time.

The announcement further stated that “[t]he public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter.”

For additional information and resources on the TRID rule, please visit our TRID Resource Center.

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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POSTED IN: Consumer Finance, Special Alerts

Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets

The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims.  In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party.  If left undisturbed, the Court’s decision may well have broad and alarming ramifications.  The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.

Click here to view the full special alert.

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: CFPB Finalizes Rule To Oversee Nonbank Auto Lenders

On June 10, the CFPB issued its final rule to oversee “larger participant” nonbank auto finance companies.  Although the CFPB received significant feedback during the comment period, the final rule is nearly identical to that proposed in September 2014.  Under the final rule, the CFPB will have supervisory authority over nonbank auto finance companies with at least 10,000 aggregate annual originations.  These originations include making, purchasing, acquiring, or refinancing extensions of credit for the purchase or lease of an automobile.  The CFPB estimates this threshold will bring about 34 entities and their affiliates under its supervisory authority, which represents roughly seven percent of all nonbank auto finance companies, and approximately 91% of the nonbank automobile financing market.  In addition to the final rule, the CFPB also published updated automobile finance examination procedures to include industry specific guidance for covered persons.

The rule will take effect 60 days after publication in the Federal Register.  Although the CFPB has not determined when and in what order examinations will begin, some industry insiders have predicted they could start in late 2015. Read more…

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Special Alert: CFPB Consent Order Applies Loan Originator Compensation Rule to Marketing Services Agreements

On June 5, the CFPB announced a consent order against Guarantee Mortgage Corporation, resolving allegations that the company paid loan originators based on the terms of their mortgage loans in violation of the Loan Originator Compensation Rule (the “LO Comp Rule”).  Since inheriting responsibility for the LO Comp Rule in 2011, the CFPB has devoted substantial resources to revising the rule and enforcing its provisions.  During that same period, the CFPB brought several actions enforcing the prohibition on referral fees in the Real Estate Settlement Procedures Act (“RESPA”), including an action against Lighthouse Title, Inc. that created considerable uncertainty about the Bureau’s view of marketing services agreements (“MSAs”).

Click here to view the full Special Alert. 

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: CFPB Issues Statement on TRID Enforcement

On June 3, CFPB Director Cordray responded to requests from industry and members of Congress for delayed enforcement of the Bureau’s TILA-RESPA Integrated Disclosure (“TRID”) rule, which will take effect for applications received on or after August 1, 2015. The Bureau did not, as many had hoped, delay the effective date or establish a “hold harmless” period during which the rule would be in effect but public and private enforcement would be limited.

Instead, Director Cordray stated that he had spoken with other regulators “to clarify that [the Bureau’s] oversight of the implementation of the [TRID] Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time.” As noted in Director Cordray’s letter and a related CFPB blog post, this is consistent with the approach applied by the Bureau in early 2014 after the Ability-to-Repay/Qualified Mortgage Rule, Mortgage Servicing Rules, revised Loan Originator Compensation Rule, and other regulations implementing Title XIV of the Dodd-Frank Act took effect. Director Cordray noted that, in the Bureau’s view, this approach “has worked out well.” The Bureau stated in its Winter 2015 Supervisory Highlights that “[m]ost of the Title XIV rules took effect in January 2014 and the CFPB commenced supervisory examinations for compliance four months after the effective date.”

The Bureau’s statements, while helpful in understanding its general approach to supervision and enforcement under the TRID rule, do not provide guidance on what constitutes “good-faith efforts to come into compliance.” Instead, as with the Title XIV rules, this will be determined by the Bureau on a case-by-case basis. Furthermore, the “good-faith efforts” standard will not apply in actions brought by borrowers to enforce the provisions of the TRID rule that carry a private right of action.

Click here to view the full Special Alert.

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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: CFPB Releases Outline of Proposed Rule for Payday, Vehicle Title, and Similar Loans

On March 26, the CFPB announced that it is considering proposing a rule to “end payday debt traps” and released several related documents, including a fact sheet and an outline of the proposal that will be presented to a panel of small businesses pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA).  The proposal sets forth ability to repay requirements for “short-term” and “longer-term” loans, and then provides alternative options for lenders to provide both types of loans in lieu of complying with the general ability to repay requirements.

Under the SBREFA process, the CFPB first seeks input from a panel of small businesses that likely will be subject to the forthcoming rule.  A report regarding the input of those reviewers is then created and considered by the CFPB before issuing its proposed rule.

Click here to view the full Special Alert. 

Questions regarding the matters discussed in this Alert may be directed to the lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert: USDA-RHS Proposes Its Own QM Rule

On March 5, 2015, the USDA-RHS released a proposed rule to amend the regulations for the Single Family Housing Guaranteed Loan Program (SFHGLP) to provide that a loan guaranteed by USDA-RHS is a QM if it meets certain requirements set forth by the CFPB. In addition, USDA-RHS proposed to add the definition of “Qualified Mortgage” to its regulations. The proposal follows the adoption of separate QM definitions for FHA and VA loans last year.

The proposed rule also seeks to: (i) expand USDA-RHS’ lender indemnification authority for loss claims in certain instances, such as fraud , misrepresentation, and noncompliance with loan origination requirements, (ii) add a new special loan servicing option, (iii) revise the interest rate reduction requirement for refinances, and (iv) add a streamlined-assist refinance option. Comments to the proposed rule must be received on or before May 4, 2015.

Questions regarding the proposed rule may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Special Alert Update: OCC Revises Guidance Regarding Consumer Protection Requirements to Overdraft Lines and Protection Services

On March 6, 2015, the OCC issued its revised “Deposit-Related Credit” booklet (“DRC booklet”) of the Comptroller’s Handbook, which replaced the “Deposit-Related Consumer Credit” booklet issued on February 11, 2015 (previously covered in this Special Alert).  While the new booklet covers the same products – check credit (overdraft lines of credit, cash reserves, and special drafts), overdraft protection services, and deposit advances – the OCC made significant amendments to scale back the provisions of the prior version.  Specifically, the new DRC booklet no longer contains supervisory principles that could be read to require that banks provide substantive consumer protections that are not currently required by the applicable consumer protection regulations.   For example, the DRC booklet no longer requires that banks:

  • only enroll customers into an overdraft protection service if they have affirmatively requested that product;
  • ensure the ability to repay for all applicants enrolled in an overdraft protection service; and
  • ensure that any fees charged in connection with an overdraft protection service are reasonably related to the program’s costs and associated risks.

In making these changes, the OCC requires supervisors to assess DRC products more in line with existing consumer protection laws.  The OCC states as much in OCC Bulletin 2015-17, which announced the DRC booklet.  There, the OCC acknowledges that the DRC booklet “is intended as a summary restatement of existing laws, regulations, and policies [and] … [n]othing in this booklet should be interpreted as changing existing OCC policy.”

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