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CFPB publishes final rule adjusting annual dollar amount thresholds under TILA regulations
On August 27, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), including as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank ability-to-repay and qualified mortgage provisions (ATR/QM). The CFPB is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2018. The following thresholds will be effective on January 1, 2019:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will increase from $27 to $28, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase from $38 to $39;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $21,549, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,077; and
- The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) 3 percent of the total loan amount for loans greater than or equal to $107,747; (ii) $3,232 for loan amounts greater than or equal to $64,648 but less than $107,747; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,549 but less than $64,648; (iv) $1,077 for loan amounts greater than or equal to $13,468 but less than $21,549; and (v) 8 percent of the total loan amount for loan amounts less than $13,468.
Conference of State Bank Supervisors announces single, national exam for mortgage loan originator licensing
On August 8, the Conference of State Bank Supervisors announced that all states and U.S. territories now use a single, common exam to assess mortgage loan originators (MLOs) in order to simplify the licensing process and streamline the mortgage industry. MLSs who pass the National SAFE MLO Test with Uniform State Content (National Test) will no longer be required to take additional state-specific tests in order to be licensed within any state or U.S. territory. The National Test is part of CSBS’ Vision 2020, which is geared towards streamlining the state regulatory system to support business innovation and harmonize licensing and supervisory practices, while still protecting the rights of consumers.
Find continuing InfoBytes coverage on CSBS’ Vision 2020 here.
FHFA reports results of Fannie Mae, Freddie Mac annual stress tests
On August 7, the Federal Housing Finance Agency (FHFA) published a report providing the results of the fifth annual stress tests conducted by government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs). According to the report, Dodd-Frank Act Stress Tests Results – Severely Adverse Scenario—which provides modeled projections on possible ranges of future financial results and does not define the entirety of possible outcomes—the GSEs will need to draw between $42.1 billion and $77.6 billion in incremental Treasury aid under a “severely adverse” economic crisis, depending on how deferred tax assets are treated. The losses would leave $176.5 billion to $212 billion available to the companies under their current funding commitment agreements. Notably, the projected bailout maximum is lower this year than FHFA reported last year, which ranged between $34.8 billion and $99.6 billion.
FTC announces charges against auto dealerships for falsifying consumer information on auto financing documents
On August 1, the FTC announced charges against a group of four auto dealers (defendants) with locations in Arizona and New Mexico near the Navajo Nation’s border alleging, among other things, that the defendants advertised misleading discounts and incentives through their vehicle advertisements, and falsely inflated consumers’ income and down payment information on certain financing applications. The charges brought against the defendants allege violations of the FTC Act, the Truth in Lending Act, and the Consumer Leasing Act. According to the complaint, by allegedly falsifying the customers’ income and down payments, the defendants “inaccurately made consumers appear more creditworthy” on the false financing applications. Moreover, the FTC claims the defendants often prevented consumers from reviewing the falsified information provide in the financing applications prior to signing. As a result, credit was extended to consumers—many of whom are members of the Navajo Nation—who then subsequently “defaulted at a higher rate than properly qualified buyers.” Furthermore, the complaint asserts that the defendants’ deceptive advertising practices concealed the true nature and terms of the financing or leasing offers, and were in violation of federal law for failing to disclose the required terms. The complaint seeks, among other remedies, a permanent injunction to prevent future violations, restitution, and disgorgement.
Department of Education issues notice of proposed rulemaking to provide borrower defense provisions
On July 25, the U.S. Department of Education (Department) issued a press release announcing a notice of proposed rulemaking that would apply to students who qualify for loan discharges in circumstances where a borrower was significantly misled or defrauded by the higher education institution they attended. Provisions under the proposed Institutional Accountability regulations include:
- instituting a “borrower defense to repayment adjudication process that is clear, consistent and fair to borrowers who were harmed by institutional misconduct”;
- replacing the existing state standard for adjudicating claims with a federal standard to provide a more expeditious review of student claims;
- encouraging students to seek remedies directly from institutions when misrepresentation has occurred;
- expanding the “closed school loan discharge” eligibility time period to 180 days from 120 days for students who have left an institution prior to its closure;
- ensuring that any mandatory arbitration requirements or class action lawsuits restrictions are explained in plain language to enable students to make informed enrollment decisions; and
- preventing guaranty agencies from charging borrowers a fee on defaulted loans if the loan goes into repayment within 60 days.
The Department also seeks public comment on whether borrower defense to repayment claims should be limited only to students in default instead of also allowing students to apply for forgiveness who remain in good financial standing. Additionally, the Department seeks comments on whether students should be held to a higher standard through the showing of “clear and convincing” evidence, rather than the lower legal “preponderance of the evidence” standard. The new plan would affect students who take out loans beginning July 1, 2019. Comments on the proposal are due 30 days after publication in the Federal Register.
NYDFS recommends online lenders be subject to state licensure and usury limits in new report
On July 11, the New York Department of Financial Services (NYDFS or the Department) released a study of online lending in New York, as required by AB 8938. (Previously covered by InfoBytes here.) In addition to reporting the results of its survey of institutions believed to be engaging in online lending activities in New York, NYDFS makes a series of recommendations that would expand the application of New York usury and other statutes and regulations to online loans made to New York residents, including loans made through partnerships between online lender and banks where, in the Department’s view, the online lender is the “true lender.”
In particular, NYDFS recommends, “[a]ll New York lenders should operate under the same set of rules and be subject to consistent enforcement of those rules to achieve a level playing field for all market participants….” Elsewhere in the report, the Department states that it “disagrees with [the] position” that online lenders are exempt from New York law if they partner with a federally-chartered or FDIC-insured bank that extends credit to New York residents. NYDFS criticizes these arrangements, stating its view that “the online lender is, in many cases, the true lender” because the online lender is “typically … the entity that is engaged in marketing, solicitation, and processing of applications, and dealing with the applicants” and may also purchase, resell, and/or service the loan.
NYDFS also noted that it opposed pending federal legislation that would reverse the Second Circuit’s decision in Madden v. Midland Funding, LLC, which held that federal preemption of New York’s usury laws ceased to apply when a loan was transferred from a national bank to a non-bank. The Department expressed concern that, if passed, the bill “could result in ‘rent-a-bank charter’ arrangements between banks and online lender that are designed to circumvent state licensing and usury laws.”
Noting that many online lenders remain unlicensed in New York, the Department states that “[d]irect supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery….” To this end, NYDFS recommended lowering the interest rate threshold for licensure from 16 percent to 7 percent.
Although NYDFS stressed that its survey results may be unreliable due to uneven response rates, it reported that, for respondents, the average median APR for online loans to businesses was 25.9%, the average median APR for online loans to individuals for personal use was 14.8%, and the average median APR for the underbanked customers was 19.6% (New York currently caps interest for civil liability at 16% and at 25% for criminal liability).
Overall, the report appears to forecast a more difficult regulatory and enforcement environment in New York for online lenders, as has been the case in West Virginia and Colorado.
Florida Supreme Court: Lender may file second suit for deficiency claim provided foreclosure court has not adjudicated the claim
On July 5, the Florida Supreme Court held that Section 702.06, Florida Statutes (2014), allows a lender pursuing a deficiency claim in a foreclosure action in one court to bring a separate action against the homeowner in another court provided the foreclosure court that has reserved jurisdiction has not yet adjudicated the deficiency claim. Section 702.06 provides in part that, “In all suits for the foreclosure of mortgages . . . . [t]he complainant shall also have the right to sue at common law to recover for such deficiency, unless the court in the foreclosure action has granted or denied a claim for a deficiency judgment.” At issue was a residential property that was foreclosed by final judgment. In the judgment, the foreclosure court expressly reserved jurisdiction to rule on any future deficiency claim, although no one tried to adjudicate the claim in that forum. The mortgage loan purchaser filed a separate action against the homeowner in a different court and obtained a deficiency judgment. On appeal from that action, the First District Court of Appeal disagreed with several other Florida appellate courts and concluded that the trial court lacked subject-matter jurisdiction because the original foreclosure court had previously reserved jurisdiction. The high court unanimously disagreed, holding that a “reservation of jurisdiction is not a grant or denial of the claim. The foreclosure court would have only ‘granted or denied’ the deficiency judgment if it had adjudicated the claim. Therefore, [§ 702.06, Fla. Stat.] plainly precludes the separate action only where the foreclosure court has actually ruled on the claim—as held by the Second, Third, Fourth and Fifth District Courts of Appeal.” In issuing its ruling, the high court quashed the decision of the First District Court of Appeal and approved the certified conflict decisions of the four other appellate courts.
CFPB announces settlement with national bank to resolve alleged TILA violations
On June 29, the CFPB announced a $335 million settlement with a national bank who allegedly violated the Truth in Lending Act by failing to properly implement annual percentage rate (APR) reevaluation requirements, which would reduce APRs for certain consumer credit card accounts, consistent with Regulation Z. According to the consent order, the Bureau also claimed the bank failed to put in place reasonable written policies and procedures to conduct the APR reevaluations. Under the terms of the consent order, the bank is required to pay $335 million in restitution to affected consumers and implement corrected policies and procedures to ensure proper APR reevaluation processes. The Bureau further noted that it did not assess civil monetary penalties due to efforts undertaken by the bank to self-identify and self-report violations to the Bureau. The bank also voluntarily corrected the deficiencies, took steps to initiate remediation to affected consumers, and implemented compliance management system enhancements.
Court allows certain City of Oakland claims to proceed against national bank
On June 15, the U.S. District Court for the Northern District of California granted in part and denied in part a national bank’s motion to dismiss an action brought by the City of Oakland, alleging violations of the Fair Housing Act (FHA) and California Fair Employment and Housing Act. In its September 2015 complaint, Oakland alleged that the bank violated the FHA and the California Fair Employment and Housing Act by providing minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, leading to disproportionate defaults and foreclosures causing reduced property tax revenue for the city. After the 2017 Supreme Court decision in Bank of America v. City of Miami (previously covered by a Buckley Sandler Special Alert), which held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, Oakland filed an amended complaint. The amended complaint expanded Oakland’s alleged injuries to include (i) decreased property tax revenue; (ii) increases in the city’s expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. The bank moved to dismiss all of Oakland’s claims on the basis that the city had failed to sufficiently allege proximate cause. The court granted the bank’s motion without prejudice as to claims based on the second alleged injury to the extent it sought monetary relief and claims based on the third alleged injury entirely. The court allowed the matter to proceed with respect to claims based on the first injury and, to the extent it seeks injunctive and declaratory relief, the second injury.
New York Fed report finds CFPB oversight does not significantly reduce volume of mortgage lending
The Federal Reserve Bank of New York (New York Fed) released a June 2018 Staff Report titled “Does CFPB Oversight Crimp Credit?” which concludes that there is little evidence that CFPB oversight significantly reduces the overall volume of mortgage lending. The report compared the lending outcomes of companies subject to CFPB oversight with smaller institutions below $10 billion in total assets that are exempt from CFPB supervision and enforcement activities, as well as lending outcomes before and after the CFPB’s creation in July 2011. Using HMDA data, bank balance sheets, and bank noninterest expenses, the report concluded, among other things, that (i) CFPB oversight may have changed the composition of lending—supervised banks originated fewer loans to lower-income, lower-credit score borrowers; (ii) there has been a drop in lending to borrowers with no co-applicant by CFPB supervised banks; and (iii) there has been an increase in origination of “jumbo” mortgage loans by CFPB supervised banks. The report noted that its results do not speak to the effect of the CFPB’s rulemaking, such as the TILA-RESPA integrated disclosure rule.