On July 6, the U.S. Supreme Court ruled in Barr v. American Association of Political Consultants that the Telephone Consumer Protection Act’s exception from its automated call restriction for calls to collect government debts violates the First Amendment of the U.S. Constitution.  The Court also decided that the proper remedy for the constitutional violation is to sever the exception from the remainder of the TCPA, thereby making calls to collect government debts subject to the TCPA’s automated call restriction and otherwise leaving the restriction in place for any other calls to which it now applies.

The TCPA generally prohibits sending calls to cellular telephones using an automatic telephone dialing system or that deliver an artificial or prerecorded voice.  However, it includes an exception for emergency calls and calls made with the prior express consent of the called party.  In 2015, Congress amended the TCPA to create another exception for calls “made solely to collect a debt owed to or guaranteed by the United States.”

As described by Justice Kavanaugh in his opinion announcing the Supreme Court’s decision, the plaintiffs in the case were “political and nonprofit organizations that want to make political robocalls to cell phones.”  The plaintiffs argued that the government debt exception violated the First Amendment by favoring debt collection speech over political and other speech.  As a remedy for the alleged constitutional violation, the plaintiffs asserted that the TCPA’s entire restriction on automated calls should be invalidated, not just the government debt exception.

A North Carolina federal district court rejected the plaintiffs’ constitutional challenge but the Fourth Circuit vacated the judgment and held that the TCPA’s government debt exception violated the First Amendment.  Having concluded that the government debt exception was severable from the underlying automated call restriction, the Fourth Circuit invalidated and severed the exception.

In its petition for a writ of certiorari, the Government argued that because the TCPA exception is directed at communications concerning a discrete type of economic activity (i.e., collecting government debts) and not at the words used in the communications, the Fourth Circuit erred in concluding that the exception was an unconstitutional content-based restriction on speech.  The plaintiffs supported the petition but argued that the Fourth Circuit did not go far enough in providing relief and should have invalidated the TCPA’s entire provision restricting automated calls.

Justice Kavanaugh was among the Supreme Court majority that agreed with the Fourth Circuit that the exception was a content-based restriction on speech that violated the First Amendment.  He was also among the majority that agreed with the Fourth Circuit that the exception could be severed and the remainder of the law could function independently of the exception.  Notably, in his opinion (one of four separate opinions), Justice Kavanaugh wrote: “Americans passionately disagree about many things.  But they are largely united in their disdain for robocalls.”

The decision means that calls to collect debts owed or guaranteed by the federal government that are made to cellular phones using an automatic telephone dialing system or an artificial or prerecorded voice will now require the called party’s prior express consent.  Accordingly, companies must make sure their operations are TCPA compliant when servicing or collecting  government-owned or -guaranteed loans or other obligations, such as mortgage loans and student loans.

Given that the Supreme Court has not provided relief for industry from the TCPA’s automated call restriction, perhaps the FCC will ease industry’s compliance burden through the issuance of long-awaited guidance.  In 2018, the FCC issued a notice announcing that it was seeking comments on several TCPA issues following the D.C. Circuit’s ACA International decision, such as what constitutes an “automatic telephone dialing system” for purposes of the restriction, how to interpret the term “called party” in the TCPA’s prior express consent requirement for purposes of automated calls to reassigned numbers, and whether/how a party can revoke prior express consent to receive automated calls.

 

 

The CFPB has issued its long-awaited final rule rescinding the ability-to-repay provisions in its final payday/auto title/high-rate installment loan rule (Payday Rule).  The final rule will be effective 90 days after its publication in the Federal Register.

The CFPB also issued a document in which it affirmed and ratified the Payday Rule’s payments provisions.  The document states that the ratification relates back to November 17, 2017, the date the Payday Rule was published in the Federal Register.  The ratification is intended to preserve the validity of the payments provisions in response to the U.S. Supreme Court’s decision last week in Seila Law which held that the Dodd-Frank provision that only allows the President to remove the CFPB Director “for cause” violates the separation of powers in the U.S. Constitution.

The compliance date for the payments provisions has been stayed pursuant to an order entered by the Texas federal district court hearing the lawsuit filed against the CFPB challenging the Payday Rule.  The Bureau states in its press release that it “will seek to have [the payments provisions] go into effect with a reasonable period for entities to come into compliance.”  (The CFPB also issued a separate document today in which it purported to ratify most regulatory actions the Bureau took from January 4, 2012 through June 30, 2020.  We will discuss that ratification in a separate blog post.)

In its press release, the CFPB announced that it has denied the petition it received to commence a rulemaking to exclude debit and prepaid cards from the payments provisions.  We are disappointed that the Bureau decided not to address this issue as well as the payments provisions’ other serious shortcomings that we have highlighted in previous blogs and in letters to the CFPB.

The Bureau also announced that it has issued guidance to clarify the payments provisions’ scope and assist lenders in complying with the provisions.  In addition, it announced that it plans to conduct research on developing potential disclosures to provide consumers with  help them better understand certain features of payday loans.

There could beinformation to an effort to override the final rule under the Congressional Review Act and the Bureau is likely to face a lawsuit challenging the final rule under the Administrative Procedure Act,

We are now reviewing the final rule and guidance and will provide our thoughts in future blogs.

 

 

The CFPB has published its Spring 2020 rulemaking agenda as part of the Spring 2020 Unified Agenda of Federal Regulatory and Deregulatory Actions.  It represents the CFPB’s third rulemaking agenda under Director Kraninger’s leadership.  The agenda’s preamble indicates that the information in the agenda is current as of March 5, 2020 and identifies the regulatory matters that the Bureau “reasonably anticipates having under consideration during the period from May 1, 2020 to April 30, 2021.”

The Bureau issued a proposed debt collection rule in May 2019.  In the preamble to the rulemaking agenda, the Bureau states that it expects to issue a final debt collection rule in October 2020.  In February 2020, the Bureau issued a supplemental proposal that would require debt collectors to make specified disclosures when collecting time-barred debts and has extended the proposal’s comment deadline until August 4, 2020.  The Bureau indicates in the preamble that it plans to finalize the supplemental proposal “at a later date” (thus ending conjecture as to whether the Bureau intends to finalize the two proposals at the same time).

The new agenda provides outdated information regarding when the Bureau can be expected to finalize its February 2019 proposal to rescind the ability to repay provisions of its final payday/auto title/high-rate installment loan rule.  The proposal is not mentioned in the Bureau’s blog post about the new agenda and the agenda estimates a June 2020 date for issuing a final rule.  In the preamble to the new agenda, the Bureau states that in response to stakeholder input, it “is now evaluating what, if any, other actions to take with respect to the application of the payments provisions of the [final rule] to the short-term, longer-term balloon-payment, and certain high cost installment loans covered by those provisions.  These actions could include, but are not limited to, updated compliance aids, policy statements, or other guidance.”

The Bureau recently took action on the following items listed in the agenda:

  • Higher-Priced Mortgage Loan Escrow Exemption.  The Economic Growth, Regulatory Relief, and Consumer Protection Act directs the CFPB to implement an exemption from the mandatory escrow account requirement for higher-priced mortgage loans under the Truth in Lending Act and Regulation Z for certain insured credit unions and insured depository institutions.  The CFPB recently proposed amendments to Regulation Z pursuant to this directive.
  • Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z).  The CFPB recently proposed a temporary extension of the qualified mortgage (QM) criteria that is based on a loan being eligible for sale to Fannie Mae or Freddie Mac (often referred to as the “GSE Patch”).  The CFPB also proposed to replace the strict 43% debt-to-income (DTI) ratio basis for the general QM with an approach tied to the loan’s annual percentage rate that would still require the consideration of the DTI ratio or residual income.
  • Amendments to Regulation Z to Facilitate Transition from LIBOR.  The CFPB recently proposed amendments to Regulation Z to address the discontinuation of the London Inter-Bank Offered Rate (LIBOR) that is currently used by many creditors as the index for calculating the interest rate on credit cards and other variable-rate consumer credit products.  (On July 14, 2020, from 12:00 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB’s LIBOR Transition Proposal and Guidance: What You Need To Know.”  Click here for more information and to register.)

Other items listed in the agenda on which the CFPB expects to take action this year include:

  • Business Lending Data (Regulation B).  Section 1071 amended the ECOA, subject to rules adopted by the Bureau, to require financial institutions to collect and report certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  The agenda estimates that in anticipation of convening a SBREFA panel, the Bureau will issue a SBREFA outline in September 2020.  (Pursuant to the Stipulated Settlement Agreement in the lawsuit filed against the Bureau in May 2019 alleging wrongful delay in adopting regulations to implement Section 1071, the Bureau is required to release the outline by September 15 and convene a panel by October 15.  However, in its first status report filed with the California federal district court, the Bureau stated that while it believes it is on track to meet the September 15 and October 15 deadlines, the COVID-19 pandemic may “introduce uncertainty with respect to the Bureau’s future ability to meet these deadlines.”)
  • Role of Supervisory Guidance.  In September 2018, the CFPB, together with the Federal Reserve, FDIC, NCUA, and OCC, issued an Interagency Statement Clarifying the Role of Supervisory Guidance.  The agenda estimates issuance of a proposed rule to codify the guidance in June 2020.
  • Property Assessed Clean Energy Financing.  In March 2019, the CFPB issued an Advance Notice of Proposed Rulemaking to extend Truth in Lending Act ability-to-repay requirements to PACE transactions.  The agenda estimates pre-rule activity in October 2020.
  • Home Mortgage Disclosure Act (Regulation C).  The HMDA amendments adopted by the CFPB in October 2015 revised certain pre-existing data points, added data points set forth in Dodd-Frank, and included additional data points based on discretionary authority in Dodd-Frank permitting the CFPB to mandate reporting of other information.  The October 2015 amendments also expanded the scope of reportable loans by requiring the reporting of dwelling-secured business or commercial purpose loans that meet the definition of a home purchase, refinancing, or home improvement transaction.  In May 2019, the Bureau issued an Advance Notice of Proposed Rulemaking seeking comment on whether to make changes to the revised or new data points, and the coverage of business or commercial-purpose loans that are made to a non-natural person and secured by a multi-family dwelling.  The agenda estimates issuance of a Notice of Proposed Rulemaking in September 2020.
  • Public Release of Home Mortgage Disclosure Act Data.  In December 2018, the CFPB announced final policy guidance regarding the application-level HMDA data that will be made available to the public.  The agenda estimates issuance of a Notice of Proposed Rulemaking on the public disclosure of HMDA data in September 2020.
  • Amendments to FIRREA Concerning Appraisals (Automated Valuation Models).  The Bureau is participating in interagency rulemaking with the Federal Reserve, OCC, FDIC, NCUA and FHFA to develop regulations to implement the amendments made by the Dodd-Frank Act to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) concerning appraisals.  The FIRREA amendments require implementing regulations for quality control standards for automated valuation models. The agenda estimates that the agencies will issue a Notice of Proposed Rulemaking in December 2020.

The Bureau’s long-term regulatory agenda items, which have no estimated dates for further action, include the following:

  • Abusive Acts and Practices.  In January 2020, the CFPB issued a policy statement to clarify the Dodd-Frank Act’s abusiveness standard.  The agenda indicates that in issuing the policy statement, “the Bureau did not foreclose the possibility of engaging in a future rulemaking to further define the abusiveness standard.”
  • Artificial Intelligence.  In February 2017, the CFPB issued a request for information concerning the use of alternative data and modeling techniques in the credit process.  In the agenda, the Bureau states that as it “continues to monitor developments concerning AI, the Bureau will evaluate whether rulemaking, a policy statement, or other Bureau action may be appropriate.”

Other long-term items include changes to loan originator compensation requirements in Regulation Z, consumer access to financial records, and the application of E-Sign Act requirements in the context of certain Bureau regulations.

Finally, the preamble to the agenda indicates that pursuant to Dodd-Frank Section 1022(d), which requires the Bureau to conduct an assessment of each significant rule or order it adopts under a Federal consumer financial law and publish a report of each assessment not later than 5 years after the rule’s or order’s effective date, the Bureau is now conducting an assessment of its Integrated Mortgage Disclosures Rule.  The Bureau states in its blog post about the agenda that it will issue its assessment report no later than October 2020.

The preamble also indicates that the Bureau conducted its first review pursuant to section 610 of the Regulatory Flexibility Act, which requires the Bureau to consider the effect on small entities of certain rules it promulgates.  That review looked at the impact of the Bureau’s 2009 overdraft rule on small banks and credit unions.  The preamble states that “after considering the statutory review factors, including a review of public comment, the Bureau has determined that the rule should continue without change.  The Bureau believes that there is a continued need for this rule, which does not overlap with other Federal or State rules and which likely preserves a valuable consumer choice.”

Now that the U.S. Supreme Court has ruled in Seila Law that the Dodd-Frank Act provision allowing the President to remove the Bureau’s Director only “for cause” is unconstitutional and the appropriate remedy is to sever that provision, a Democratic President, if elected in 2020, will be able to remove Director Kraninger without cause.  As a result, the Bureau’s rulemaking priorities could change significantly in 2021 from those reflected in the new agenda.  (We also expect that Director Kraninger will soon ratify all existing CFPB regulations that the Bureau still supports.)

 

As previously reported, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act), also known as S.2155, directs the CFPB to implement an exemption from the mandatory escrow account requirement for higher-priced mortgage loans (HPMLs) under the Truth in Lending Act (TILA) and Regulation Z for certain insured credit unions and insured depository institutions. The CFPB recently proposed amendments to Regulation Z pursuant to this directive. Consistent with recent practice, the CFPB also issued a non-official redline showing the changes that would be made to Regulation Z.

Currently Regulation Z provides an exemption to the escrow requirement for HPMLs that applies to a creditor that:

  • Together with its affiliates that regularly extend first lien loans subject to the ability to repay rule (covered transactions), have total assets of less than $2.0 billion (the dollar amount is adjusted annually for inflation, and for 2020 is $2,202,000);
  • Together with its affiliates that regularly extend first lien covered transactions, during the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, extended no more than 2,000 first lien covered transactions that were sold, assigned or otherwise transferred to another person;
  • Does not, nor does its affiliate, maintain escrow accounts on mortgage loans, exclusive of escrow accounts established (a) for a first lien HPML for which the application was received on or after April 1, 2010 and before May 1, 2016, or (b) as an accommodation to a distressed consumer to assist the consumer in avoiding default or foreclosure; and
  • During the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, extended a first lien covered transaction on property located in a “rural” or “underserved” area, as those terms are defined for purposes of the HPML rules. We recently reported on a CFPB interpretive rule addressing the manner in which underserved areas are determined.

A loan made by a lender that qualifies for the exemption would not be entitled to the exemption if at consummation the loan is subject to a commitment to be acquired by a party that does not meet the conditions of the exemption.

The proposal would implement a similar exemption for insured credit unions and insured depository institutions, with principal differences being that:

  • The asset threshold would be $10 billion (and would be adjusted annually for inflation); and
  • During the preceding calendar year or, for applications received before April 1 of the current year, during either of the two preceding calendar years, the credit union or depository institution and its affiliates could have extended no more than 1,000 covered transactions secured by a first lien on a principal dwelling.

Additionally, the exclusion from the condition that the creditor and its affiliate not maintain escrow accounts on mortgage loans for accounts established for a first lien HPML for which the application was received on or after April 1, 2010 and before May 1, 2016, would be revised by replacing the May 1, 2016 date with a date that is 90 days after the final rule is published in the Federal Register. This time period would also apply to the current exemption.

Comments on the proposal will be due 30 days after publication in the Federal Register.

The recent announcement by a consumer lender in an SEC filing that it had earmarked $21.7 million to resolve an SEC probe into its FCPA compliance could signal new interest by regulators in enforcing the FCPA against consumer financial services providers with operations outside of the U.S.  In this podcast, we review what practices are prohibited by the FCPA, which regulators enforce the FCPA, how the FCPA can be enforced and penalties for non-compliance, and tips for avoiding FCPA liability.

Click here to listen to the podcast.

 

Monday, in Seila Law v. CFPB, the U.S. Supreme Court held that the structure of the CFPB, with a single-director who the President could not remove without cause, violates the separation of powers mandated by the U.S. Constitution.  The decision allows the CFPB to continue to operate but effectively provides that the Director will henceforth be removable by the President at will.

The decision has a number of immediate consequences:

First, it is clear that the President has the authority and power to remove the incumbent CFPB Director and appoint a new director at will.  This means that if Joe Biden is elected in 2020, he will not need to wait until the expiration of Director Kraninger’s current term in December 2023 to appoint a director more attuned to his regulatory philosophy.

Second, a principal argument made by the payday lending industry in its Texas federal court lawsuit challenging the CFPB’s Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans has now been conclusively established.  Thus, Seila Law provides a strong argument for the industry in its lawsuit against the CFPB and an additional justification for the CFPB to rescind the mandatory underwriting provisions.  While rescission of the mandatory underwriting provisions could still be challenged, the CFPB would have a powerful additional defense to any such challenge.  Barring an injunction against a rescission of the mandatory underwriting provisions, any future CFPB director inclined to take a different approach to regulating the payday lending industry would almost certainly need to restart the rulemaking process anew.

Of course, in addition to its mandatory underwriting provisions, the Rule also contains payment provisions.  In our view, expressed in previous blogs and in letters to the CFPB, these provisions also have serious shortcomings, although Director Kraninger has not (yet) sought to repeal or modify them.  Seila Law throws these provisions into question as well.  We submit that the safest (and best) course for the CFPB with respect to the payment provisions would be to first reconsider their necessity and advisability.  If the CFPB continues to believe they are largely worthwhile, it should initiate a new rule-making to maximize the potential benefits and minimize burdens and technical problems.

Third, while the prepaid rule may be distinguishable from the Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans insofar as the prepaid rule has gone into effect and was adopted by former Acting Director Mulvaney, who was removable by the President without cause, the Seila Law decision has buttressed PayPal’s challenge to the prepaid card rule.

Other consequences of the decision are less clear.  Unresolved questions include the following:

  • Apart from the prepaid rule, are some or all rules previously adopted by the CFPB at risk or can they be preserved from invalidation by the “de facto officer” doctrine and/or potential ratification by Director Kraninger?
  • What impact will the decision have with respect to ongoing rule-making, such as the CFPB’s proposed debt collection regulation?
  • What impact will the decision have on the CID issued to Seila Law and other ongoing enforcement proceedings?  Can (and will) Director Kraninger simply ratify prior actions taken by her and and/or her predecessors to avoid this issue?
  • Can (and will) any financial services companies subject to existing CFPB consent orders and settlements now collaterally attack their consent orders?
  • Does the Supreme Court’s decision to sever from the statute the unconstitutional requirement of for-cause termination suggest how it will address any severance questions in other unconstitutional statutes?  For example, if the TCPA’s exemption of communications relating to government debt is held to be unconstitutional, which is the issue pending before the Supreme Court in the Barr case and which the litigants all but conceded was the case at oral argument, does Seila Law suggest that the Court is likely to sever the government debt exemption from the larger TCPA or will it require the Court to strike some or all of the statute to avoid further restricting commercial speech?
  • How will the decision affect other independent U.S. Government agencies, if at all?

The dust has not yet cleared but consumer financial services and administrative law lawyers throughout the country will certainly be pondering these issues over the Independence Day holiday and for weeks to come.

Recently federal agencies proposed revisions to the Interagency Questions and Answers Regarding Flood Insurance. The agencies are the Comptroller of the Currency, Farm Credit Administration, FDIC, Federal Reserve Board, and National Credit Union Administration.

The proposed revisions would (1) revise and reorganize the existing Q&As into new categories by subject to enhance clarity and understanding for users, and (2) introduce new Q&As on the escrow of flood insurance premiums, force placement of flood insurance, and the detached structures exemption. Once finalized, the new Q&As will supersede the 2009 and the 2011 Interagency Questions and Answers, and supplement other guidance or interpretations issued by the agencies relative to loans in areas having special flood hazards. The agencies also announced that they plan to issue separately for notice and comment another set of proposed Q&As relating to the private flood insurance rule adopted by the agencies in 2019. However, the current proposed Q&As address private flood insurance in certain contexts.

As proposed, the Q&As would be divided into the following 17 categories:

I.     Determining the Applicability of Flood Insurance Requirements for Certain Loans
II.    Exemptions from the Mandatory Flood Insurance Purchase Requirements
III.   Coverage – NFIP/Private Flood Insurance
IV.   Required Use of Standard Flood Hazard Determination Form
V.    Flood Insurance Determination Fees
VI.   Flood Zone Discrepancies
VII.  Notice of Special Flood Hazards and Availability of Federal Disaster Relief
VIII. Determining the Appropriate Amount of Flood Insurance Required
IX.   Flood Insurance Requirements for Construction Loans
X.    Flood Insurance Requirements for Residential Condominiums and Cooperatives
XI.   Flood Insurance Requirements for Home Equity Loans, Lines of Credit, Subordinate Liens, and Other Security Interests in Collateral Located in an Special Flood Hazard Area
XII.   Requirement to Escrow Flood Insurance Premiums and Fees – General
XIII.  Requirement to Escrow Flood Insurance Premiums and Fees – Small Lender Exception
XIV.  Requirement to Escrow Flood Insurance Premiums and Fees – Loan Exceptions
XV.   Force Placement of Flood Insurance
XVI.  Flood Insurance Requirements in the Event of the Sale or Transfer of a Designated Loan and/or Its Servicing Rights
XVII.  Mandatory Civil Money Penalties

Certain topics addressed by the proposed Q&As include the following:

NFIP Temporarily Unavailable. To address the potential for lapses in the authorization for the National Flood Insurance Program (NFIP), a proposed Q&A would provide that during a period when coverage under the NFIP is not available, such as due to a lapse in authorization or in appropriations, lenders may continue to make loans subject to the flood insurance requirements without requiring flood insurance coverage. However, lenders would need to continue to make flood zone determinations, provide timely, complete, and accurate notices to borrowers, and comply with other applicable parts of the flood insurance requirements.

Private Flood Insurance Sufficiency. With regard to private flood insurance, one proposed Q&A would provide that some factors, among others, that a lender could consider in determining whether a private policy provides sufficient protection of a loan may include whether:

  • A policy’s deductibles are reasonable based on the borrower’s financial condition;
  • The insurer provides adequate notice of cancellation to the mortgagor and mortgagee to allow for timely force placement of flood insurance, if necessary;
  • The terms and conditions of the policy with respect to payment per occurrence or per loss, and aggregate limits are adequate to protect the regulated lending institution’s interest in the collateral;
  • The flood insurance policy complies with applicable state insurance laws; and
  • The private insurance company has the financial solvency, strength, and ability to satisfy claims.

Effective Date of Flood Insurance. To provide guidance regarding when a flood insurance policy must be effective, a proposed Q&A would provide as follows:

  • A lender should use the loan “closing date” to determine the date by which flood insurance must be in place for a designated loan. FEMA deems the “closing date” as the day the ownership of the property transfers to the new owner based on state law.
  • “Wet funding” and “dry funding,” which varies by state, refer to when a mortgage is considered officially closed. In a “wet” settlement state, the signing of closing documents, funding, and transfer of title occur all on the same day. By contrast, in a “dry” settlement state, documents are signed on one date, but loan funding and/or transfer of title/recording occur on subsequent date(s). Therefore, in “dry” settlement states, the “closing date” is the date of property transfer, regardless of loan signing or funding date.
  • It is also important to note that the application and premium payment for NFIP flood insurance must be provided at or prior to the closing date because this affects the FEMA flood insurance effective date and any resulting 30-day waiting period for new policies not made in connection with a triggering event. This application requirement applies for properties located in both dry and wet settlement states.

Detached Structures. Among several proposed Q&As on the detached structure exemption, one would provide that even if coverage is not required on a detached structure, because a flood hazard determination is often needed to identify the number and types of structures on the property, conducting a flood hazard determination remains necessary for the lender to be able to comply with the flood insurance requirements.

Other Q&As. Among other proposed Q&As, there are Q&As that would address:

  • When a lender must require flood insurance in connection with a loan secured by a building in the course of construction.
  • The agencies’ expectations regarding a lender’s obligation when there is a discrepancy between the flood determination form and the flood insurance policy.
  • That a loan to a cooperative unit owner, secured by the owner’s share in the cooperative, is not a designated loan that is subject to the flood insurance requirements.
  • That when a loan is secured by a building located in a special flood hazard area and also the contents of the building, flood insurance is required on the contents regardless of whether the security interest in the contents is perfected.
  • That multi-family buildings or mixed-use properties are included in the definition of “residential improved real estate” and therefore are subject to the requirement to escrow for flood insurance premiums unless an exception applies.
  • That when a junior lienholder determines that the primary lienholder does not have sufficient flood insurance coverage in place and is also not escrowing for flood insurance, the junior lienholder would need to ensure that adequate flood insurance is in place and also would need to escrow for that flood insurance.
  • That construction-to-permanent loans that have a construction phase before the loan converts into permanent financing do not qualify for the 12-month exception from the flood insurance premium escrow requirement, even if one phase of the loan is for 12 months or less.
  • That while a lender or servicer may send a force-placement of insurance notice to the borrower prior to the expiration date of the flood insurance policy as a courtesy, the lender or servicer is still required to send notice upon determining that the flood insurance policy actually has lapsed or is insufficient in meeting the statutory requirement.
  • That a lender, or a servicer acting on its behalf, may force place insurance and charge the borrower for the cost of premiums and fees incurred by the lender or servicer in purchasing the flood insurance on the borrower’s behalf at any time starting from the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount. The lender or servicer would not have to wait 45 days after providing the required notification to the borrower.

Comments on the proposed Q&As will be due 60 days after publication in the Federal Register.

The Senate Banking Committee will hold a hearing tomorrow, June 30, titled, “The Digitization of Money and Payments.”

The witnesses will include Charles Cascarilla, Chief Executive Officer and Co-Founder, Paxos, and Professor Nakita Q. Cuttino, Visiting Assistant Professor of Law, Duke University School of Law.

 

By a five to four vote, the U.S. Supreme Court ruled this morning in Seila Law that the CFPB’s single-director-removable-for-cause leadership structure violates the separation of powers in the U.S. Constitution.  Seven of the justices agreed that the provision in Title X of the Dodd-Frank Act that gives the Director for-cause removal protection can be severed, thereby leaving the remainder of Title X in place.

The ruling consists of multiple opinions, running 105 pages in total.  In addition to the majority opinion authored by Chief Justice Roberts, there is a dissent written by Justice Kagan and two other separate opinions.

We are currently reading and analyzing the various opinions and will be blogging again soon to share our reactions and thoughts.

 

 

The FDIC has issued its widely anticipated final rule resolving the uncertainty caused by the Second Circuit’s Madden v. Midland Funding decision.  Madden held that a non-bank entity that purchased charged-off loans from a national bank could not charge the same rate of interest on the loans as the national bank was able to charge based on its authority under Section 85 of the National Bank Act (“NBA”).

The FDIC’s Notice of Proposed Rulemaking (“NPR”) was published the same week as an OCC proposed rule intended to address the same issue for national banks under Section 85.  The OCC’s final rule was issued on May 29, 2020.  Although the press release accompanying the FDIC’s final rule states that the “FDIC’s action mirrors” the OCC final rule, the two final rules are not identical in every respect.

On July 20, 2020, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The OCC’s Final Rule to Undo Madden: An Analysis and A Look Ahead.”  Click here for more information and to register.

In its discussion and analysis accompanying the final rule, the FDIC posited that Section 27 of the Federal Deposit Insurance Act (“FDIA”), which along with Section 24 of the FDIA establishes the statutory framework for the ability of state chartered insured depository institutions to enjoy parallel interest rate preemption and “most favored lender” benefits permitted for national banks under the NBA, contained two “statutory gaps.”

The FDIC’s first point of concern was that Section 27 does not explicitly state at what point in time the validity and enforceability of the interest rate term of a bank’s loan should be determined for purposes of that section.  The second point was that while Section 27 expressly gives state banks the right to make loans at the rates permitted by their home states, the section “does not explicitly list all the components of that right.  One such implicit component is the right to assign the loans made under the preemptive authority of Section 27.”

The FDIC’s final rule amends Part 331 of Title 12 of the Code of Federal Regulations by providing the following language in 12 CFR §331.4(e) that is intended to address the two “statutory gaps”:

(e) Determination of interest permissible under section 27.   Whether interest on a loan is permissible under section 27 of the Federal Deposit Insurance Act is determined as of the date the loan was made.  Interest on a loan that is permissible under section 27 of the Federal Deposit Insurance Act shall not be affected by a change in State law, a change in the relevant commercial paper rate after the loan was made, or the sale, assignment, or other transfer of the loan, in whole or in part.

In the FDIC’s discussion of comments submitted in response to its NPR, the FDIC reiterated that, while the common law principles of “valid when made” and “stand-in-the-shoes” are consistent with the FDIC’s interpretation of the statutes, such interpretation was not based on those doctrines, and that “as stated in the NPR, the FDIC’s authority to issue the proposed rule arises under Section 27 rather than common law.”

Also in keeping with its analysis as set forth in the NPR, the FDIC was careful in its discussion of the final rule to avoid the “true lender” issue.  In rejecting the concept that the true lender doctrine was somehow necessarily linked with the issues clarified by the final rule, the FDIC held the view that “[w]hile both questions ultimately affect the interest rate that may be charged to the borrower, the FDIC believes that they are not so intertwined that they must be addressed simultaneously by rulemaking.”

While declining to address the “true lender” issue as part of this final rule, the FDIC did observe in response to comments raising the issue or urging rulemaking from the FDIC to address the issue that: (i) consideration of the true lender issue (albeit apart from this rulemaking) is warranted; (ii) the text of this regulation “cannot be reasonably interpreted to foreclose true lender claims”; and (iii) “the FDIC continues to support the position that it will view unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing State(s).”

Acting Comptroller of the Currency Brian Brooks has stated publicly that the OCC will soon be issuing a proposed “true lender” rule and that he expects the FDIC to do the same.  The FDIC’s comments seem to support that expectation, especially if the OCC in fact delivers such a rule.

Not surprisingly, reaction to the FDIC final rule has been swift.  Certain consumer advocacy agencies have already released public statements condemning the final rule, and opining that both the FDIC’s rule and the OCC’s rule may face legal challenges.  The consumer advocates believe the FDIC’s rule will encourage the proliferation of abusive high-rate lending by providing an avenue for non-bank lenders to avoid state interest rate cap protections.

More importantly, it remains to be seen how state regulators react to the OCC and FDIC Madden-fix rules.  Will they focus on the true lender doctrine to enforce their state usury caps?  Moreover, lawsuits such as Martha Fulford, Administrator, Uniform Commercial Credit Code v. Marlette Funding, LLC et al. ( in which the court ruled several days after the OCC final regulation was issued–a fact of which the court was apparently unware–that a non-bank assignee of loans made by a state bank cannot charge the same interest rate that the state bank itself could charge under FDIA Section 27(a)), as well as the cases filed by the Conference of State Bank Supervisors and the New York Department of Financial Services challenging the OCC’s proposed fintech charter, all indicate that states will litigate to protect their interests.

On the national front, an attempt to override both the FDIC and OCC final rules under the Congressional Review Act may be a possibility.  Finally, with the Presidential election on the horizon, a new administration may result in changes to the regulatory leadership and their policy objectives.