Last Week, This Morning

April 29, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an “Amicus Brief(ly)¹” comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters – CARLAW®, HouseLaw®, InstallmentLaw™, PrivacyLaw®, and BizFinLaw™ – provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On April 24, the Consumer Financial Protection Bureau released an edition of Supervisory Highlights focusing on recent examinations of mortgage servicers that were completed from April through December 2023. CFPB examiners found certain unfair and deceptive acts and practices and regulatory violations, including:

• charging property inspection fees on Fannie Mae loans where such inspections were prohibited by Fannie Mae guidelines;
• charging late fees that exceeded the amount allowed in the loan agreement and charging late fees even though borrowers had entered into loss mitigation agreements that should have prevented late fees;
• failing to waive existing fees following acceptance of COVID-19 loan modifications;
• failing to provide an adequate description of fees in billing statements by using the general label “service fee” without including any additional descriptive information;
• failing to make timely disbursements from escrow accounts;
• sending notices to borrowers stating that they had been approved for loss mitigation even though the servicers had not yet determined whether the borrowers were actually eligible;
• sending borrowers inaccurate delinquency notices;
• sending notices to borrowers who submitted loss mitigation applications that failed to specify whether the borrowers’ applications were complete or incomplete, and, after receiving borrowers’ complete loss mitigation applications: (1) failing to provide timely notices stating the servicers’ determination of which loss mitigation options, if any, the servicers would offer to the borrower, and (2) failing to provide the deadline for accepting or rejecting loss mitigation offers;
• failing to make good faith efforts to establish live contact with delinquent borrowers and failing to send early intervention notices to delinquent borrowers; and
• failing to retain records documenting actions taken on mortgage loan accounts.

In response to the CFPB’s findings, mortgage servicers took corrective action, including providing remediation to borrowers and changing their policies and procedures.

Amicus brief(ly): The Supervisory Highlights are a great way to get a snapshot of what the CFPB is thinking about and to check your compliance policies and procedures to ensure that the exceptions noted by the CFPB will not trip you up. In the best-case scenario, you review the Supervisory Highlights, see no novel interpretations of the law, recognize the issues raised by the CFPB, and double-check your written compliance materials and complaint logs to make sure your company has accounted for all those issues correctly. If the issues are not familiar, it is an opportunity to make sure that: (1) your business model does not implicate the regulatory matter described (e.g., servicers that are not responsible for escrow disbursements or oversight of that process do not need procedures that address timely escrow disbursements), or (2) you catch those issues and add them to your policies and procedures so that, going forward, you can avoid compliance mistakes. The Supervisory Highlights are required reading for any compliance professional.

The Mississippi governor recently enacted Senate Bill 2543, which amends Section 75-67-181 of the Mississippi Code to provide for an annual adjustment of the maximum loan amount under which Mississippi Consumer Alternative Installment Loan Act licensees may impose finance charges permitted under the Act. The new law provides that, in lieu of the interest and charges in Section 75-17-21 (governing the maximum finance charges by licensees under the state’s Small Loan Regulatory Law), on loans of $5,100 or less, a licensee under the state’s CAILA may contract for and charge a monthly finance charge not to exceed an annual percentage rate of 59% per annum on the unpaid balance of the amount financed. Beginning with calendar year 2024 and for each subsequent calendar year, on or before July 1, the Mississippi Department of Banking and Consumer Finance will issue a memo authorizing a new maximum loan size permitted under this section. The new amount will be calculated by applying any increase or decrease in the CPI for the previous calendar year to the previous maximum loan size and rounding that amount upward to the nearest $10 increment.

Amicus brief(ly): Mississippi joins a long list of other states with this law that will rely on an external index to set the maximum amounts for loans eligible for CAILA’s benefits. The Act allows lenders to charge higher interest rates on small loans than Mississippi’s other small loan laws. Before this change, licensees could only charge the 59% rate on loans up to $4,000. The new maximum loan amount is more than 25% higher and can adjust up or down (Mississippi’s new law differs from most others in that it allows for the possibility of a reduction in the loan amount cap if the CPI decreases) as soon as next year. Licensees already relying on this rate authority will be able to offer their loan product more broadly. Other lenders enticed by this change should review the alternatives before committing to the CAILA for their interest rate authority, but, on its face, this regulatory change favors lenders.

On April 22, the Federal Housing Finance Agency published in the Federal Register a notice inviting comment on a proposal by Freddie Mac to begin purchasing certain single-family, closed-end second mortgage loans from lenders that are approved to sell mortgage loans to Freddie Mac. The new Freddie Mac product is intended to provide borrowers with a lower cost alternative to a traditional cash-out refinance. The FHFA notes that, in the current high interest rate environment, a traditional cash-out refinance requires refinancing the entire outstanding loan at a new, and possibly much higher, interest rate. When borrowers obtain a second mortgage to access the equity in their home, only the smaller, second mortgage would be subject to the current market interest rate, with the original terms of the first mortgage remaining intact. The FHFA will accept written comments on the proposed new product until May 22, 2024.

Amicus brief(ly): This is an interesting and potentially significant development. Freddie Mac has not been in the secondary market for junior lien home equity loans, notwithstanding the authority in its charter. As the notice indicates, there is a potential impact not just on borrowers and Freddie Mac, but on market participants. Notably, if the outcome of this proposal is that Freddie Mac can begin to buy these loans, that adds a new player with enormous purchasing power to the secondary market for closed-end home equity loans. Watch this development closely – this short proposal has the potential for a big impact on the secondary mortgage market.

Virginia’s governor recently signed House Bill 184 into law, with an effective date of July 1, 2024. The bill amends and reenacts Section 55.1-321 of the Code of Virginia governing foreclosure procedures. The bill adds two paragraphs to the existing provisions of Section 55.1-321.

The first new paragraph, A1, states that if a proposed foreclosure sale is initiated due to a default in payment under a security instrument that was, at the time it was recorded, subordinate to another security interest encumbering the same property and has not been elevated to a first priority lien by a recorded voluntary subordination agreement, then the subordinate mortgage lienholder must submit to the trustee an affidavit affirming whether monthly statements were sent to the property owner for each period that any interest, fees, or other charges were assessed. No interest, fees, or other charges may be assessed or charged for any period during which periodic statements were not sent, unless the subordinate lienholder identifies a specific exemption. The affidavit must also include an itemized list of the current amount owed, including any periods in which interest, fees, and other charges were waived because no monthly statements were sent during that period. The subordinate lienholder must provide a copy of the affidavit to the borrower with written notice that a request for sale will be made of the trustee upon the expiration of 60 days from the day of mailing the notice. The notice must be sent by certified mail, return receipt requested, to the last known mailing address of the borrower. The notice must advise that if the borrower believes that interest, fees, or other charges have been assessed in error, the borrower may, prior to the sale, petition the circuit court of the city or county where the property or some part thereof lies for an accounting and order declaring the proper balance secured by the subordinate mortgage. If the court determines that charges were assessed in error, the borrower will be entitled to recover attorneys’ fees and costs against the subordinate lienholder. Note that these provisions do not apply to subordinate lienholders that are the original creditor, a mortgage servicer acting on behalf of the original creditor, a national or state-chartered bank, or a federal or state-chartered credit union.

The second new paragraph, A2, provides that any purchaser at a foreclosure sale must certify that the purchaser will pay off any priority security instruments no later than 90 days from the date that the trustee's deed conveying the property is recorded in the land records. The borrower will have the right to petition the circuit court of the city or county where the property or some part thereof lies to recover from the purchaser any payments toward such priority lien amounts made by the borrower after the date of the foreclosure sale, plus attorneys’ fees and costs.

Amicus brief(ly): Mortgage servicers with Virginia business will have a couple new forms in their Virginia foreclosure documents, one for some junior lienholders (but not all) and the other for buyers. The affidavit requirement is reserved for secondary market, non-bank junior lienholders initiating foreclosure sales, so it applies to a fairly limited subset of the market. The foreclosure purchaser certification appears to be required in all sales. These document and process changes will seem insignificant to any servicer that was working in the area during and after the mortgage foreclosure crisis over a decade ago.

On April 19, the Kansas governor signed Senate Bill 2560, which enacts the Kansas Earned Wage Access Services Act and the Kansas Money Transmission Act.

Under the EWASA, "earned wage access services" means the “business of providing consumer-directed wage access services or employer-integrated wage access services, or both.” The new law establishes registration and bond requirements for providers of earned wage access services, surety bond requirements, prohibited acts and practices, annual reporting requirements, record retention requirements, bases upon which registration may be denied, suspended, revoked, or refused, powers of the State Bank Commissioner, and penalties for violations of the Act. The Act does not apply to: (1) a bank holding company regulated by the Federal Reserve; (2) a depository institution regulated by a federal banking agency; or (3) a subsidiary of either (1) or (2) if the subsidiary directly owns 25% of the bank holding company or depository institution's common stock.

The new law also establishes licensing procedures for money transmitters and the powers, duties, and responsibilities of the State Bank Commissioner under the MTA.

Amicus brief(ly): Kansas had a busy legislative session. Following its recent update to its Uniform Consumer Credit Code, with this bill the state joins Nevada, Missouri, and Wisconsin by enacting a specific earned wage access law. Beyond the licensing and registration requirements, there are a few substantive requirements and limitations, including significant agreement enforcement restrictions. With Wisconsin’s recent enactment of an earned wage access law just before Kansas finalized this statute, providers should definitely be tracking state law developments because regulation in this area is trending up.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.