Last Week, This Morning

May 6, 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, Georgia enacted House Bill 876, which amends various laws relating to banking and finance, including revising and adding to exemptions from mortgage lender licensing, providing for closing fee refunds for installment loans prepaid within 90 days after closing, and altering the definition of “bona fide discount points” in the Georgia Fair Lending Act.

Currently, the Financial Institutions article of the Official Code of Georgia Annotated exempts any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, provided that such person holds the individual loans for less than seven days, from being required to obtain a mortgage loan originator, mortgage broker, or mortgage lender license and from being subject to the provisions of Article 13 (Licensing of Mortgage Lenders and Mortgage Brokers), except if registration is required. The new law revises the exemption to apply to any person who purchases or holds closed mortgage loans for the sole purpose of securitization into a secondary market, provided that such person holds the individual loans for 14 days or less and does not service the loans, but with such loans being serviced by a person licensed as a mortgage lender or exempt from the licensing requirements of Article 13. The new law also adds an exemption for any trust, the trustee of which is a bank that is exempt from licensing and that purchases or holds closed mortgage loans for the sole purpose of securitization or otherwise transferring the loans into a secondary market, provided that the loans held in the trust are not serviced by the trust or the trustee but are instead serviced by a person licensed as a mortgage lender or exempt from the licensing requirements of Article 13. However, a trust that commences foreclosure proceedings on a mortgage loan held by the trust either through the trustee or otherwise will not qualify for this exemption.

The new law also provides that when any installment loan upon which a closing fee has been charged by a licensee is prepaid by any means within 90 days of the date of the loan, the borrower is entitled to a refund or credit of the closing fee. The installment lender must determine, on a daily pro rata basis over the original term of the loan, the amount of the closing fee that has accumulated prior to the prepayment. The installment lender must refund or credit the borrower with the pro rata amount that has not accumulated prior to the prepayment, but the installment lender may retain from the collected closing fee the greater of the accumulated pro rata closing fee or $25.

Finally, the new law revises the definition of “bona fide discount points” in the GFLA to mean loan discount points knowingly paid by the borrower for the express purpose of reducing, and which in fact do result in a bona fide reduction of, the interest rate applicable to the home loan; provided, however, that the undiscounted interest rate for the home loan does not exceed by more than one percentage point the average prime offer rate as defined in 12 C.F.R. § 1026.35 that applies to a comparable transaction, as published by the Consumer Financial Protection Bureau as of the last date the discounted interest rate for the transaction is set before consummation.

Amicus brief(ly): Georgia’s amendments related to mortgage lender licensing for passive pass-through trust entities pooling assets in the securitization channel quietly but expressly codify the bank trustee exemption on which many trusts rely to avoid licensing. This express exemption makes clear that where a license might otherwise be required to hold those mortgage assets based on the definitions and licensing requirements, the fact that a bank (and not just a national bank) serves as the trustee of the non-bank entity exempts that trust from licensing. And for other non-bank pass-through companies that are not trusts, this amendment extends the holding period that qualifies for the exemption from seven to 14 days to allow more time for pooling when originations are slow. This is a useful bill.

On April 26, Oklahoma enacted Senate Bill 1492 relating to the state’s Secure and Fair Enforcement for Mortgage Licensing Act. Of primary importance, the law, effective November 1, 2024, encompasses within the definition of “mortgage broker” an entity who, for compensation or gain or in the expectation of compensation or gain, services a residential mortgage. The law adds a definition of “servicing” that includes the administration of a residential mortgage loan following the closing of such loan and notes that an entity will be deemed to be servicing if it either holds the servicing rights or engages in any activities determined to be servicing, including collection of monthly mortgage payments, the administration of escrow accounts, the processing of borrower inquiries and requests, and default management. Therefore, under these new changes, an entity that either holds the servicing rights to a residential mortgage loan or engages in any activities that are determined to be servicing a residential mortgage loan following closing of that loan will need a mortgage broker license.

The new law adds a definition of “branch office” as any location, other than a mortgage lender’s or mortgage broker’s principal place of business or a remote location, where the licensee or its employees or independent contractors maintain a physical presence for the purpose of conducting business. If an entity wishes to maintain one or more branch offices for the transaction of business in addition to a principal place of business, the entity must first register the branch office.

SB 1492 also adds a definition of “remote location” as a location, other than a licensee’s principal place of business or a branch office, at which the employees or independent contractors of a licensee may conduct mortgage business. A licensee may permit its employees or independent contractors to work at remote locations in compliance with the licensee’s written policies and procedures, provided they meet nine new conditions.

Finally, the new law establishes various mortgage licensing fees. The application fee for mortgage brokers and mortgage lenders is $1,200, which includes application and examination fees for all registered locations. License renewal for mortgage brokers and mortgage lenders is based on the submission of an annual assessment fee, which is calculated based on the dollar value of loans originated and the dollar value of loans serviced for residential real property located in Oklahoma, with stated minimum and maximum assessment fees per year through 2027. Branch office and additional trade name initial registration fees are $150, and reinstatement fees are $500. For mortgage loan originators, application fees are $450, and renewal fees are $250.

Amicus brief(ly): Rather than follow other states down the path of creating a separate mortgage servicer licensing law, Oklahoma simply expands the definition of “mortgage broker” to include mortgage servicers and subjects them to an existing licensing regime. The statute also catches up with other states – not just in the mortgage lending or servicing world – that have clarified that that certain remote workers can perform work for a licensee without subjecting their residences to branch office licensing requirements. These kinds of laws are worth a look for any company that allows remote work in a state and in a line of business that requires branch office licensing.

On April 26, the Alaska Senate introduced Senate Bill 264. Following the lead of a few other states (Florida, Washington, Maryland, Missouri, Rhode Island, and Washington, D.C.) that have introduced legislation designed to cover bank partnership lending programs this legislative session, SB 264 would extend the applicability of the Alaska Small Loans Act by incorporating the “predominant economic interest” test and “anti-evasion” language. The SLA generally applies to loans of $25,000 or less with rates exceeding those otherwise permitted by law. In addition to providing clarification on how interest should be computed for loans of $25,000 or less, SB 264 would repeal Alaska’s payday lending law, limiting the rates available to such lenders.

Pursuant to SB 264, a licensee under the SLA is authorized to charge a maximum statutory interest rate of 36% on loans of $25,000 or less, which will include fees, costs, and premiums charged under Section 06.20.260 of the Act. The bill also revises the Alaska Interest and Usury Provision to clarify that interest under that statute will generally include fees charged by the lender, creditor, or mortgagee for opening, renewing, or continuing an account. This provision imposes interest rate limitations on loans of $25,000 or less.

SB 264 expands the applicability of the SLA by adding language stating that “a person, including the agent or service provider of another person, is a lender subject to the requirements of [the Act] if the interest rate on a loan exceeds [36% per annum] and:

• the person directly or indirectly holds, acquires, or maintains the predominant economic interest in a loan in the amount of $25,000 or less;
• the person offers, markets, brokers, arranges, facilitates, or services a loan in the amount of $25,000 or less and holds the right, requirement, or first right of refusal to purchase the loan, a receivable in the loan, or interest in the loan;
• the person makes a loan disguised as a personal property sale or lease back transaction; or
• the totality of the circumstances indicate that the person is a lender in a loan in the amount of $25,000 or less and the transaction is structured to evade the requirements of [the SLA].”

SB 264 further provides that a loan or transaction takes place in Alaska if the borrower is a resident of the state and completes the transaction, either in person or electronically, while physically present in Alaska. The bill also adds a new section to the SLA that prohibits a licensee from threatening a borrower with criminal prosecution as a result of the borrower’s default.

In addition, SB 264 repeals Alaska’s payday lending law, the Deferred Deposit Advances Chapter, effectively eliminating the rate exemption previously available to licensees.

If SB 264 is enacted, it will take effect on July 1, 2025.

Amicus brief(ly): Alaska is not known in financial services circles for leading the way in industry-regulating legislation, but it joins other states in this effort to regulate the non-bank players in the bank partnership and fintech space. The states are using broad language to make clear that they want to regulate the company with the ultimate right to the principal and interest in those loans when they cannot regulate the banks that make them. While a number of states are already regulating the non-banks in the space, it is clear that the state effort in this regard is not over. Companies should track these developments to stay ahead of new licensing requirements like these (though it is not clear whether Alaska will pass the bill – and if it doesn’t, we do not expect the effort to falter. Watch for the bill to be re-introduced next session).

On April 29, the Federal Housing Finance Agency issued a final rule that codifies many of the FHFA’s existing practices and programs regarding fair housing and fair lending oversight of its regulated entities – Freddie Mac, Fannie Mae (collectively, “Enterprises”), and the Federal Home Loan Banks (“Banks”) - and adds new related requirements, including requirements concerning the Equitable Housing Finance Plan program for the Enterprises. The final rule also codifies requirements for the Enterprises to collect and report language preference, homeownership education, and housing counseling information. The final rule makes changes to the Equitable Housing Finance Plan program to promote greater accountability for the Enterprises and public transparency, adds oversight of unfair or deceptive acts or practices to the FHFA’s fair housing and fair lending oversight programs, requires additional certification of compliance by the regulated entities, and establishes more precise standards related to fair housing, fair lending, and principles of equitable housing for regulated entity boards of directors. In addition, the final rule establishes a requirement for the Banks to report annually on any actions they voluntarily take to address barriers to sustainable housing opportunity for underserved communities in order to provide public transparency.

The final rule is effective 60 days after its publication in the Federal Register, except for subpart D, Federal Home Loan Bank Equitable Housing Finance Planning, which, as noted above, requires the Banks to report on any meaningful actions they have voluntarily taken to support underserved communities and any such actions they have planned for the coming year. Subpart D is effective on February 15, 2026.

Amicus brief(ly): The codification of FHFA fair lending policy here is on-mission and not surprising, and the final rule should not be disruptive to the Enterprises or Banks that are already subject to the fair lending practices and programs described. The transparency and accountability provisions appear to be consistent with the mission as well and give these companies an opportunity to describe their efforts to the public (in 2026 – there is time to prepare those reports regarding efforts made to serve underserved communities).

On May 1, the Federal Housing Administration published Mortgagee Letter 2024-07 - Appraisal Review and Reconsideration of Value (“ROV”) - to update its existing ROV policy as part of the Department of Housing and Urban Development’s efforts to strengthen safeguards against unlawful discrimination in residential property valuations and to address a lack of consistent, industry-wide policies and guidelines related to the ROV process. An ROV is a request to an appraiser to re-assess the appraised value of a property due to potential appraisal reporting deficiencies, due to inappropriate selection of comparable properties, or based upon additional information the appraiser should consider.

The updated policy enhances the FHA’s current policy with additional and clarified standards for appraisal reviews, including improvements to the process by which borrowers may request an ROV if they identify a problem with the appraisal. The updated policy requires mortgagees to implement a process for reviewing and responding to borrower-initiated ROV requests that satisfies certain minimum requirements, including delivery of disclosures to borrowers at loan application and upon delivery of the appraisal with instructions on how to request an ROV. The updated policy also includes guidance to: ensure that mortgagees properly train their underwriting staff on how to identify appraisal deficiencies, including racial and ethnic bias; require that a mortgagee’s appraisal review process includes protocols for remediating deficiencies; establish limits on the quantity and frequency of ROV information provided to the appraiser with protocols for a mandatory appraiser response; and require that mortgagees incorporate these appraisal review and ROV processes into their quality control plans.

The provisions of the Mortgagee Letter may be implemented immediately but must be implemented for FHA case numbers assigned on or after September 2, 2024. The policy updates will be incorporated into an update of the FHA’s Single Family Housing Policy Handbook 4000.1.

Amicus brief(ly): The FHA’s move here is consistent with prior actions and statements from the CFPB and the Department of Justice to try to identify and eliminate appraisal bias in the housing market. This update outlines a process for FHA borrowers to formally challenge appraisal values on their FHA loans. The FHA and other lenders with vendor oversight obligations should understand the process and should consider having proprietary methods for identifying and eliminating bias in this critical component of mortgage loan origination. The government is taking this concern, and all fair lending concerns, seriously.

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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.