Last Week, This Morning

June 3, 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 May 30, the U.S. Supreme Court, in a unanimous opinion, vacated the U.S. Court of Appeals for the Second Circuit’s 2022 decision in Cantero v. Bank of America, which concluded that the National Bank Act preempted a New York law requiring banks to pay borrowers interest on balances held in escrow accounts maintained in connection with mortgages on real estate.

Bank of America, a national bank, provided mortgage loans to certain borrowers, and the mortgage contracts required the borrowers to make monthly payments into escrow accounts. Bank of America did not pay interest on the balances in the escrow accounts. Escrow accounts operated by national banks (and other lenders and servicers) are regulated by the Real Estate Settlement Procedures Act, but RESPA does not require national banks to pay interest on escrow accounts. A number of states, however, do require mortgage lenders to pay interest on escrowed borrower funds. In Cantero, the borrowers brought a putative class action lawsuit against Bank of America, alleging that it failed to pay interest on their escrow accounts, in violation of the New York interest-on-escrow law. Bank of America argued that the New York law was preempted by the NBA, and, therefore, as a national bank, it did not have to comply with the state law. The trial court concluded that nothing in the NBA or other federal law preempted the New York law on the question of interest on escrow. On appeal, the Second Circuit reversed, finding that because the New York law “would exert control over” national banks’ power to “create and fund escrow accounts,” the law was preempted.

The Supreme Court concluded that the Second Circuit “did not conduct the kind of nuanced comparative analysis required by [Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996)], but instead distilled a categorical test that would preempt virtually all state laws that regulate national banks.” According to the Supreme Court, the Dodd-Frank Act of 2010 provides that the NBA preempts a state law “only if” the state law: (1) discriminates against national banks as compared to state banks, or (2) “prevents or significantly interferes with the exercise by the national bank of its powers,” as determined “in accordance with the legal standard for preemption” that the Supreme Court articulated in Barnett Bank. Because the New York interest-on-escrow law does not discriminate against national banks, the Supreme Court found that the preemption question should be analyzed under the “prevents or significantly interferes” standard in accordance with Barnett Bank, a case that “did not draw a bright preemption line.” Because the Second Circuit did not apply the preemption standard in a manner consistent with the Dodd-Frank Act and Barnett Bank, the Supreme Court vacated and remanded the decision.

Amicus brief(ly): In the regulatory “reset” following the recession and housing crisis of the late 2000s, the adoption of the Barnett Bank reasoning as the measuring stick for federal preemption questions for federally chartered banks was material, but it did not change much. In the aftermath of the adoption of the Dodd-Frank Act, the Office of the Comptroller of the Currency reiterated its preemption stance on a number of core issues related to lending and banking. In the OCC’s estimation, the areas where it had already made clear by regulation (12 CFR Parts 7 and 34) that national banks could preempt state law (e.g., licensing and disclosures) were still within national banks’ authority and powers under the NBA – so the OCC effectively re-issued its preemption regulations and referenced Barnett Bank as the required guiding principle for national bank preemption. Among those re-issued regulations was 12 CFR § 34.4(a)(6), which states squarely that state law limitations on mortgage-related escrow accounts are preempted. The fight in this case is effectively over whether that provision of the regulation is enforceable and sufficiently well-reasoned under the Barnett Bank case. Stay tuned for the Second Circuit’s second review of the case, and we’ll see where it lands.

On May 28, the Federal Housing Administration published a frequently asked question to address inquiries from stakeholders regarding reimbursement of attorney’s fees for judicial foreclosures in states where non-judicial foreclosure is the preferred method of foreclosure but a mortgagee determines to proceed judicially due to the presence of a subordinate FHA lien.

The question presented was: “If the mortgagee proceeds with judicial foreclosure due to the presence of a federal lien, such as a Secretary-held lien, in a state where non-judicial foreclosure is the preferred method as listed in Appendix 5.0 of the Single Family Housing Policy Handbook 4000.1, will the mortgagee be reimbursed for attorney’s fees that exceed the amount provided under the preferred method of foreclosure?”

The FHA answered in the affirmative, stating: “If the mortgagee proceeds with a judicial foreclosure due to the presence of a subordinate federal lien … in a state where non-judicial foreclosure is the preferred method as listed in Appendix 5.0 of … Handbook 4000.1, HUD will consider judicial foreclosure to be the preferred method of foreclosure notwithstanding Appendix 5.0 of Handbook 4000.1. Therefore, HUD will reimburse attorney’s fees where the mortgagee submits a breakdown for reasonable and customary attorney’s fees that exceed the amount provided under the non-judicial foreclosure based on the Fannie Mae Allowable Foreclosure Attorney Fees Exhibit, as required under Allowable Foreclosure Attorney Fees and Fees Associated with Bankruptcy Clearance, Possessory Actions, and Completion of a DIL (III.A.2.t.ii.(F)) and For Amounts Exceeding the Maximum Fee and Not Provided for in HUD Schedule (IV.A.2.a.ii(K)(1)(b)).”

Amicus brief(ly): This is a useful clarification from the FHA and a fair, sensible result. It is also a relief for mortgage servicers faced with the uncertainty of recovering from HUD attorneys’ fees incurred in connection with a judicial foreclosure that the servicer would not have pursued but for the existence of an FHA loan and security interest. This development is also a helpful reminder to servicers to consult the Policy Handbook and FAQs for common servicing issues like these.

On May 30, the Consumer Financial Protection Bureau issued a request for information seeking input from the public on the impact residential mortgage closing costs (such as costs for origination, credit scores, credit reports, employment verification, title insurance, title searches, document preparation, appraisal reports, and settlement services) have on borrowers and the mortgage lending market. Specifically, the CFPB is seeking the following information:

• What closing costs are concerning or cause hardships for consumers?
• What closing costs are charged that are not or should not be necessary to close the loan?
• What is the degree to which consumers compare closing costs across lenders and settlement service providers?
• How are closing costs currently set, who profits from the various fees, who benefits from the services provided, and what leverage or oversight do lenders have over third-party costs that are passed onto the consumer?
• Which closing costs have increased the most over the past several years, and what is the cause of such increases? Do they differ for purchase or refinance loans?
• What is driving the recent price increases of credit reports and credit scores?
• Would lenders be more effective at negotiating closing costs than consumers?
• What studies or data are available to measure the potential impact closing costs may have on overall costs, housing affordability, access to homeownership, or home equity?

The American Bankers Association, Housing Policy Council, and Mortgage Bankers Association issued the following statement, in part, in response to the CFPB’s RFI: “Mortgage lenders fully and transparently disclose costs to every borrower on forms developed and prescribed by Congress in the Dodd-Frank Act and implemented by the CFPB. Many of those disclosed costs, such as title, appraisal and credit reports are required by federal statutes, safety and soundness guidelines, and the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Fannie Mae and Freddie Mac as a condition of buying and insuring a mortgage. Moreover, the services these fees cover mitigate risk for taxpayers and borrowers alike. The CFPB recently concluded a formal review and evaluation of its mortgage disclosure rules and praised them for improving borrower understanding and facilitating the ability to shop among lenders. The industry invested considerable resources to implement these new rules just a decade ago. If the CFPB is now modifying its previous position and is considering changing this complex regulatory disclosure regime, a rule-making process governed by the Administrative Procedure Act – and supported by a robust cost-benefit analysis – is the only appropriate vehicle to initiate that work. Such a rule-making process would allow for the proper level of engagement to produce changes that benefit consumers and do not add compliance costs and lead to negative unintended consequences.”

Comments on the RFI must be received by August 2, 2024.

Amicus brief(ly): The ABA, MBA, and Housing Policy Council said it best, but we’ll paraphrase – after the miles of work lenders and servicers did to comply with the disclosure rules coming out of Dodd-Frank, and the millions of dollars spent to develop systems, forms, and procedures to comply, the only appropriate means of amending those rules (if that is where this undertaking is headed) is a comprehensive rulemaking with a meaningful opportunity to engage with the CFPB on any new or revised rule related to closing costs. The move appears to be in keeping with the CFPB’s recent focus on what it refers to as “junk” fees, though that is not explicit in the announcement of its public inquiry. (It is, however, explicit in CFPB Director Chopra’s comments on the inquiry, in which he states: “Junk fees and excessive closing costs can drain down payments and push up monthly mortgage costs.”) If the comments in response to this RFI lead to information on which the CFPB feels it must act, the Bureau ought to undertake the more robust rulemaking the interested trade groups seek.

The Oregon Department of Consumer and Business Services recently adopted rules requiring data brokers to register with the DCBS. As part of the registration process, a data broker must submit to the director of the DCBS a declaration in which the data broker: (1) states whether individuals residing in Oregon may opt out of all or a portion of the data broker’s collection, sale, or licensing of the individuals’ personal data; (2) identifies which of the data broker’s collection, sale, or licensing activities an individual may opt out of or which portion of the individual’s brokered personal data the individual may opt out of permitting the data broker to collect, sell, or license; (3) describes the method by which individuals may exercise their opt out rights; and (4) states whether individuals may authorize another person to exercise their opt out rights on their behalf and, if so, how to do so.

The new rules set forth the annual fees data brokers must pay to initially register or renew their registration with the DCBS, the procedure for renewing a valid registration, the procedure for correcting any deficiencies in a data broker’s registration application or registration renewal, and the procedure for suspension of a registration. The rules also set forth the requirements for data brokers that intend to use an assumed business name.

Finally, the rules require data brokers to disclose to the DCBS any breach of security of individuals’ personal information within 45 days of such breach.

The Oregon rules were effective May 28, 2024.

Amicus brief(ly): These data broker registration laws are a relatively recent phenomenon, but they appear to be catching on. Oregon passed its bill in 2023, and these regulations implement the statute to provide detail about how data brokers must register and what information they must provide. Recall that the CFPB started down the road of enhancing consumer control over what companies can do with consumer financial data back in late 2022, with an announcement of proposals and alternatives under consideration that are designed to inform some sort of rulemaking that allows consumers to actively manage their data and financial relationships. The new Oregon rules are largely procedural but are indicative of the direction states appear to be headed with respect to consumer data management.

On May 28, Florida enacted Senate Bill 556 to authorize financial institutions to delay a disbursement from or transaction involving an account of a specified adult – defined as a person aged 65 years or older or a vulnerable adult – or an account for which a specified adult is the beneficiary or beneficial owner if the financial institution suspects financial exploitation of that adult.

SB 556 defines “financial exploitation” as the “wrongful or unauthorized taking, withholding, appropriation, or use of money, assets, or property of a specified adult; or any act or omission by a person, including through the use of a power of attorney, guardianship, or conservatorship of a specified adult, to: (1) [o]btain control over the specified adult’s money, assets, or property through deception, intimidation, or undue influence to deprive him or her of the ownership, use, benefit, or possession of the money, assets, or property; or (2) [d]ivert the specified adult’s money, assets, or property to deprive him or her of the ownership, use, benefit, or possession of the money, assets, or property.”

A delay of a disbursement or transaction expires 15 business days after the date on which the delay was first placed, but the delay may be extended under certain circumstances. A financial institution that acts in good faith and exercises reasonable care in placing the delay of a disbursement or transaction is immune from any administrative or civil liability. Financial institutions are required to develop and implement policies, procedures, and training for employees on issues pertaining to suspected financial exploitation of older or vulnerable adults.

SB 556 takes effect on January 1, 2025.

Amicus brief(ly): States regulate the financial exploitation of the elderly and/or vulnerable adults, oftentimes as a criminal matter, but Florida is now empowering financial institutions to intervene when they suspect exploitation in order to slow transactions down and investigate. Florida now requires those financial institutions to develop policies and procedures to help identify and address potential financial exploitation. That work is worthwhile and should help limit the potential financial abuse of the elderly and vulnerable in the state, which is ranked second for the percentage of its population that is 65 years old or older. Financial institutions that do not have fraud and abuse policies that try to detect the kinds of financial abuses addressed in this law should consider the passage of this bill as a jumping-off point for those policies, adopting some baseline procedures to detect and address this specific form of consumer protection.

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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.