Last Week, This Morning

September 30, 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 September 23, the U.S. Department of Justice, on behalf of the Department of Housing and Urban Development, announced a $2.4 million settlement with a mortgage lender, resolving allegations that the lender submitted false claims for federal mortgage insurance. Specifically, the DOJ alleged that the lender did not comply with certain HUD underwriting requirements for home equity conversion mortgages insured by HUD's Federal Housing Administration during the period from January 1, 2007, through December 31, 2010. The lender then submitted claims on or before June 30, 2023, for payment on those HECMs. The DOJ alleged that this conduct violated the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989.

FHA's HECM insurance program is a reverse mortgage program specifically for homeowners aged 62 and older. Lenders that participate in the program are authorized to underwrite mortgages without first having the government review the loans for compliance with the agency's underwriting and origination requirements but must follow FHA rules to ensure that only eligible mortgages are insured. As of September 2023, the lender subject to this settlement agreement is no longer an FHA-approved mortgagee.

Amicus brief(ly): Reverse mortgage lending is a technical business, most of which has been tied up in HUD's HECM product for decades. As with all government-insured loans, there is a handbook for HECMs that tells approved lenders how to underwrite loans to qualify for the program's insurance. When you deviate from the government handbook, you take risk - and that is evidently what happened in this case, with the risk realized. There were allegations that the lender "knowingly" violated the HECM underwriting requirements by using temporary staff to do underwriting and submit loans for approval with falsified underwriter signatures, among other things. HUD filed suit against the non-bank lender back in 2020, and this settlement closes the case. Following the handbook is a program requirement, not a best practice.

On September 25, the Federal Trade Commission announced "Operation AI Comply," an enforcement sweep by the agency that is focusing on deceptive and unfair claims by companies regarding their use of artificial intelligence. As part of its initial announcement of the enforcement sweep, the FTC announced settlements with five companies allegedly making deceptive and unfair AI claims. The companies subject to the enforcement actions included: (1) a company that provided an online subscription service that claimed to use AI to generate legal documents and perform other legal services; (2) a company that sold an AI-enabled writing assistant service designed for a number of uses, one of which allowed customers to generate online consumer reviews and testimonials; and (3) three companies that claimed that their AI-powered services would help consumers earn passive income by opening online storefronts.

The FTC's corresponding blog post regarding Operation AI Comply offers some guidance to companies regarding AI. The blog post first advises that companies should not mention in their advertisements that they use AI if they don't, noting that companies should "[b]e aware that just using an AI tool when you're developing your product is not the same as offering your customers a product with AI inside." The blog post also advises that the same advertising principles apply to companies' claims about the use of AI in connection with their products and services, and the FTC expects companies to have a reasonable basis for any claim they make about their products or services in their advertisements. Finally, the blog post notes that the FTC is "examining whether AI and other automated tools are being used for fraud, deception, unfair manipulation, or other harmful purposes. On the back end, [it is] looking at whether automated tools have biased or discriminatory impacts."

Amicus brief(ly): AI is constantly in the news these days, and it is here to stay, as are government concerns about fraud and deception in any context. But the government is increasingly focused on whether and how the use of AI in advertising can be misleading. (The FTC's news release mentions that companies may be using "AI powered tools that can turbocharge deception." (emphasis ours)). Amidst these concerns, the FTC announced its enforcement sweep with details on five enforcement actions. The FTC also published straightforward but useful guidance for companies using AI, cautioning those companies to be skeptical about claims made by AI providers and to get as much information as possible about what they are offering and what the AI service can actually do. And, importantly, the FTC reminds companies not to post fake product or service reviews (using AI or otherwise) and to make sure there is a "reasonable basis" for claims made in advertising (i.e., make sure what your advertisements say is true). That is good counsel.

On September 20, California Governor Gavin Newsom signed Assembly Bill 2424, which adds procedural requirements to the foreclosure process, including: (1) requiring additional disclosures to a borrower about the right of a third party to receive copies of foreclosure process notices in order to assist the borrower; (2) allowing additional time for the borrower to sell the home on the open market prior to the foreclosure auction; and (3) establishing a minimum sale price, in relation to fair market value, for the initial foreclosure auction.

Specifically, the new law requires additional disclosures about the right of specified third parties, such as a family member, HUD-certified housing counselor, or attorney, to request to receive copies of any notice of default and notice of sale at specified times in the loan and foreclosure process and that receiving a copy of these documents may allow the third party to assist the borrower in avoiding foreclosure.

The new law also prohibits a foreclosure sale until the expiration of 45 days if the trustee receives, at least five business days before the scheduled date of sale, from the mortgagor or trustor a listing agreement for the sale of the property subject to the power of sale. If a scheduled date of sale has been postponed pursuant to that provision and the trustee receives, at least five business days before the scheduled date of sale, from the mortgagor or trustor a copy of a purchase agreement for the sale of the property, the new law requires the trustee to postpone the scheduled date of sale to a date that is at least 45 days after the date on which the purchase agreement was received by the trustee.

Finally, the new law requires the mortgagee, beneficiary, or authorized agent to provide to the trustee the fair market value of the property at least 10 days prior to the initially scheduled date of sale and prohibits the trustee from selling the property at the initial trustee's sale for less than 67% of the fair market value. If the property remains unsold after the initial trustee's sale, the new law requires the trustee to postpone the sale for at least seven days and authorizes the property to be sold thereafter to the highest bidder.

Amicus brief(ly): The end of summer is a notoriously slow period for enacting state legislation, but some big states, like California, keep working all year to give us state law developments to report. This new law increases the regulation of residential mortgage foreclosures in California, requiring additional consumer disclosures and a disclosure to the trustee of the fair market value of the collateral property before the foreclosure sale date. As a practical matter, an exchange of information related to the property's FMV and the amount of the debt securing the loan is pretty routine in the pre-foreclosure process as lenders seek to set and manage expectations for the sale. But now it is a requirement in California. Mortgage servicers and trustees exercising the power of sale found in California deeds of trust should take note of these updates for their foreclosure policies and procedures.

California Assembly Bill 3100, signed by Governor Gavin Newsom on September 22, relates to home mortgage loans not insured or guaranteed by the federal government that are secured by owner-occupied residential real property containing four or fewer dwelling units with multiple borrowers. On or after January 1, 2027, such loans must include a provision allowing any of the existing borrowers to purchase the property interest of another borrower on the loan by assuming the seller's portion of the mortgage in connection with a decree of dissolution of marriage, a legal separation agreement, or an incidental property settlement if the assuming borrower qualifies for the underlying loan, as determined by the lender.

Amicus brief(ly): With a couple of years' advance notice for this change, mortgage lenders will have to update their California credit agreements used with mortgage loans not insured or guaranteed by the government. This brief bill that applies only to new mortgage loans made after January 1, 2027, effectively codifies an assumption arrangement in connection with owner-occupied consumer mortgage loans where the lender still has the right to (re-)underwrite an existing borrower who has the interest in and ability to assume a co-borrower's mortgage obligation. While the new provision does not guarantee that the assumption will work out for the applicant, it does require lenders to include specific information about the assumption right in the loan documents. The new law mentions divorce and separation as the likely impetus for the law change, and that circumstance provides a pretty clear use case for the provision. Lenders have some time but will need to get working on that new language before the date when the documents have to include this provision on assumption.

On September 24, the Consumer Financial Protection Bureau's Office of Servicemember Affairs issued its annual report, which provides an overview of complaints about consumer financial products and services submitted to the CFPB by servicemembers, veterans, and military families in 2023.

The report first identifies the top complaints submitted by the military community in 2023. Credit or consumer reporting remained the top complaint category among the military community, followed by complaints about debt collection and checking or savings accounts. Of note, among active duty servicemembers, from 2022 to 2023, complaints about mortgages (47 percent increase), credit cards (41 percent increase), and checking or savings accounts (41 percent increase) saw the largest increases. Among veterans, from 2022 to 2023, complaints about vehicle loans or leases (47 percent increase), checking or savings accounts (34 percent increase), credit and consumer reporting (31 percent increase), and credit cards (30 percent increase) saw the largest increases.

Another key finding in the report is that the military community submitted a significant number of complaints about federal student loan servicers and about educational institutions withholding student transcripts. With respect to student loan servicing, the complaints reflect issues the military community has experienced with contacting their student loan servicer, including long wait times, frequent disconnections, waiting for call backs that never occurred, and inconvenient call center hours for servicemembers stationed overseas. The complaints also reflect issues with enrollment in income-driven repayment plans, as well as complaints about incorrect calculations of monthly payment amounts once enrolled in income-driven repayment plans. In addition, deployed servicemembers have submitted complaints about servicers' failure to properly process requests for interest rate reductions during the deployment period. The military community also reports problems related to the withholding of transcripts by colleges and universities as a means to collect debts allegedly owed to those institutions.

Finally, the report focuses on complaints submitted to the CFPB by older veterans, highlighting that this community is often the target of fraud or scams, particularly with respect to unaccredited companies that charge high fees for assistance in processing veterans' benefits claims.

Amicus brief(ly): The fact that consumer reporting and debt collection complaints are the top two areas of complaints for servicemembers is a little surprising because that data tracks overall consumer complaint data gathered by the CFPB and the FTC every year. While consumer reporting and debt collection have changed places on the annual lists of top sources of consumer complaints over the years, they have consistently been the two top sources of consumer complaints for decades. We would have guessed that servicemembers who have special protections in the Servicemembers Civil Relief Act would have more formal complaints about their interest or finance charge rates not being reduced as required, wrongful repossessions or foreclosures, or difficulty in getting rental agreements canceled than the more routine consumer reporting and debt collection complaints referenced in the report. Based on the report, we know we would have been wrong (though, as noted in our summary, servicemembers do have complaints about how the industry honors those SCRA rights). The counterintuitive result may be attributable to good awareness and tight SCRA policies and procedures, but it also could be that consumer reporting and debt collection efforts are just the kinds of servicing activities that consumers of all kinds like the least - so they issue complaints about them the most.

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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.