Last Week, This Morning

February 24, 2025

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.

New York Governor Kathy Hochul recently signed Assembly Bill 2056, which amends a provision that limits the amount of flood insurance that can be required by a mortgage lender. Existing law states that "no mortgagee shall require a mortgagor to whom the mortgagee makes, increases, extends, or renews any loan or line of credit secured by improved residential real property to purchase or pay for flood insurance on such residential real property: (1) at a coverage amount that exceeds the outstanding principal mortgage balance as of the beginning of the year for which the policy shall be in effect; or (2) that includes coverage for contents. The new law now states that the coverage amount may not exceed "the lesser of the replacement value of the residential real property or the outstanding principal mortgage balance as of the beginning of the year for which the policy shall be in effect [emphasis added]." The new law also amends the language in the notice provided by the mortgagee to the mortgagor when the mortgagor is required to purchase or pay for flood insurance.

Amicus Brief(ly): This new law is likely a reaction to the increase in frequency and intensity of storms that lead to flooding, and it follows a 2023 law requiring sellers of property in New York to advise buyers if the property has previously flooded or is in a flood risk area that was prompted by a similar concern. Under the new law, mortgage lenders cannot require New York borrowers to carry flood insurance coverage tied only to the outstanding principal balance on the mortgage loan. Instead, the new coverage requirement limit is the lesser of that balance or the replacement value of the real property. The rule that coverage for contents is not allowed continues from the previous version of this law. Mortgage loan originators should note that this law also updates the pre-closing flood insurance notice that lenders have to give borrowers to advise them that the required flood coverage may not be sufficient to fully cover losses that result from a flood.

New York Governor Kathy Hochul also recently signed Assembly Bill 431, which requires student loan servicers to annually report private education debts to the Superintendent of the Department of Financial Services. "Private education debt" is defined under the new law as an extension of credit to, or debt or obligation owed or incurred by, a consumer to pay for higher education expenses.

The new law requires each student loan servicer to submit an annual report containing a list of all private education creditors associated with the private education debts serviced by the student loan servicer that are owed by New York residents. The law amends the definition of "private education creditor" to mean "any person engaged in the business of extending a private education debt." The law removes the requirement for private education creditors to register with the state and to provide information to the superintendent about the creditor's private education debt portfolio related to consumers who reside in the state.

For each private education creditor listed in the annual report now required to be submitted by the student loan servicer, certain information must be included, such as: a list of the providers of higher education associated with the private education debts serviced by the student loan servicer; the total outstanding dollar amount and number of private education debts and the number of consumers who owe such private education debts; the total dollar amount and number of private education debts created in the prior calendar year; the number of private education debts that experienced a default and the percentage of such private education debts associated with each private education creditor; the total dollar amount and number of private education debts that defaulted for reasons other than non-payment; the total dollar amount and number of private education debts with a cosigner or guarantor; the total dollar amount and number of private education debts created to refinance other private education debts or federal student loans; and the total dollar amount and number of defaulted private education debts for which the student loan servicer commenced, maintained, or settled a lawsuit for collection.

Amicus Brief(ly): New York pivots in this new law from requiring student lenders to register to requiring licensed student loan servicers to identify those lenders in annual reports of their servicing activities. The new law will result (in a couple of years) in a public-facing website that identifies student loan servicers and includes other summary information. It is not clear why New York made the change, but it appears to be a shift in perspective that will allow the state to better track private student loan borrower performance. The state will be getting largely the same information through this update that they would have gotten through the now-obsolete registry, but the state will also be getting information about defaults, servicing volume, and collection lawsuits that was not part of the information that student lenders had to provide. Licensed student loan servicers have a new reporting burden in New York, but the information they have to provide should be easy enough to gather and furnish.

In our January 21 issue of Last Week, This Morning, we described the impact of the Maryland Office of Financial Regulation's guidance on the licensing requirements for mortgage trusts and their assignees in light of the Appellate Court of Maryland's decision in Estate of Brown v. Ward, 261 Md. App. 285 (April 19, 2024). The OFR heard from industry representatives about the consequences of the guidance for the secondary market and recently issued follow-up guidance. To address industry stakeholder concerns "that the licensing requirements create unique challenges for passive trusts and the role they serve by providing liquidity to the mortgage market," the OFR collaborated with industry to develop proposed legislation - the Maryland Secondary Market Stability Act of 2025 (Senate Bill 1026/House Bill 1516). This legislation has been introduced in the Maryland General Assembly. The bills are emergency bills and would take effect immediately upon enactment.

The OFR explained that the legislation "is designed to provide a licensing exemption from Maryland's licensing requirements for entities that acquire mortgage and installment loans by assignment but do not originate, service, or collect these loans on their own behalf." The exemption does not apply to a person who acquires or is assigned a loan originated under the Maryland Consumer Loan Law, Md. Code Ann., Com. Law §§ 12-301 et seq.

The OFR also extended the enforcement deadline of the licensing requirements outlined in its January 10, 2025, guidance from April 10, 2025, to July 6, 2025. It is expected that the legislation will be enacted by July 6, 2025.

Amicus Brief(ly): If/when these bills pass, they will provide a measure of relief from Maryland's heavy licensing requirements for companies with multiple business lines. Maryland's licensing laws have evolved to add licensing requirements for brokers, lenders, servicers, debt collectors, and debt buyers, but the state has not included sensible cross-exemptions with those licensing requirements that would allow a licensed company already on Maryland's radar to add services or new products without having to get another license. Many states include exemptions that allow lenders that also service loans, and passive holders like a securitization trust or a passive debt buyer, to obtain a single license that allows the state to regulate the businesses without burdening them with multiple licensing regimes. Good for the secondary mortgage market for getting to the OFR in the aftermath of the Estate of Brown case and obtaining a more efficient result. We hope that the state will engage in a self-assessment of its licensing requirements and implement other amendments that can result in licensing efficiencies.

On February 17, the U.S. District Court for the Southern District of Florida entered summary judgment in favor of the Consumer Financial Protection Bureau in a lawsuit brought by Revenue Based Finance Coalition ("RBFC") challenging the CFPB's small business lending data collection final rule. Specifically, RBFC challenged the fact that the final rule does not exclude merchant cash advances ("MCAs") from its coverage.

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act to require financial institutions to collect and report to the CFPB data concerning applications for credit for women-owned, minority-owned, and small businesses. In March 2023, the CFPB issued a final rule entitled Small Business Lending Under the Equal Credit Opportunity Act to implement the changes to the ECOA made by Section 1071. The final rule does not exclude MCAs and/or other sales-based financing transactions from the collection and reporting requirements as urged during the proposal stage of the rule by MCA providers and trade associations representing MCA providers. According to the court's decision, the final rule "defined covered credit transactions using ECOA's statutory definition of 'credit' and declined to adopt a definition that 'explicitly state[s] that it applies to any particular type of credit, whether it be installment, loans, credit cards, or merchant cash advances' because the Bureau 'believe[d] that the statutory term 'credit' in ECOA is intentionally broad so as to include a wide variety of products without specifically identifying any particular product by name.' ... In commentary, however, the Bureau did interpret the Rule's definitions of 'credit' and 'covered credit transactions' to 'include all business credit (including loans, lines of credit, credit cards, and merchant cash advances)' that are not excluded by § 1002.104(b) ... and the Rule did set forth one data item that was to be compiled for covered credit transactions that was specific to MCAs or other sales-based financing ... (requiring, for 'a merchant cash advance or other sales-based financing transaction,' data about 'the difference between the amount advanced and the amount to be repaid')."

The court rejected RBFC's arguments that: (1) MCAs are not "credit" under the ECOA and, therefore, should not be covered by the final rule; and (2) the final rule is arbitrary and capricious under the Administrative Procedure Act. The court found that the CFPB did not exceed its statutory authority by adopting a rule that did not specifically exclude MCAs or sales-based financing transactions from the rule's definition of "covered credit transactions," a definition that, according to the court, tracks the ECOA's definition of credit. The court concluded that MCAs qualify as "credit" under the ECOA because MCA agreements confer "a right to defer payment of a debt." Finally, the court rejected RBFC's argument that the final rule is arbitrary and capricious under the APA, which asserted that the CFPB only chose to regulate MCAs in order to benefit competitors of MCA providers and that the CFPB failed to properly consider RBFC's comments on the proposed rule during the rulemaking process.

Amicus Brief(ly): The CFPB victory in this case comes on the heels of a limited stay of enforcement of the 1071 rule that the Fifth Circuit handed down on Valentine's Day. But this is one of the last CFPB "wins" carrying over from the prior administration, as new leadership has begun to dismiss cases that the CFPB has brought and to change position in cases where it is a defendant. In fact, in a case in Kentucky where several banks and the Kentucky Bankers Association sued the CFPB over the 1071 rule, the CFPB responded to a motion from the plaintiffs asking for an extension of the compliance date for the 1071 rule by indicating that it does not object to an extension of the compliance date "for all covered entities," effectively expanding the reach of that more limited Fifth Circuit holding to stay the compliance date across the board. And there is young legislation in Congress seeking to repeal the rule. Notwithstanding this legal victory for the CFPB in Florida, based on the clear change in direction at the CFPB and the indefinite pause on the compliance date for the rule, it appears that the future of the rule is in doubt.

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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.