CURRENT MONTH (February 2021)
Banking Law
FinCEN Updates PPP FAQ
By Emily Honsa-Hicks, McGlinchey Stafford, PLLC
On February 1, 2021, FinCen republished (with clarification) its FAQs surrounding Bank Secrecy Act (BSA) requirements applicable to Paycheck Protection Program (PPP) loans. The FAQs include the following information:
- A PPP loan made to an existing customer whose information has already been verified does not trigger a requirement to re-verify.
- For participating federally insured depository institutions and federally insured credit unions, the PPP loans do not trigger a requirement to collect and verify beneficial ownership information for existing customers (unless otherwise required by the lender’s BSA compliance program). For other lenders, if the lender has previously verified beneficial ownership information and the PPP loan is being made to an existing customer, no re-verification is required.
- A lender may rely on the information obtained in connection with a First Draw PPP loan from an existing customer for a Second Draw PPP loan application. However, updating customer information and due diligence should be conducted consistently with this FAQ and the previous FinCEN April 2020 FAQ.
- For new customers, beneficial ownership information must be collected for natural persons, businesses, and legal entities as appropriate. For natural persons with a 20% or greater ownership stake, the lender should collect the owner name, title, ownership %, TIN, address, and date of birth.
- Clarification that the FinCEN FAQs from April 2020 apply to Second Draw PPP loans.
Building Regulation
HUD Publishes Final Rule Amending the HUD Code, Effective March 15, 2021
By Devin P. Leary-Hanebrink, McGlinchey Stafford, PLLC
The HUD Code, the federal building code regulating the manufacture, installation, and overall safety standards of manufactured homes, is about to undergo the most comprehensive update in over a decade. On January 12, 2021, HUD published its final rule amending the HUD Code, with a Monday, March 15, 2021, effective date for the revisions. (Note that HUD also recently published a correction to its final rule.)
In total, HUD is implementing 45 updates to the HUD Code. Most of the changes (36 of the 45 updates) revise the HUD Code’s Construction and Safety Standards. Specifically, HUD is amending nine of the 10 existing Subparts under the Construction and Safety Standards and introducing a new Subpart—Subpart K—that is specific to attached manufactured homes. The final rule also provides new guidelines applicable to multi-story and multi-family structures, as well as updated standards for attached garages, carports, and accessory buildings, among other changes.
HUD’s Office of Manufactured Housing Programs has stated that any home entering the first stage of production on or after March 15, 2021, must comply with the HUD Code as revised, regardless of the date of manufacture listed on the home’s Data Plate. However, because of the effect COVID-19 had on the industry’s capacity last year, manufacturers are reporting a significant backlog in home production. In response, several homebuilders are requesting that HUD postpone implementation of the final rule. While nothing has been confirmed, it is anticipated that HUD will postpone implementation until later this year.
Going forward, industry participants should also anticipate corresponding activity at the state level, as state and local jurisdictions amend their respective building code requirements to incorporate (or at least accommodate) changes at the federal level.
Consumer Finance
Biden Administration Extends Protections for COVID-19 Impacted Homeowners
By Sanford P. Shatz, McGlinchey Stafford, PLLC
With his presidency less than one month old, on February 16, 2021, the Biden Administration announced that it was committed to delivering immediate relief to American families who were bearing the brunt of the pandemic by delaying foreclosures of federally-backed mortgages, and extending additional opportunities to obtain a forbearance on their mortgage payments.
Three federal agencies, the Department of Housing and Urban Development, the Department of Veterans Affairs, and the Department of Agriculture extended their foreclosure moratoriums from March 31, 2021, through June 30, 2021, to help Americans who are at risk of falling further into debt avoid losing their homes. In addition, these three agencies extended by three months, to June 30, 2021, the enrollment window for their borrowers to seek a twelve-month forbearance on their mortgage payments. Any borrowers who had obtained a forbearance before June 30, 2020, could obtain up to six additional months of forbearance, through the middle of 2022.
In addition, the Federal Housing Finance Administration, which oversees Fannie Mae and Freddie Mac, recently extended its foreclosure moratorium from February 28, 2021, through June 30, 2021. It also extended the time for borrowers to seek a twelve-month forbearance through June 30, 2021.
These coordinated actions cover approximately 70 percent of the existing single-family mortgages in the country and permit distressed homeowners an opportunity to keep their homes. Borrowers should not wait to seek any relief, and should contact their mortgage services at their earliest opportunity to determine what programs could best help them. For additional information, borrowers can visit the CFPB’s Help for homeowners and renters during the coronavirus national emergency webpage.
California Seeks Comment on California Consumer Financial Protection Law
By Catherine M. Brennan, Hudson Cook, LLP
The California Department of Financial Protection and Innovation (“DFPI”) seeks comments for a proposed rulemaking under the California Consumer Financial Protection Law (“CCFPL”), the state’s version of the Consumer Financial Protection Bureau. The CCFPL also authorizes the DFPI to establish rules relating to covered persons, service providers, and consumer financial products or services. The DFPI seeks input from stakeholders in developing regulations to implement the CCFPL. Specifically, the DFPI seeks feedback on numerous questions, including the following:
- For what industries should the DFPI first establish registration requirements under Financial Code section 90009, subdivision (a)? What consumer protection risks do those industries present to consumers that would make it appropriate to prioritize the registration of those industries over others? The DFPI invites stakeholders to submit examples of acts or practices in those industries that stakeholders find concerning.
- For each industry that a stakeholder states should be a priority for registration, what rules should the DFPI establish to facilitate oversight of the industry, what records should the DFPI require those registrants to maintain, and what requirements should the DFPI impose to ensure that covered persons are legitimate? (Fin. Code § 90009, subd. (b)) What data should the DFPI require registrants to submit in annual or special reports to the DFPI? (Fin. Code § 90009, subd. (f)(2)) Why should the DFPI collect this data?
- Should providers of commercial financing and other financial products and services to small business recipients, nonprofits, and family farms be required to collect and report data to the DFPI? (Fin. Code § 90009, subd. (e)) If so, what data should the DFPI require to be collected and why?
Comments are due by March 8, 2021.
NY Court of Appeals Issues Landmark Decision on Statute of Limitations in Mortgage Foreclosure Action
By Mikelle V. Bliss and Amier Shenoda, McGlinchey Stafford, PLLC
On February 18, 2021, the New York Court of Appeals issued a landmark decision in four cases related to the application of the statute of limitations to foreclose a mortgage in New York. Most notable is the long anticipated decision in Freedom Mortgage Corporation v. Engel (“Engel”), which reversed the Appellate Division’s prior decision on the requirements to revoke a prior acceleration of a mortgage loan. The common issue in Engel and Ditech Financial, LLC v. Naidu (“Naidu”) is whether a valid election to accelerate, effectuated by the commencement of a prior foreclosure action, was revoked upon the noteholder’s voluntary discontinuance of that action. Determining whether, and when, a noteholder revoked an election to accelerate is critical to determine whether a foreclosure action commenced more than six years after acceleration is time-barred.
The Court of Appeals now adopted a “clear rule” that where an acceleration of the loan occurred by virtue of the filing of a complaint in a foreclosure action, the noteholder’s voluntary discontinuance of that action constitutes an affirmative act of revocation of that acceleration as a matter of law, absent an express, contemporaneous statement to the contrary by the noteholder. Now, a voluntary discontinuance withdraws the complaint and, when the complaint is the only expression of a demand for immediate payment of the entire debt, this is the functional equivalent of a statement by the lender that the acceleration is being revoked. The Court of Appeals noted that this clear rule comports with its precedent favoring consistent, straightforward application of the statute of limitations which serves the objectives of “finality, certainty and predictability,” to the benefit of both borrowers and noteholders.
Higher-Priced Mortgage Escrow Exemption Published in the Federal Register
By Eric Mogilnicki & Uttara Dukkipati, Covington & Burling LLP
On February 17, 2021, the Federal Register published a CFPB rule amending Regulation Z, which implements the Truth in Lending Act. The amendment exempts certain insured depository institutions and insured credit unions from the requirement to establish escrow accounts for higher-priced mortgages. Specifically, a loan that is secured by a first lien on the principal dwelling of a consumer does not require an escrow account if: (1) the lending institution has assets of $10 billion or less; (2) the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year; (3) the institution and its affiliates do not maintain escrow accounts for the payment of property taxes or mortgage-related insurance on any of the loans they service; and (4) certain other criteria, generally dealing with originating loans in rural or underserved areas, are met.
The rule went forward notwithstanding a January 20, 2021, memorandum from President Biden’s Chief of Staff to the heads of executive agencies requiring that rules that had been sent to the Federal Register but not yet published be immediately withdrawn and approved by a department or agency head appointed by President Biden. The higher-priced mortgage escrow exemption as well as a rule on the role of supervisory guidance, which was finalized the day before President Biden’s inauguration, were not withdrawn by Acting Director Uejio.
Blog Post by Acting Director Uejio Detailing Priorities for Consumer Outreach and Education
By Eric Mogilnicki & Graves Lee, Covington & Burling LLP
On February 10, 2021, the CFPB published a blog post by Acting Director Dave Uejio that reflected his recent guidance to the Bureau’s Division of Consumer Education and External Affairs (“CEEA”) regarding his priorities for consumer outreach. This is the third such directives from the Acting Director to the Staff; prior missives were directed to Supervision, Enforcement and Fair Lending, and to Research, Markets and Regulation. In this blog post, the Acting Director notes again that his top policy priorities for the Bureau are “(1) relief for consumers facing hardship due to COVID-19 and the related economic crisis and (2) racial equity.” To those ends, he makes a number of requests of the CEEA. These include:
- The preparation of a public report highlighting companies that have exhibited a poor track record in responding to consumer complaints, including in responding to consumer complaints from Black, Brown, and Indigenous communities;
- Focusing consumer education and outreach efforts towards homeowners at risk of foreclosure and renters at risk of eviction;
- Collaboration with community groups to tailor messaging to homeowners and renters in accessible languages and terminology; and
- Improvement of relationships with consumer, civil rights, racial justice, and tribal and Indigenous rights groups.
Acting Director Uejio Signals Potential Delay on Qualified Mortgage and Debt Collection Rules
By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP
In a February 4, 2021 blog post, Acting Director Uejio set forth “his broad vision for the Division of Research, Markets, and Regulations (“RMR”) in the coming months.”
This vision includes asking the RMR to “explore options for preserving the status quo with respect to QM [qualified mortgage] and debt collection rules.” Both rules have been finalized but are not yet in effect. This effort is designed “to preserve, where possible, maximum policy flexibility for the president’s nominee once confirmed.” The Acting Director has also asked RMR to:
- Prepare an analysis on housing insecurity, including mortgage foreclosures, mobile home repossessions, and landlord-tenant evictions;
- Prepare an analysis of the most pressing consumer finance barriers to racial equity to inform research and rulemaking priorities;
- Explicitly include in policy proposals the racial equity impact of the policy intervention; and
- Resume data collections paused at the beginning of the pandemic, including HMDA quarterly reporting and the CARD Act data collection, as well as the previously completed 1071 data collection and the ongoing PACE data collection.
- Focus the mortgage servicing rulemaking on pandemic response to avert, to the extent possible, a foreclosure crisis when the COVID-19 forbearances end in March and April; and
- Explore options for preserving the status quo with respect to QM and debt collection rules.
Employment Law
The Risk of Not Keeping Adequate Payroll Records
By Magdalen Blessey Bickford and Andrew Albritton, McGlinchey Stafford, PLLC
If employers do not keep detailed payroll records, they run the risk of losing overtime claims under the Fair Labor Standards Act (FLSA). An employer recently lost just such a case in the U.S. Fifth Circuit Court of Appeal.
In U.S. Department of Labor v. Five Star Automatic Fire Protection, L.L.C., the Department of Labor brought suit alleging that the company engaged in a regular practice of having its employees arrive to work 15-30 minutes before their shift without clocking in, as well as failing to compensate for required travel time between locations after hours. Calling the employer’s records “bare bones timesheets,” and noting that they contained “numerous evidentiary gaps,” the Fifth Circuit held the usual employee burden of proof did not apply. The Court, relying on Supreme Court precedent, found when there are inadequate records, employees or the Department of Labor only have to prove that there is a “just and reasonable inference” that the work was performed based on the available records. If the employer fails to prove otherwise, a court may find a violation and award damages, even if the calculation is not exact, because the lack of evidence was its fault.
Although only six employees (less than 12% of the workforce) testified, the Court found an FLSA violation and awarded back wages for the unpaid overtime.
This rule applies to all employers affected by the FLSA. Importantly, as the Court notes, when an employer keeps adequate records, this burden of proof on the employer will be different. The purpose of the rule when there are inadequate records, however, is to prevent employers benefitting from their “failure to keep required payroll records, thereby making the best evidence of damages unavailable.” Employers should therefore ensure they maintain quality record-keeping standards under the FLSA, and if possible, improve record-keeping practices above the minimum required to avoid liability.
Tax Law
Maryland Tax on Technology Revenues Challenged in Court
By John E. Ottaviani, Partridge Snow & Hahn LLP
Can Maryland tax the Internet? The Maryland General Assembly says “Yes,” but a complaint filed in Federal court in Baltimore in February says “No.”
The new Maryland law seeks to bring Maryland’s tax regime into the modern world of online and social media advertising. Under the new law, Maryland would tax revenue that certain companies make on digital advertisements shown in Maryland. The tax rates would only kick in when a company’s global annual gross revenues reach $100 million and would range from 2.5 % up to 10% for companies with annual gross revenues of $15 billion or more.
The lawsuit, filed in U.S. District Court in Baltimore, contends the law “is illegal in myriad ways.” It alleges the law violates the federal Internet Tax Freedom Act, a 1998 federal law that prevents “state and local governments from taxing internet access, or imposing multiple or discriminatory taxes on electronic commerce,” according to the Congressional Research Service, as well as the Constitution’s commerce and due process clauses. The plaintiffs include the U.S. Chamber of Commerce and a coalition of industry groups and companies including Amazon, Google and Facebook.
The moratorium on taxing internet access and electronic commerce in the Internet Tax Freedom Act was supposed to last only three years but has been renewed eight times. With states needing revenue to deal with COVID-related expenses, the case is being watched closely to see if it provides a roadmap for other states to bring in revenue from the big technology companies.
