CURRENT MONTH (October 2020)

Banking Law

OCC Issues True Lender Rule

By Catherine M. Brennan and Latif Zaman, Hudson Cook, LLP

The Office of the Comptroller of the Currency has finalized its rule that determines when a national bank or federal savings association is the "true lender" on a loan made in the context of a partnership between a bank and a third party. The OCC's final rule specifies that a bank makes a loan and is the true lender if, as of the date of origination, it (1) is named as the lender in the loan agreement or (2) funds the loan.

The rule also specifies that if, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan. The rule also clarifies that as the true lender of a loan, the bank retains the compliance obligations associated with the origination of that loan, thus negating concern regarding harmful rent-a-charter arrangements.  

The OCC adopted the final rule in an attempt to resolve the legal uncertainty around “true lender” determinations, which the OCC found threatened to “discourage banks and third parties from partnering, limit competition, and chill the innovation that results from [bank] partnerships.” While the benefits of a clear standard are clear, the OCC faced significant opposition when it issued its proposed rule in June of this year. Critics argued that the OCC overstepped its authority in adopting the rule, that the rule impinged on the regulatory authority of the states and would potentially lead to an increase in predatory lending practices.

The rule is effective on December 29, 2020. Legal challenges to the final rule are likely.

California Attorney General Proposes New Changes to CCPA Regulations

By Webb McArthur, Hudson Cook, LLP

On October 12, 2020, the Office of the Attorney General of proposed a new set of changes to the regulations implementing the California Consumer Privacy Act. The CCPA regulations came into force on August 14, 2020. The proposed changes relate to the following four areas:

  • Providing Notice of Right to Opt Out Offline. The proposed revisions would add language requiring a business that collects personal information in the course of interacting with consumers offline to provide notice of right to opt out that facilitates consumers' awareness of their opt-out right. The proposal also provides illustrative examples of such offline notice.
  • Providing Opt-Out Methods that are Easy and Require Minimal Steps. The proposed revisions would require a business' opt-out methods to be easy for consumers to execute and involve minimal steps. The proposal also includes illustrative examples, including that the method take no more steps than an opt-in process, that consumers may not be required to click through reasons why not to submit an opt-out request, and that consumers should not be required to scroll through certain material before locating the opt-out mechanism.
  • Requesting Proof of Authorized Agency. The proposed revisions would clarify that a business may require an authorized agent to provide proof of its agency and permit the business to request information from the consumer.
  • Required Privacy Policy Content Relating to Information on Minors. The proposed revisions would clarify that a business subject to sections 999.330 or 999.331, relating to consumers under 16 years of age, must include a description of the relevant processes in its privacy policy.

The OAG accepted written comments regarding these proposed changes until October 28, 2020.

The CCPA provides California residents with certain rights with regard to their personal information and imposes related requirements on certain businesses in California. Regulated businesses should consult the current and complete text of the law and regulations alongside knowledgeable counsel. Significant exemptions may apply to financial services businesses. The CCPA became effective on January 1, 2020, and enforceable on July 1, 2020.

Consumer Finance

CFPB Extends GSE Patch, With Other Qualified Mortgage Rules in the Works

By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On October 20, 2020 the CFPB issued a final rule that extends the so-called “GSE Patch” in Regulation Z, which was set to expire on January 10, 2021, until the mandatory compliance date of a separate final rule to be issued by the Bureau.  The final rule also amends the Bureau’s Official Interpretation of the relevant section of Regulation Z.

The Dodd-Frank Act amended the Truth in Lending Act to require creditors making residential mortgage loans to consider a consumer’s ability to repay.  Under the Bureau’s 2013 amendments to Regulation Z that implemented the ability-to-repay requirement, certain loans (referred to as qualified mortgage loans) are presumed to meet the ability-to-repay requirement.  However, some of the more restrictive criteria – in particular, the requirement that the consumer’s debt-to-income ratio may not exceed 43 percent – are waived if the loan is eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac while under the conservatorship of the Federal Housing Finance Agency.  This “GSE Patch” was scheduled to sunset on January 10, 2021.  The expiration of the GSE Patch was expected to impact over 950,000 mortgage loans, either by causing lenders not to make the loans, or to charge higher interest rates.

The avoid this result, the final rule extends the GSE Patch until the mandatory compliance date of a future rulemaking by the Bureau that will amend the general “qualified mortgage” definition. 

CFPB Issues ANPR on Consumer Access to Financial Records

By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On October 22, 2020 the Bureau issued an advanced notice of proposed rulemaking (“ANPR”) to solicit stakeholder input on ways the Bureau might effectively and efficiently implement the financial record access rights described in Section 1033 of the Dodd-Frank Act.  Section 1033 – which was the topic of a February 2020 symposium at the Bureau – generally provides that (subject to the rules prescribed by the Bureau) covered persons must make available to consumers upon request information concerning the consumer financial product or service that the consumer obtained from such covered person.  

The ANPR seeks comment on 46 specific questions across 9 general topics related to section 1033, including benefits and costs to the consumer, competitive incentives, and the scope of access.  Comments must be submitted within 90 days after the ANPR is published in the Federal Register.

CFPB Issues Policy Statement on Applications for Early Termination of Consent Orders

By Eric Mogilnicki & Uttara Dukkipati, Covington & Burling LLP

On October 5, 2020 the Bureau issued a policy statement regarding applications for early termination of administrative consent orders.  According to the statement, "the Bureau believes that in most instances Consent Orders should run for their full negotiated terms.  At the same time, the Bureau recognizes that Consent Orders can impose burdens on the entities subject to them."

The statement provides that a consent order will be terminated early if the Bureau determines in its sole discretion that, (1) the entity meets certain eligibility criteria (identified in the statement), (2) the entity has complied with the terms and conditions of the Consent Order, and (3) the entity's compliance position is "satisfactory" in the institutional product line or compliance area for which the Order was issued.  Note that "[u]nder this policy, which is not binding on the Bureau, the Bureau’s Director intends to retain complete discretion and sole authority to terminate Consent Orders."

CFPB Publishes Report on Mortgages Before Origination

By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On October 1, 2020 the Bureau published a Data Point examining how the terms and costs of a mortgage might change during the origination process.  The information included in the Data Point was taken from disclosure forms of roughly 50,000 mortgages originated between March 2016 and November 2017.  Key findings of the report included:

  • 90 percent of mortgages received at least one revision (either a revised loan estimate or corrected closing disclosure).
  • The prevalence of changes in loan terms between the first loan estimate and the last closing disclosure varied greatly across mortgage terms tracked in the Bureau data.  For example, interest rates only changed in about eight percent of mortgages, but the APR changed for more than 40 percent of mortgages.  Similarly, the magnitude of changes varied widely among the terms tracked.  For example, changes to loan amount and APR were relatively small whereas the changes to interest rates were relatively large.
  • Most lenders provided loan estimates sooner (generally within one day) than required under the TRID Rule.  Lenders also provided closing disclosures sooner (generally within six days) than they were required to under the TRID Rule.

Post-closing, copies of the closing disclosures were generally generated in response to secondary market requirements and didn’t necessarily reflect substantial changes to the mortgage.

Maine Court Rules FCRA Preempts State Credit Reporting Law

By Aaron P. Kouhoupt, McGlinchey Stafford PLLC

On October 8, 2020 the U.S. District Court for the District of Maine held in Consumer Data Industry Association v. Frey that the Fair Credit Reporting Act (“FCRA”) preempted two amendments to the Maine Fair Credit Reporting Act (“Maine FCRA”). The amendments modified the Maine FCRA by placing restrictions on when medical debt may be included in a consumer report and requiring consumer reporting agencies to reinvestigate debt (and potentially remove the debt from the consumer report) if a consumer gave evidence that the debt was the product of “economic abuse.”

Under section 1681t(b) of the FCRA, no requirement or prohibition may be imposed under the laws of any State with respect to any subject matter regulated under section 1681c of the FCRA, relating to information contained in consumer reports. The court noted that section 1681t has eleven “subject matters” regulated under sections of the FCRA that are reserved to the federal government. The court found that the structure of FCRA sections 1681c(a) and 1681t(b) reflect an “affirmative choice by Congress to set “uniform federal standards” regarding the information contained in consumer credit reports. The court therefore struck the Maine amendments since they intruded upon a subject matter which Congress has sought to expressly preempt.

Fourth Circuit Reverses Dismissal of Servicer's RESPA Tax Escrow Disbursement Claim

By Christopher P. Hahn, Maurice Wutscher LLP

On October 2, 2020 in Harrell v. Freedom Mortgage Corporation, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of a borrower’s claims that the servicer of his mortgage loan violated the federal Real Estate Settlement Procedures Act (“RESPA”) by failing to timely make his tax payment from the loan’s escrow account. Before the service transfer of the loan, funds tendered by the borrower for payment of property taxes were deposited into the loan’s escrow account, then overseen by the lender, who was also the prior servicer.  The new servicer failed to timely pay the borrower’s November 2017 real estate taxes and did not disburse the tax payment until 2018, leading the municipality to assess late payment penalties and allegedly resulting in a loss of tax savings to the Borrower for his 2017 income taxes.

After the trial court dismissed the borrower’s complaint, holding that the responsibility to timely pay taxes fell on the original lender and prior servicer, the Fourth Circuit was tasked with defining who was the relevant “servicer” under RESPA on November 15, 2017, the date the taxes were due. Applying RESPA’s definition of “servicer” — “the person responsible for servicing of a loan,” the appellate court concluded that the Borrower’s complaint properly alleged that the transferee servicer was “responsible for servicing the loan” on November 15, 2017, and thus, the complaint plausibly alleged that the new servicer was obligated to make the payment.   Accordingly, the trial court’s dismissal for failure to state a cause of action was reversed.

Energy Law

ICC Finalizes 2021 I-Code Updates

By Devin Leary-Hanebrink, McGlinchey Stafford PLLC

Before the end of the year, the International Code Council (ICC) will publish the 2021 edition of its International Codes (I-Codes), including updates to the International Building Code, the International Residential Code (IRC), and the International Energy Conservation Code (IECC), as well as updates to the fire and plumbing codes. Altogether, the ICC’s 2021 update includes revisions to 14 different code standards with an underlying focus on energy efficiency, conservation of resources, and the overall impact of energy usage on the environment. Unsurprisingly, several updates did not go far enough for energy and environment advocates, while homebuilders remain concerned that certain revisions are too restrictive and will affect affordability.

The ICC originally planned to release its 2021 I-Codes in October; however, the appeals process took longer than anticipated. The outstanding items were three appeals filed by a coalition of associations that represent homebuilders and their interests, including the National Association of Home Builders (NAHB), the Leading Builders of America, and the American Gas Association. The specific changes appealed were RE147-19 and CE217-19, Parts I and II. (Separately, the NAHB argued for the rejection of 20 other changes because the adoption process violated the ICC’s voter eligibility and validation procedures, but this appeal was denied in early October.) These code changes would require the installation of several additional 40A, 220V receptacles in all new homes to accommodate electric readiness for future electric retrofit of gas appliances and electric vehicle supply equipment (i.e., vehicle charging stations). The coalition argued the proposals went beyond the scope and intent of the code, adding thousands of dollars to the price of a new home for electrical equipment homeowners may never use.

On September 25, 2020, the Appeals Board published its recommendation, determining that the proposed changes are outside the current scope and intent of the energy provisions of the IRC and IECC. On October 8, 2020, the Code Council Board sustained the appeals. RE147-19 and CE217-19 will not appear in the 2021 I-Codes.

Understanding how the I-Codes affect state and local code requirements is critical for anticipating legal challenges. The ICC and its committees update the I-Codes on three-year cycles, with adoption by state and local jurisdictions usually trailing a few cycles behind. While the I-Codes are only models and not legally binding, eventually most U.S. jurisdictions at the state and local levels will either adopt the codes as written or with amendments. As a result, the I-Codes are a reliable tool not only for anticipating home building and manufacturing requirements, but also for gauging future regulatory enforcement activity.

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