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Financial Services Law Insights and Observations

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  • District Court enters first significant decision under CFPB’s ATR/QM Rule

    Courts

    On March 26, the U.S. District Court for the Southern District of Ohio, in what appears to be the first significant decision on claims brought against a mortgage lender under the CFPB’s Ability-to-Repay/Qualified Mortgage Rule, granted summary judgment in favor of the lender. The court rejected plaintiff’s claims that his bank improperly relied on income under his spousal support agreement, stating that “[t]he fact that Plaintiff and [his spouse] did not keep the separation agreement and instead opted to divorce – a series of events which reduced Plaintiff’s income by an order of magnitude – was not an event that was reasonably foreseeable to the Bank.” The court also noted that, “[a]lthough Plaintiff is now in his eighties, he is a repeat player in the field of real estate and mortgages, and a consumer of above-average sophistication.” While this decision does not break new legal ground, it does provide useful insights into how courts may respond to inherently fact-specific claims about the underwriting of individual loans.

    Courts Ability To Repay Qualified Mortgage Mortgages Mortgage Lenders Lending CFPB

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  • California DBO seeks to revoke auto title lender’s license

    State Issues

    On March 19, the California Department of Business Oversight (DBO) filed an administrative action to revoke the license and void loans made by a Southern California auto title lender for allegedly violating state lending laws. According to the DBO announcement, the lender allegedly, among other things, (i) charged consumers more interest than permitted by state law; (ii) failed to consider the borrower’s ability-to-repay; and (iii) engaged in “false and misleading” advertising. Specifically, DBO alleges that, in two separate examinations, it determined the lender included DMV fees in borrowers’ principal loan amounts to bring the loans above $2,500. DBO alleges these loans carried interest rates over 100 percent, while the state law cap is 30 percent for loans under $2,500. DBO also alleges the lender violated state law by failing to report the profits it made from a “duplicate-key fee” and made loans from unlicensed locations.

    In addition to the formal accusation, the DBO also has commenced an investigation to determine whether the more than 100 percent interest rates that the lender charges on most of its auto title loans may be unconscionable under the law.

    State Issues Lending Enforcement Supervision Usury Auto Finance DBO

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  • OCC fines national bank $25 million for violating Fair Housing Act

    Lending

    On March 19, the OCC announced that a national bank has agreed to pay a $25 million civil money penalty to resolve alleged violations of the Fair Housing Act. According to the OCC’s consent order, (i) from August 2011 to April 2015, the bank did not properly train loan officers about available mortgage discounts under its Relationship Loan Program (RLP); (ii) from August 2011 to November 2014, the bank failed to provide explicit instructions within their written guidelines that employees should offer those discounts to all eligible customers; and (iii) from August 2011 to November 2014, the bank did not require loan officers to document the reason for a customer’s rejection. Moreover, according to the OCC, the bank did not require loan officers to inform customers about potential mortgage discounts from August 2011 to January 2015. As a result, the OCC stated that certain borrowers allegedly did not receive RLP benefits for which they were eligible and were adversely affected on the basis of their race, color, national origin, and/or sex. The bank—which did not admit nor deny the allegations and self-reported the problems in 2015—initiated and has nearly completed a reimbursement plan, which will deliver roughly $24 million in restitution to the approximately 24,000 borrowers who may have missed out on the appropriate RLP benefit.

    Lending OCC Fair Lending Fair Housing Act Enforcement

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  • Fair lending claims dismissed against Connecticut bank

    Lending

    On March 1, the U.S. District Court for the District of Connecticut signed an order dismissing with prejudice a Fair Housing Act complaint filed by the Connecticut Fair Housing Center through its legal counsel, the National Consumer Law Center, against a Connecticut-based bank. The bank denied all allegations of wrongdoing and liability. Under the terms of the stipulation of dismissal, the bank agreed voluntarily to resolve the claims and, among other things, to (i) revise its fair lending policies and procedures and conduct fair lending training for all employees; (ii) open a loan production office in Hartford; (iii) spend $230,000 on targeted marketing and advertising to minority communities, and provide additional consumer financial education opportunities; (iv) invest $300,000 for subsidies to promote home ownership and enhance access to credit in identified communities; (v) identify a Community Development Officer within the bank; and (vi) expand its community development loan program by investing $5 million over the next three years.

    Lending State Issues Fair Lending FHA Redlining

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  • CFPB analyzes first-time homebuying data for servicemembers

    Lending

    On March 1, the CFPB released its latest Quarterly Consumer Credit Trends report titled, “Mortgages to First-time Homebuying Servicemembers,” which analyzes mortgages made to first-time homebuying active duty servicemembers and veterans (collectively defined as “servicemembers”). The report, using data from the Bureau’s Consumer Credit Panel (CCP) supplemented with data on military service, offers information on the mortgage choices and mortgage performance outcomes of servicemembers who bought homes between 2006 and 2016. Key findings include:

    • The share of first-time homebuying servicemembers using the U.S. Department of Veterans Affairs (VA) guaranteed home loan program significantly increased, from 30 percent before 2007 to 63 percent in 2009. By 2016, 78 percent of servicemembers relied on a VA mortgage for their first home loan.
    • Conventional mortgages, which accounted for approximately 60 percent of loans among first-time homebuying servicemembers in 2006 and 2007, declined to 13 percent by 2016. During this period, the use of conventional mortgages among non-servicemembers also decreased, as the use of FHA and U.S. Department of Agriculture (USDA) increased.
    • In 2016, the median servicemember first-time homebuyer VA loan amount was $212,000, increasing from $156,000 in 2006.
    • Early delinquency rates for nonprime servicemember first-time VA-loan borrowers decreased from an average of 5 percent to 7 percent in 2006 and 2007 to slightly above 3 percent in 2016. Notably, early delinquency rates were lower for active duty VA-loan borrowers than for veteran VA-loan borrowers.

    Lending CFPB Military Lending Servicemembers Mortgages Department of Veterans Affairs FHA Department of Agriculture

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  • FTC hits online student loan lender with order

    Federal Issues

    On February 25, the FTC announced it has approved a final consent order with an online student loan refinance lender resolving allegations that the lender violated the FTC Act by misrepresenting in television, print, and internet advertisements how much money student loan borrowers can save from refinancing their loans with the company. As previously covered by InfoBytes, the FTC alleged that the lender inflated the average savings consumers have achieved by refinancing through the lender, in some instances doubling the average savings by selectively excluding certain groups of consumers from the data. Additionally, the FTC also alleged that in some instances, the lender’s webpage misrepresented instances where a loan option would result in the consumer paying more on a monthly basis or over the lifetime of the loan, simply stating the savings would be “0.00.” In October 2018, without admitting or denying the allegations, the lender agreed to a consent order that required it to cease the alleged misrepresentations and agree to compliance monitoring and recordkeeping requirements. Following a public comment period, the FTC Commission voted 5-0 to approve the final consent order.

    Federal Issues Lending Student Lending FTC Enforcement FTC Act Settlement Consent Order

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  • VA Circular clarifies rules on cash-out refis

    Agency Rule-Making & Guidance

    On February 14, the Department of Veterans Affairs (VA) released Circular 26-19-05 (and on February 15, accompanying Change Circular 26-19-05) to clarify the VA’s interim final rule regarding VA-guaranteed cash-out refinancing loans, which was released in December 2018 and became effective on February 15. The interim final rule was previously covered by InfoBytes. Among other things, the Circular provides clarification regarding (i) the Net Tangible Benefit test; (ii) the contents of the loan comparison and home equity disclosures (including sample 3-day and final loan closing disclosures); (iii) the loan seasoning requirements, including a new obligation that, for loans refinanced within 1 year of the original closing date, lenders obtain a payment history/ledger documentating all payments, unless a credit bureau supplement clearly identifies all payments made in that timeframe; and (iv) the manner by which lenders should calculate fee recoupment.  

    Agency Rule-Making & Guidance Department of Veterans Affairs Refinance Mortgages Lending EGRRCPA

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  • CFPB releases 2019 lists of rural or underserved counties

    Agency Rule-Making & Guidance

    On February 12, the CFPB released its annual list of rural counties and rural or underserved counties for lenders to use when determining qualified exemptions to certain TILA regulatory requirements. In connection with the release of the lists, the Bureau also directed lenders to use its web-based Rural or Underserved Areas Tool to assess whether a rural or underserved area qualifies for a safe harbor under TILA’s Regulation Z.

    Agency Rule-Making & Guidance CFPB TILA Regulation Z Consumer Finance Lending

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  • Illinois authorizes higher verification fee under Payday Loan Reform Act

    State Issues

    On January 4, the Illinois governor signed HB 4873, which amends the state’s Payday Loan Reform Act (the Act) to increase from $1 to $3 the maximum verification fee that a certified consumer reporting service may charge a lender—and that the lender may pass on to the borrower—for verifying an installment payday loan as required by the Act. The increased verification fees may be charged beginning July 1, 2010. The verification fee paid by the borrower cannot exceed the fee paid by the lender.

    State Issues Payday Lending Fees Consumer Reporting Agency Lending

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  • Fannie Mae issues guidance on impact of government shutdown

    Federal Issues

    On December 26, Fannie Mae issued temporary guidance relating to loan origination and loan servicing during the government shut down. According to LL-2018-06, loans are not rendered ineligible for purchase solely because a borrower’s employment is directly impacted by the shutdown. However, the lender must still be able to obtain a verbal verification of employment prior to the time of loan delivery in order for the loan to be eligible for sale to Fannie Mae. For military borrowers, the lender can use a Leave and Earnings Statement dated within 30 calendar days prior to the note date in lieu of a verbal verification. Additionally, among other things, if a borrower is furloughed on or after closing, the loan remains eligible for sale to Fannie so long as the lender has obtained all required documentation, including the verbal verification.

    The guidance also addresses government verifications of certain information. For IRS transcripts, Fannie Mae notes that Desktop Underwriter will continue to process tax transcript verification reports received prior to the shutdown, but will not able to access new verification reports for validation. As a result, requests for verification reports may remain in pending status until normal government operations resume. Further, Fannie Mae is temporarily allowing lenders to obtain verification of a borrower’s social security number, if needed, prior to the delivery of the loan. If the number cannot be verified prior to delivery, however, the loan will not be eligible for sale. With respect to flood insurance, Fannie Mae advises that it will purchase loans secured by properties located in Special Flood Hazard Areas so long as the loans meet certain conditions, including proof the borrower has completed an application for the insurance and paid the initial premium. Lenders are obligated to have a process in place to identify any mortgaged properties that do not have proper evidence of active flood insurance, or where an increase in coverage or renewal of existing policies would have occurred during the shutdown, and to make sure coverage is obtained once the shutdown ends. Finally, with respect to loan servicing, servicers are authorized to offer forbearance plans to assist borrowers who cannot make their regular monthly payment as a result of the shutdown

    Fannie Mae notes that additional guidance will be released if the shutdown lasts “for a prolonged period.”

    Federal Issues Fannie Mae Mortgages Lending Mortgage Origination Shutdown Relief

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