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On September 13, the California Department of Financial Protection and Innovation (DFPI) issued a notice detailing a new requirement that mortgage servicers provide information to DFPI describing the actions servicers are taking to help homeowners avoid foreclosure. According to the announcement, DFPI intends to “ensure that licensees tell consumers about assistance that is or will soon be available to delinquent mortgage borrowers and document their good faith efforts toward screening borrowers for applicable loan modifications, mortgage relief funds and other protections, including the upcoming federal Homeowner Assistance Fund,” which licensees are strongly encouraged to participate in. To protect vulnerable homeowners, DFPI will require licensees handling residential mortgages, either directly or through sub-servicers, to provide information describing the servicer’s: (i) screening process for determining borrower eligibility for foreclosure aid; (ii) compliance policies and procedures regarding loss mitigation; and (iii) assessment of the “magnitude of foreclosure risk among the loans they service.”
The same day, DFPI released a social media campaign designed to educate consumers about the California Homeowner Bill of Rights, the availability of HUD-certified housing counselors, and foreclosure options, among other things. The announcement also notes that DFPI recently launched a multi-pronged communications campaign to educate consumers and protect homeowners from foreclosure.
On September 13, the U.S. Court of Appeals for the Sixth Circuit reversed a district court’s summary judgment ruling in favor of a defendant mortgage servicer, holding that a jury could find the defendant “willfully and negligently” violated the FCRA by incorrectly reporting a past due account status to consumer reporting agencies (CRAs) for over a year after the plaintiff’s mortgage loan was discharged in bankruptcy. The plaintiff discovered the loan was being mis-reported as past due when he checked his credit score in advance of buying a car and found it to be lower than expected. The plaintiff disputed the tradeline, and the CRAs forwarded his dispute to the mortgage servicer. In response to the dispute, the servicer changed the plaintiff’s account status from past due to “no status”—which meant the status had not changed from the prior month—and continued reporting it to the CRAs.
The plaintiff sued the servicer for violating the FCRA, claiming the defendant knew the loan had been discharged but still reported it as past due for more than a year. The defendant countered, among other things, that because the plaintiff “chose not to apply for a car loan” he could not prove that he was harmed by negligence due to the mis-reporting. The district court ultimately ruled that (i) the plaintiff did not have standing to allege a negligent violation of the FCRA, and (ii) no “reasonable jury” would find that the defendant had willfully violated the statute.
On appeal, the 6th Circuit disagreed, finding that the plaintiff had standing to assert a negligence claim under FCRA and that a reasonable jury could find a negligent and willful violation. The court pointed out that the plaintiff’s credit score increased by almost 100 points once the tradeline was removed, suggesting the servicer’s mis-reporting did harm the plaintiff and gave him standing to sue in negligence. The court also found the defendant “knew that [the plaintiff’s] loan had been discharged but for more than a year told the credit-reporting agencies that the loan was past due. A jury could therefore find that [the defendant] was either incompetent or willful in its failure to correct its reports sooner.” The 6th Circuit added that the defendant’s implementation of policies to guide its analysts through resolving credit disputes “hardly disproves as a matter of law that [the defendant] acted willfully.” The court held the defendant was not entitled to summary judgment and remanded the case for further proceedings.
On September 9, the CFPB released its annual report to Congress on college credit card agreements. The report was prepared pursuant to the CARD Act, which requires card issuers to submit to the CFPB the terms and conditions of any agreements they make with colleges, as well as certain organizations affiliated with colleges. The CFPB cited data from 2019 and 2020 showing that (i) the number of college card agreements in effect continued to decline; (ii) the total volume of payments by issuers declined; and (iii) agreements with alumni associations continue to dominate the market based on most metrics. The complete set of credit card agreement data collected by the Bureau can be accessed here.
On September 10, FHA issued FHA INFO 21-7, which reminds mortgagees originating and/or servicing FHA-insured mortgages in the U.S. and its territories of guidance applicable in the event of a presidentially declared major disaster area (PDMDA) during the Covid-19 pandemic. For PDMDAs issued in connection with Covid-19, mortgagees must continue to follow existing guidance for borrowers already on a Covid-19 loss mitigation or recovery option. For all other borrowers, mortgagees must evaluate borrowers for all loss mitigation options available to them, which includes any applicable “PDMDA or COVID-19 Loss Mitigation Options or COVID-19 Recovery Options,” based on the reason for hardship. In addition, for all “mortgaged properties in areas covered by PDMDA declarations not related to the COVID-19 National Emergency,” FHA provides a number of other reminders to mortgagees, including: (i) FHA-insured forward mortgages secured by properties in a PDMDA are subject to a 90-day foreclosure moratorium after a disaster declaration; (ii) mortgagees should reach out to borrowers who may need loss mitigation assistance as soon as possible following the presidential declaration; and (iii) FHA-insured HECM loans secured by PDMDA properties that are due and payable for reasons other than the death of the last surviving borrower or the end of a deferral period due to the death of an eligible non-borrowing spouse are subject to a 90-day HECM foreclosure timeline extension.
On September 3, HUD announced a Charge of Discrimination against a Florida-based homeowner association (respondent) for allegedly violating the Fair Housing Act by discriminating against residents with disabilities. According to HUD, the complainants alleged that the respondents refused to accommodate their request to leave their shoes outside of their units to prevent tracking contaminants inside and exacerbating a respiratory disability. In addition, the complainant allegedly provided medical documentation from a physician, which advised the need to keep their home free from outdoor allergens, chemicals, or pollutants. HUD determined that a disability under the Act existed, and that the respondents refused to grant a reasonable accommodation. The charge will be heard by a United States Administrative Law Judge unless a party elects to have the case heard in federal district court.
Over a decade ago, Congress enacted an amendment to the Equal Credit Opportunity Act that directed the Consumer Financial Protection Bureau to implement a new regime for small business loan data collection similar to the regime that exists in the mortgage industry. Last week, a month before a court-imposed deadline, the Bureau issued its long-awaited proposed rule. The proposal was largely consistent with prior Bureau statements regarding its approach, but nonetheless contained some surprises that reflect the change in leadership at the CFPB. Lenders will need to carefully assess the impact of the proposed rule on their business.
The proposed rule would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. This information would be reported annually to the Bureau, and eventually published by the Bureau on its website, with some potential modifications.
The statute’s stated intent is to “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” CFPB Acting Director Dave Uejio echoed these themes in prepared remarks, suggesting that the proposal was a step towards “a fairer, more transparent small business lending market.” But the Bureau itself acknowledges that it is engaged in a balancing exercise, weighing the intended benefits of the rule against the cost imposed on lenders (and by extension, borrowers), the risk to privacy interests, and the risk of unintended consequences that accompany any major regulatory intervention. The public, including lenders potentially subject to the rule, have 90 days to submit comments on whether the Bureau got the balance right.
The proposed rule would cover most of the small business lending market
By its terms, the statute would apply broadly to any “financial institution” that extended credit to any women-owned, minority-owned, or small business. But the statute also allowed the Bureau to exempt any “class of financial institutions” from its requirements. Last fall, as part of a process required under the Small Business Regulatory Enforcement Fairness Act (SBREFA), the Bureau suggested that it might exempt lenders based on their size (i.e., those beneath thresholds of $100 million or $200 million in assets), their loan activity (i.e., those making 25, 50, or 100 or fewer loans annually), or based on either threshold. The proposed rule lands at the broadest end of this possible spectrum, abandoning any exemptions based on size altogether and adopting the lowest of the proposed activity levels. Any financial institution that originates at least 25 “covered credit transactions” for “small businesses” in each of the two preceding years would be subject to the rule.
Any loan, line of credit, credit card, or merchant cash advance, including agricultural-purpose credit and those that are also covered by HMDA, would be considered a “covered credit transaction.” Notably, the Bureau suggested in its SBREFA Outline that it would exclude merchant cash advances, but declined to do so in the proposal, concluding that the segment is growing and presents unique fair lending risk.
Just as it did in its SBREFA Outline, the Bureau would adopt the Small Business Administration’s definition of “small business,” except that the Bureau’s definition would use a simplified size threshold of $5 million or less in gross annual revenue. This divergence will require SBA approval, which Uejio expressed confidence in getting.
The proposal’s collection requirements are triggered whenever a lender subject to the rule under the activity threshold receives a “covered credit application.” This term is defined broadly to include “any oral or written request for a covered credit transaction that is made in accordance with procedures used by [the] financial institution for the type of credit requested.” Reevaluation requests, extension requests, and renewal requests would not be considered applications (unless the request seeks additional credit amounts), nor would inquiries and prequalification requests.
The rule would require the collection of 21 data points
The statute sets forth thirteen specific data points to be collected by lenders that the Bureau refers to as “mandatory data points:”
- Whether the applicant is minority-owned
- Whether the applicant is women-owned
- Unique identifier for each application
- Application date
- Loan type (i.e., product type, guarantees, and term)
- Loan purpose
- Amount applied for
- Amount approved or extended
- The action on the application (i.e., originated, approved but not accepted, denied, withdrawn, or incomplete)
- Action date
- Census tract
- Gross annual revenue
- Race, sex, and ethnicity of the principal owners
The collection of information about the principal owner’s race, sex, and ethnicity is a major change from the SBREFA Outline, which suggested that the Bureau would likely propose the collection of such information solely based on applicant self-reporting. As the Bureau recognized at the time, “requiring reporting based on visual observation or surname could create unwarranted compliance burdens in the context of small business lending.” The proposal reverses course, and would require lenders who meet with any principal owner to determine the ethnicity and race of the principal owner if the applicant declines to provide that information. As the statute requires, the data collected regarding the principal owners’ race, sex, and ethnicity—as well as whether the business is minority-owned or women-owned—must not be shared with underwriters, unless restricting access is not feasible.
The statute also authorized the Bureau to require additional data that would advance the purposes of the statute (so-called “discretionary data points”). The CFPB’s proposed discretionary data points are consistent with this administration’s prioritization of fair lending enforcement:
- Time in business
- NAICS Code
- Number of employees
- Application method (e.g., in-person, phone, mail, online)
- Application recipient (e.g., direct or through a third party)
- Reasons for denial (providing nine specific reasons and a text box for any other reason)
- Number of principal owners (i.e., 0-4)
The SBREFA Outline envisioned the first four above; the last four were introduced in the proposal. Of particular note, pricing data is granular: for fixed-rate loans, the rate; for variable-rate loans, the margin, index value, and index name; for merchant cash advances and similar products, the difference between the amount advanced and the amount paid; and for all transactions, origination charges, broker fees, whether the fees were paid directly to the broker or to the financial institution for delivery to the broker, noninterest charges imposed over the first year, whether the financial institution could have included a prepayment penalty under its policies, and whether it did impose a prepayment penalty.
Will everything be published?
Lenders must collect and report to the Bureau annually, which will publish the data on its website — subject to modifications or deletions that it determines advance a privacy interest. The Bureau has not yet proposed modifications or deletions, but intends to issue a policy statement on its approach after it has received one full year of data.
In the meantime, however, the Bureau has made clear that it will disclose the identity of financial institutions and is generally not persuaded that competitive or reputational harms to financial institutions or increased litigation are a basis to withhold publication of data. Instead, the Bureau has indicated that its principal concern is avoiding the risk that an applicant could be re-identified through specific data points.
How will the rule impact small business lending?
The proposal would apply to thousands of small business lenders offering a wide range of products. The Bureau acknowledges the collection and reporting of this information will impose costs on lenders, some of which it expects to be passed along to borrowers.
But the most significant impact of the rule will be the Bureau’s eventual publication of the data. In its view, publication of granular data on specific lending decisions will advance the statutory goals of facilitating fair lending enforcement and business and community development. But concerns over reputational harms and increased fair lending scrutiny may also cause lenders to eliminate subjective elements of underwriting that are a traditional, and often appropriate, feature of small business underwriting. If the eventual effect of the rule is to, as one commenter put it, “artificially flatten prices,” the rule could lead to a small business lending market that is less innovative and less sensitive to actual credit risk than the market that exists today.
The public has 90 days to submit comments regarding the CFPB’s proposal.
If you have any questions regarding the CFPB’s proposed rule, please visit our Fair Lending and Fair Servicing page or contact a Buckley attorney with whom you have worked in the past.
 The proposal would exclude certain other types of credit, including trade credit, public utilities credit, securities credit, and incidental credit. The rule would also not cover factoring, leases, consumer-designated credit used for business purposes, and credit secured by certain investment properties (specifically 1-4 individual dwelling units).
 A principal owner is any individual who owns 25% or more of the small business.
 If not feasible, the institution must provide notice to the applicant of its intention to share this information.
On September 1, the SEC filed a complaint against an online cryptocurrency lending platform, its founder, and an additional executive and his affiliated company (collectively, “defendants”) alleging they fraudulently raised approximately $2 billion from retail investors through a global unregistered offering of investments involving digital assets. According to the SEC, the defendants sold securities in the form of investments tied to the company’s lending program, and falsely promised investors that its purported proprietary “volatility software trading bot” could generate monthly returns as high as 40 percent. However, the SEC alleged that instead of trading investor funds, the defendants used the funds for their own benefit, such as transferring funds to a digital wallet controlled by their top U.S. promoter (one of the defendants here). To hide the fact that they were not trading the funds as promised, the SEC claimed the defendants “conducted a Ponzi-like scheme in which they at times used funds deposited by newer investors in order to satisfy withdrawal demands made by earlier investors.” The SEC charged the defendants with violating antifraud and registration provisions of the federal securities laws, and is seeking injunctive relief, disgorgement plus prejudgment interest, and civil penalties. In a parallel action, the DOJ announced the same day that the top U.S. promoter pleaded guilty to criminal charges for his role in the cryptocurrency scheme.
On September 1, HUD announced disaster assistance for certain Louisiana parishes impacted by Hurricane Ida, providing foreclosure relief and other assistance to affected homeowners. This followed President Biden’s major disaster declaration for the same parishes issued on August 29. Specifically, HUD is providing an automatic 90-day moratorium on foreclosures of FHA-insured home mortgages for covered properties and is making FHA insurance available to those victims whose homes were destroyed or severely damaged such that “reconstruction or replacement is necessary[.]” Additionally, HUD’s Section 203(k) loan program will allow individuals who have lost homes to finance the purchase of a house, or refinance an existing house and the costs of repair, through a single mortgage. The program will also allow homeowners with damaged property to finance the rehabilitation of existing single-family homes. Flexibility measures for state and local governments, public housing authorities, tribes, and tribally designated house entities are also discussed.
Maryland Court of Appeals rejects distinction between “methods” of debt collection and “amounts” of debt to be collected
On August 27, the Maryland Court of Appeals reversed a circuit court’s dismissal of petitioners’ Maryland Consumer Debt Collection Act (MCDCA) and Consumer Protection Act (MCPA) claims, rejecting a distinction drawn by some courts “between ‘methods’ of debt collection and ‘amounts’ of debts sought to be collected, when assessing a claim under CL § 14-202(8).” At issue is the amount of post-judgment interest charged above the maximum legal rate to individuals who defaulted on their residential leases.
In reversing, the Court of Appeals disagreed with the circuit court that MCDCA claims were restricted to “methods,” holding that § 14-202(8) should be interpreted “broadly to reach any claim, attempt, or threat to enforce a right that a debt collector knows does not exist,” and in this case, petitioners were not “precluded from invoking § 14-202(8) when the amount claimed by the debt collector includes sums that the debt collector, to its knowledge, did not have the right to collect.” However, the Court of Appeals held that, in contrast to the FDCPA, the MCDCA is not a “strict liability statute,” and although “where the law is settled at the time a collector takes a contrary position in claiming a right, the collector’s recklessness in failing to discover the contrary authority is equivalent to ‘aware[ness]’ (i.e., actual knowledge) of the authority,” such knowledge is a question of fact that could, in some cases, require a jury determination. As a result, the case was remanded to the circuit court to allow the petitioners an opportunity to file a new motion for class certification.
On August 26, the FDIC issued FIL-58-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Tennessee affected by severe storms and flooding. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements.
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