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Financial Services Law Insights and Observations

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  • Fannie expands underwriting eligibility to help "credit invisible" borrowers

    Agency Rule-Making & Guidance

    On December 6, Fannie Mae announced enhancements to its Desktop Underwriter to create more homeownership opportunities for “credit invisible” borrowers by changing its automated underwriting system to expand eligibility and further simplify the borrowing process for loans where borrowers do not have a credit score. Fannie noted that close to 15 percent of Black and Latino/Hispanic people are credit invisible (as compared to nine percent of their white and Asian counterparts), explaining that these imbalances lead to racial disparities in access to credit and quality affordable housing. “We believe consumers should benefit from their responsible money management habits and a steady stream of income when buying a home, even if they don’t have an established credit history,” Mallory Evans, Executive Vice President and Head of Single-Family Business at Fannie Mae, said in the announcement. “Traditional lending practices make it hard for borrowers with no credit score to access credit, so we’ve taken steps that may help them responsibly qualify for a home loan using data that provides a more holistic view of how they manage their money.”

    Beginning December 10, enhancements made to the Desktop Underwriter will (i) update borrower eligibility criteria for those with no credit score to align with Fannie’s standard selling guide requirements; (ii) enable the system to evaluate “a borrower’s monthly cash flow over a 12-month period to potentially enhance their credit risk assessment”; and (iii) simplify the mortgage process by automating the current selling guide requirement for documenting nontraditional sources of credit.

    Agency Rule-Making & Guidance Federal Issues Fannie Mae Mortgages Consumer Finance Underwriting

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  • CFPB releases spring 2022 semi-annual report

    Federal Issues

    On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.

    In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.

    Federal Issues CFPB Consumer Finance Dodd-Frank Supervision ECOA HMDA UDAAP Diversity Fair Lending Covid-19 Small Business Lending Mortgages

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  • CFPB concerned National Guard and reservists pay extra interest on loans

    Federal Issues

    On December 7, the CFPB released a report examining the use of the Servicemembers Civil Relief Act's (SCRA) interest rate reduction benefit. Among other things, the CFPB raised concerns that servicemembers pay extra interest each year as a result of not taking advantage of interest rate reductions to which they are entitled under the SCRA. The SCRA provides certain legal and financial protections to active duty servicemembers, such as the ability to reduce the interest rate on certain pre-service obligations or liabilities to a maximum of 6 percent. According to the Bureau, members of the National Guard and Reserves are likely to have financial obligations that predate a subsequent period of service. As a result, the interest rate reduction benefit could provide considerable financial value. However, the Bureau found that only a small fraction of activated Guard and Reserve servicemembers receive interest rate reductions. Specifically, the Bureau noted that: (i)  between 2007 and 2018, less than 10 percent of eligible auto loans and six percent of personal loans received a reduced interest rate; (ii) in addition to the $100 million of foregone benefits on auto and personal loans, members of the reserve component infrequently benefit from interest rate reductions for credit cards and mortgage loans; and (iii) for longer periods of activation, the utilization rate is low. The Bureau recommended that creditors apply SCRA interest rate reductions for all accounts held at an institution if a servicemember invokes their rights for a single account, and stressed that creditors should automatically apply SCRA rights. The Bureau also noted that more frequent information on SCRA rate reduction utilization would help inform and evaluate future efforts to expand servicemembers’ financial rights and protections.

    Federal Issues CFPB SCRA Servicemembers Consumer Finance Interest Rate

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  • DOE releases post-moratorium collection guidance for guaranty agencies

    Federal Issues

    On December 2, the Department of Education’s Office of Federal Student Aid published guidance informing guaranty agencies (GAs) of their obligations related to Federal Family Education Loan (FFEL) Program loans that are in default. In August, the DOE implemented its Fresh Start initiative, which establishes guarantor obligations for a one-year period following the pandemic payment pause. As previously covered by InfoBytes, the current pause on student loan repayments, interest, and collection was extended last month as the U.S. Supreme Court reviews the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.

    According to the guidance, GAs are required to suspend collection efforts (including involuntary collections) against borrowers who are eligible for the Fresh Start initiative for one year after the pandemic moratorium ends. During this period, GAs may counsel borrowers about the processing of voluntary payments as well as their loan terms and what repayment plans may be available should their loan be removed from default. Loan rehabilitations occurring during the moratorium will not count toward a borrower’s single opportunity to rehabilitate a loan, the guidance explained, adding that beginning February 1, 2023, “GAs will report all defaulted borrowers as current unless their first date of delinquency (FDD) – which is not the same as their default date – is more than seven years ago. If the FDD is more than seven years ago, GAs must delete the borrower’s tradeline.” However, GAs will not be expected to perform retroactive tradeline updates. Following the end of the moratorium, GAs may resume interest rate accruals for all loans provided it is done in accordance with the law and the borrower’s promissory note, in addition to any loan modifications agreed upon by the GA. GAs must also obtain consent under the TCPA when communicating with borrowers, and gather information related to borrowers’ income-driven repayment plans and bankruptcy account details, if applicable.

    Federal Issues Department of Education Student Lending Consumer Finance Debt Collection Covid-19

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  • Supreme Court asked to stay judgment holding that HEROES Act does not authorize the creation of the DOE’s student debt relief plan

    Courts

    Recently, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas in an action related to whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. As previously covered by InfoBytes, the district court held that while the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the district court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness. On December 1, the U.S. Court of Appeals for the Fifth Circuit denied the DOE’s motion for stay pending appeal.

    In its application, the DOE argued that the plaintiffs never asserted that the debt relief plan exceeded the education secretary’s statutory authority. Instead, the DOE argued, the plaintiffs alleged only that they were improperly denied the opportunity to comment on the plan, stressing that while the district court recognized that the HEROES Act expressly exempts the APA’s notice-and-comment obligations, it went further by holding that the plan went beyond the secretary’s authority. “The district court profoundly erred by raising and deciding a claim that respondents did not assert and could not have asserted,” the DOE stressed, further adding that the plaintiffs did not claim that providing debt relief to other borrowers would inflict injury on them. Beyond this, the secretary’s plan “falls squarely within the plain text of his statutory authority,” the DOE asserted. The DOE requested that the Supreme Court stay the district court’s judgment, or in the alternative, defer the application pending oral argument and treat it as a petition for certiorari before judgment, grant the petition, and hear the case along with a second separate action, discussed below, involving a challenge to an injunction that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.

    As previously covered by InfoBytes, on December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit. The 8th Circuit held that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose,” and pointed to the fact that the collection of student loan payments and the accrual of interest have both been suspended. (Covered by InfoBytes here.) The 8th Circuit’s opinion followed a ruling issued by the U.S. District Court for the Eastern District of Missouri, which dismissed an action filed by state attorneys general from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina for lack of Article III standing after concluding that the states—which attempted “to assert a threat of imminent harm in the form of lost tax revenue in the future”— failed to establish imminent and non-speculative harm sufficient to confer standing. In an unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument.

    Courts Student Lending DOJ Department of Education Administrative Procedure Act Debt Relief Consumer Finance U.S. Supreme Court Appellate Fifth Circuit Eighth Circuit HEROES Act

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  • CFPB analyzes impact of rising interest rates on borrowers

    Federal Issues

    On November 30, the CFPB’s Office of Research published a blog post regarding the recent increase of mortgage interest rates. The Bureau combined the quarterly data of 55 financial institutions reporting mortgage activities for the first and second quarters of 2022 with annual data from past years. The Bureau limited the analyses to closed-end home-purchase loans secured by site-built, single-family, and first-lien principal residences, and excluded reverse mortgage loans from its analysis. Among other things, the Bureau found that after two years of decline, the mortgage interest rate began rising in 2021, with a sharp increase in 2022. The Bureau explained that a “direct consequence of higher interest rates is the higher monthly payments borne by borrowers,” and that “though monthly payment information is not reported in HMDA data, using the reported loan amount, loan term and interest rate, [the Bureau] can impute the monthly principal and interest payment of loans at origination.” The Bureau also reported that Hispanic white and Black borrowers reached new debt burden levels, specifically the average debt-to-income (DTI) ratio for Hispanic white borrowers reached over 40 percent, while the average DTI for Black borrowers rose to 39.4 percent. The Bureau noted that increasing interest rates could also affect whether consumers qualify for mortgage loans. For many mortgage applicants who are on the margin of qualifying, the higher projected DTI could potentially lead to their applications being rejected. Compared to 2021, DTI has become more likely to be reported as a denial reason for denied Black, Hispanic white and non-Hispanic white applications in 2022. Indeed, by the end of the second quarter of 2022, the Bureau reported that over 45 percent of all Black and Hispanic white applicants who were denied had DTI reported as a denial reason.

    Federal Issues CFPB Reverse Mortgages Mortgages Interest Rate Refinance Consumer Finance

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  • Senator launches inquiry into crypto exchanges’ consumer protection measures

    Federal Issues

    On November 28, Senator Ron Wyden (D-OR) sent letters to the six largest cryptocurrency exchanges requesting information about their finances, internal controls, and how customers’ funds are used. The inquiry follows the recent bankruptcy of a major crypto exchange accused of engaging in widespread mismanagement and misusing customers’ funds. Wyden asked the exchanges to respond to a series of questions related to, among other things, (i) the number of subsidiaries that fall under an exchange’s umbrella; (ii) whether customer assets are segregated from corporate or institutional assets; (iii) the treatment of customers’ funds; (iv) safeguards for preventing market manipulation; (v) the use of customer data for proprietary trading purposes; (vi) debt-to-asset and debt-to equity ratios, balance sheets, reserves, and audit procedures; (vii) insurance coverage; and (viii) steps taken by the exchanges to work with other crypto companies to develop protections for investors and customers. Senator Wyden further announced, “As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions and securities brokers.”

    Federal Issues Digital Assets U.S. Senate Cryptocurrency Consumer Finance Consumer Protection

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  • Arizona establishes new limits on consumer debt collection

    State Issues

    Recently, the Arizona governor approved Proposition 209, which decreases the maximum lawful annual interest rate on “medical debt” from 10 percent to three percent. Among other things, the proposition defines “medical debt” as “a loan, indebtedness, or other obligation arising directly from the receipt of health care services or of medical products or devices.” Accordingly, in addition to judgments on medical debt, the three percent annual rate limit applies to loans or other financing for health care services or medical products or devices. The proposition also decreases the share of borrowers’ wages that lenders can garnish. The current limit is 25 percent, but that percentage will decrease to 10 percent for many consumers, and to five percent for consumers dealing with extreme economic hardship. Additionally, the proposition increases various exemption amounts, including: (i) $400,000 (up from $150,000) for the homestead exemption; and (ii) $15,000 (up from $6,000) for household furniture, furnishing, goods, and appliances. The proposition is effective immediately.

    On December 7, a state court granted a temporary restraining order, which stopped the enactment of the approved measure. An evidentiary hearing is set to happen in December where the plaintiffs are seeking to have the proposition nullified. 

    State Issues State Legislation Arizona Interest Consumer Finance Medical Debt Debt Collection

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  • District Court issues judgment against company for marketing fake high-yield CDs

    Federal Issues

    On December 1, the U.S. District Court for the Southern District of New York entered a stipulated final judgment and order against a Delaware financial-services company operating in Florida and New York along with its owner (collectively, “defendants”) for engaging in deceptive acts under the Consumer Financial Protection Act related to its misleading marketing representations when advertising high-yield healthcare savings CD accounts. As previously covered by InfoBytes, the Bureau’s 2020 complaint alleged that defendants engaged in deceptive acts or practices by: (i) falsely representing that consumers’ deposits into the high yield CD accounts would be used to originate loans for healthcare professionals, when in fact, the company never used the deposits to originate loans for healthcare professionals, never sold a loan to a bank or secondary-market investor, and never entered into a contract with a buyer or investor to purchase a loan; (ii) concealing the company’s true business model by falsely representing that the consumers’ deposits, when not being used to originate healthcare loans, would be held in an FDIC- or Lloyd’s of London-insured account or a “cash alternative” or “cash equivalent” account, when in reality, consumers’ deposits were, among other things, invested in securities; (iii) misleading consumers into believing that the accounts their funds were being deposited into functioned like traditional savings accounts when in fact, consumers’ deposits were actively traded in the stock market or used in securities-backed investments; and (iv) falsely representing that past high yield CD accounts allegedly paid interest at rates between 5 percent and 6.25 percent prior to 2019 when in fact, the company did not offer CDs until August 2019, and “consumers’ principals was neither guaranteed nor insured.” The complaint noted that since August 2019, the company took more than $15 million from at least 400 consumers.

    The proposed settlement, if approved, provides for a comprehensive consumer redress plan that would require defendants to refund approximately $19 million to approximately 400 depositors. Further, pursuant to the order, the defendants would be required to return the money that each affected consumer deposited into a certain account in a manner consistent with the advertised terms of the product, namely, the principal along with an average per year interest rate of about 6 percent. The proposed order also permanently bans the defendants from engaging or assisting others in any deposit taking activities and requires defendants to pay a civil money penalty to the Bureau in the amount of $391,530.

    Federal Issues Courts CFPB CFPA UDAAP Deceptive Enforcement Consumer Finance

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  • New York enacts protections for consumers with medical debt

    State Issues

    On November 23, the New York governor signed S6522A/A7363A to prohibit certain hospitals and healthcare providers from placing liens on the primary residences of individuals with unpaid medical debts or garnishing wages to collect on unpaid bills or satisfy judgments arising from a medical debt lawsuit. “No one should face the threat of losing their home or falling into further debt after seeking medical care,” Governor Kathy Hochul said in an announcement. “I’m proud to sign legislation today that will end this harmful and predatory collection practice to help protect New Yorkers from these unfair penalties. The bill is effective immediately.

    State Issues State Legislation Debt Collection Garnishment Medical Debt Consumer Finance New York

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