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Financial Services Law Insights and Observations


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  • Fannie updates Covid-19 payment deferral provisions

    Federal Issues

    On November 17, Fannie Mae reissued LL-2021-07 to provide updated requirements for servicers when evaluating a borrower for a Covid-19 payment deferral offer. The updated lender letter was originally published in November 2020 and updated in February 2021 (covered by InfoBytes here). Specifically, the revisions update requirements related to performing an escrow analysis, and require single-family servicers to: (i) perform an escrow analysis when evaluating borrower for Covid-19 payment deferrals; (ii) “inform the borrower of the full monthly contractual payment based on repayment of any escrow shortage amount over a term of 60 months before the borrower can accept the COVID-19 payment deferral offer”; and (iii) “spread any escrow shortage repayment amount in equal monthly payments over a period of 60 months, unless the borrower decides to pay the escrow shortage amount in a lump sum up-front or over a shorter period (not less than 12 months) for a COVID-19 payment deferral or a Flex Modification for COVID-19 impacted borrowers.” Changes apply to a Fannie Mae Flex Modification and a Disaster Payment Deferral and will be incorporated into the Servicing Guide in February 2022. The provisions in the lender letter are effective until further notice. Fannie Mae encourages servicers to implement these policy changes immediately but no later than March 1, 2022.

    Federal Issues Fannie Mae Mortgages Escrow Mortgage Servicing Consumer Finance Covid-19

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  • District Court: Maryland escrow law does not confer private right of action


    On September 22, the U.S. District Court for the District of Maryland granted a national bank’s motion for summary judgment in an action claiming the bank allegedly failed to pay interest on mortgage escrow accounts. The plaintiff filed a putative class action asserting various claims including for violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which requires lenders to pay interest on funds maintained in escrow on behalf of borrowers. In response, the bank filed a motion to dismiss on the basis that the MCPA is preempted by the National Bank Act and by 2004 OCC preemption regulations. In 2020, the court denied the bank’s motion to dismiss after it determined, among other things, that under Dodd-Frank, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law. (Covered by InfoBytes here.) Citing previous decisions in similar escrow interest cases brought against the same bank in other states (covered by InfoBytes here and here), the court stated that Section 12-109 “does not prevent or significantly interfere with [the bank’s] exercise of its federal banking authority, because [Section] 12-109’s ‘interference’ is minimal, when compared with statutes that the Supreme Court has previously found were preempted.” The court further noted that state law—which “still allows [the bank] to require escrow accounts for its borrowers”—provides that the bank must pay a small amount of interest to borrowers if it chooses to maintain escrow accounts.

    However, in its most recent ruling, the court held that the MCPA does not authorize the plaintiff to sue either. “[T]his court finds that § 12-109 does not confer a private right of action,” the court wrote, adding that the plaintiff’s breach of contract claim could not get around a notice-and-cure provision in her mortgage agreement that she had not complied with before suing. The plaintiff argued that these requirements did not apply because “her self-styled breach of contract claim is actually a statutory claim because the allegedly breached contractual provision is one which pledges general adherence to applicable law.” The court disagreed, stating that under the plaintiff’s theory “any claim for breach of contract, which also violated a federal or state law, would be vaulted to a privileged hybrid status. Such claims would enjoy an unlimited private right of action (regardless of whether the underlying statute created one) and. . .would be unbounded by any of the provisions or conditions precedent detailed in the contract itself.” The court also ruled that the plaintiff’s escrow statements, which “correctly reflected that her account was not accruing interest,” are themselves “not rendered deceptive by the mere fact that Plaintiff believes such interest is owed.”

    Courts State Issues Escrow Mortgages Class Action Dodd-Frank National Bank Act Interest Rate Consumer Finance

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  • OCC supports national bank’s challenge to state law requiring interest payments on escrow accounts


    On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”

    In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”

    The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”

    Courts Appellate Second Circuit State Issues Escrow OCC National Bank Act Preemption Interest Mortgages Bank Regulatory

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  • CFPB releases mortgage servicing FAQs

    Agency Rule-Making & Guidance

    On June 2, the CFPB released new FAQs regarding the Mortgage Servicing Rule and Regulation X and Regulation Z relating to escrow account guidance and analysis. General highlights from the FAQs are listed below:

    • Regulation X provides that (i) an escrow account is any account established or controlled by a servicer for a borrower to pay taxes or other charges associated with a federally related mortgage loan, including charges that the servicer and borrower agreed to have the servicer collect and pay; and (ii) the computation year for an escrow account is a 12-month period that the servicer establishes for the account, starting with the borrower’s first payment date and including each subsequent 12-month period, unless the servicer issues a short year statement.
    • Servicers must send the borrower an annual escrow account statement “within 30 days of the completion of the escrow account computation year.” 
    • Disbursement date is defined as “the date the servicer pays an escrow item from the escrow account.”
    • “The initial escrow statement is the first disclosure statement that the servicer delivers to the borrower concerning the borrower’s escrow account,” and must include: (i) “the amount of the monthly mortgage payment”; (ii) “the portion of the monthly payment going into the escrow account”; (iii) “itemized anticipated disbursements to be paid from the escrow account”; (iv) “anticipated disbursement dates”; (v) “the amount the servicer elects as a cushion”; and (vi) “trial running balance for the account.”
    • The annual escrow statement must include, among other things, “an account history that reflects the activity in the escrow account during the prior escrow account computation year and a projection of the activity in the account for the next escrow account computation year.”
    • An escrow account analysis is the accounting a servicer conducts in the form of a trial running balance for an escrow account to: (i) “determine the appropriate target balances”; (ii) “compute the borrower’s monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account”; and (iii) “determine whether a shortage, surplus, or deficiency exists.”
    • “If there is a shortage that is equal to or more than one month’s escrow account payment, the servicer may accept an unsolicited lump sum repayment to resolve the shortage. However, the servicer cannot require or provide the option of a lump sum payment on the annual escrow account statement. In addition, Regulation X does not govern whether borrowers can freely pay the servicer to satisfy an escrow account shortage. Therefore, “the acceptance of a voluntary, unsolicited payment made by the borrower to the servicer to satisfy an escrow account shortage is not a violation of Regulation X.”
    • Servicers may inform borrowers that borrowers “may voluntarily provide a lump sum payment to satisfy an escrow shortage if they choose to” if “the communication is not in the annual escrow account statement itself and does not appear to indicate that a lump sum payment is something that the servicer requires but rather is an entirely voluntary option.”

    Agency Rule-Making & Guidance CFPB Compliance Compliance Aids Regulation X Regulation Z Mortgages Mortgage Servicing Escrow

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  • CFPB amends Regulation Z HPML escrow exemption commentary

    Agency Rule-Making & Guidance

    On June 3, the CFPB published correcting amendments to its Official Interpretations to Regulation Z (TILA) that were not part of the final rule published in February, which exempts certain insured depository institutions and credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). As previously covered by InfoBytes, under the final rule, any loan made by an insured depository institution or credit union that is secured by a first lien on the principal dwelling of a consumer would be exempt from Regulation Z’s HPML escrow requirement if (i) the institution has assets of no more than $10 billion; (ii) “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”; and (iii) the institution meets certain existing HPML escrow exemption criteria. 

    The amendments add one comment to the CFPB’s commentary that was not incorporated into the Code of Federal Regulations “due to an omission in an amendatory instruction,” and revise a second comment that inadvertently did not appear in the final rule. The amendments to the commentary relate to (i) Regulation Z section 1026.35(b)(2)(vi)(B), which covers requirements for escrow exemptions for HPMLs; and (ii) Regulation Z section 1026.43(f)(1)(vi), which addresses the exemption associated with balloon-payment qualified mortgages made by certain creditors under the minimum standards for transactions secured by a dwelling. The corrections took effect June 3.

    Agency Rule-Making & Guidance CFPB Regulation Z TILA HPML Escrow Mortgages

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  • CFPB finalizes Regulation Z HPML escrow exemptions

    Agency Rule-Making & Guidance

    On January 19, the CFPB issued a final rule amending Regulation Z, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act, to exempt certain insured depository institutions and credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). Under the final rule, any loan made by an insured depository institution or credit union that is secured by a first lien on the principal dwelling of a consumer would be exempt from Regulation Z’s HPML escrow requirement if (i) the institution has assets of no more than $10 billion; (ii) “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”; and (iii) the institution meets certain existing HPML escrow exemption criteria. The final rule essentially adopts the proposed rule (covered by InfoBytes here) without change, except the end date for the exception to the prerequisite against maintaining escrows is finalized as 120 days after the date of publication in the Federal Register, instead of the 90 days as proposed.

    Agency Rule-Making & Guidance CFPB Regulation Z HPML Escrow Mortgages EGRRCPA

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  • California proposes changes to Escrow Law

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed regulations (and accompanying statement of reasons) seeking to amend the state’s Escrow Law to clarify (i) the meanings of personal property and prohibited compensation; (ii) maintenance of books and preservation of records; and (iii) the annual report requirements. Among other things, the proposal adds “gametic material” to the definition of personal property to clarify that escrow agents may conduct transactions that hold and disburse funds under assisted reproduction agreements. Additionally, the update to the escrow books and records provisions are to “ensure that CPAs may participate in engagements to meet the annual audit report requirement for Escrow Law licensees without violating any rule of professional conduct.” Comments on the proposed regulatory amendments are due by February 15.

    State Issues DFPI Escrow State Regulators

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  • 4th Circuit reverses dismissal of RESPA property tax suit


    On October 2, the U.S. Court of Appeals for the Fourth Circuit reversed the dismissal of a putative class action, concluding that the current mortgage servicer has the obligation under RESPA to pay tax payments as they become due. According to the opinion, after a consumer refinanced their mortgage loan, the mortgage was sold to a new mortgage company (defendant), which took over the servicing rights and responsibilities from the previous servicer, effective October 2017. The consumer continued making payments on the mortgage loan, which included payments to an escrow account for property taxes. The defendant allegedly did not pay the consumer’s property taxes due in November 2017 until sometime in 2018. The city assessed late penalties (which the defendant ultimately paid) and the late payment adversely affected the consumer’s income tax bill in the amount of $895. The consumer filed a putative class action alleging, among other things, that the defendant violated RESPA by failing to make the tax payment on time. The district court dismissed the action, concluding that the previous servicer was “responsible as ‘the servicer’ under RESPA” to make the payments.

    On appeal, the 4th Circuit disagreed, concluding that the consumer plausibly alleged that the defendant was responsible for servicing his mortgage at the time, and therefore, responsible for making his tax payment when due. The appellate court rejected the defendant’s argument that RESPA requires the entity that “received funds for escrow” to make the tax payment when due. RESPA, according to the appellate court, “connects the servicer’s obligation to a payment’s due date, not the date of payment into escrow by the borrower.” Thus, the defendant would be “the servicer” responsible for paying the mortgage tax from the borrower’s escrow account on its due date.

    Courts Appellate Fourth Circuit Escrow RESPA Mortgages

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  • Hawaii regulator extends authorization for reduced office hours, temporary closures

    State Issues

    On October 2, the Hawaii Division of Financial Institutions extended interim guidance allowing Hawaii-located financial institutions to reduce hours or close offices during Hawaii’s Covid-19 state of emergency (see here and here for previous coverage). Similar to previously issued guidance, financial institutions and escrow depositories are required to provide notice of closures or reductions in hours. While mortgage loan originators, mortgage servicers and money transmitters are not required to provide notice, the regulator requests a courtesy notification of any closure or reduction in hours.  The guidance is extended “in accordance with the county emergency orders found on each county website.”

    State Issues Covid-19 Hawaii Financial Institutions Escrow Mortgages Loan Origination Mortgage Origination Mortgage Servicing Money Service / Money Transmitters

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  • 9th Circuit: HOLA preempts California interest on escrow law


    On September 22, the U.S. Court of Appeals for the Ninth Circuit, in a split decision, reversed the denial of a national bank’s motion to dismiss, holding that state law claims involving interest on escrow accounts were preempted by the Home Owners Loan Act (HOLA). As previously covered by InfoBytes, three plaintiffs filed suit against the bank, arguing that it must comply with a California law that requires mortgage lenders to pay interest on funds held in a consumer’s escrow account, following the U.S. Court of Appeals for the 9th Circuit’s decision in Lusnak v. Bank of America (covered by InfoBytes here). The bank moved to dismiss the action, arguing, among other things, that the claims were preempted by HOLA. The court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan was transferred to a bank whose own lending is not covered by HOLA. The district court granted the bank’s motion for interlocutory appeal.

    On appeal, the 9th Circuit disagreed with the district court. Specifically, the appellate court applied the plain meaning of the Office of Thrift Supervision’s preemption regulation, concluding that it “extend[ed] to all state laws affecting a federal savings association, without reference to whether the conduct giving rise to a state law claim is that of a federal savings association or of a national bank.” The appellate court distinguished the case from Lusnak, noting that HOLA preemption is “triggered at a much lower threshold” than National Bank Act. Finally, the appellate court rejected the premise that applying preemption would “run afoul” of HOLA’s purpose of consumer protection, concluding that “HOLA field preemption is so broad that the traditional presumption against preemption does not apply.”

    In dissent, a judge argued that the statutory and regulatory text does not support the majority’s conclusion and therefore, HOLA’s application does not excuse the national bank from California’s law requiring interest on escrow accounts.

    Courts Mortgages Escrow Preemption HOLA Appellate State Issues Ninth Circuit

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