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CFPB sues nonbank mortgage lender for alleged HMDA and CFPA violations
On October 10, the CFPB filed a lawsuit against a Florida-based nonbank mortgage originator for allegedly failing to accurately report mortgage data in violation of the Home Mortgage Disclosure Act (HMDA). According to the complaint, in 2019 the Bureau found that the lender violated HDMA by intentionally misreporting data regarding applicants’ race, ethnicity and gender from 2014-2017, which resulted in the lender paying a civil money penalty and taking corrective action. In this action, the Bureau alleges that during its supervision process, it found the lender submitted HMDA data for 2020 contained “widespread errors across multiple data fields” including 51 errors in 159 files and the lender violated a 2019 consent order condition that required it to improve its data practices. The alleged errors include (i) mistakes in inputting data concerning subordinate lien loans and acquired loans; (ii) inclusion of loans in HMDA reporting that did not meet the HMDA criteria for reportable applications; (iii) incorrect characterization of purchaser type for tens of thousands of loans; (iv) erroneous rate spread calculations, leading to errors in interconnected fields; (iv) inaccurate data related to lender credits; and (v) incorrect categorization of specific loan applications as “approved but not accepted” when they were, in fact, withdrawn, resulting in discrepancies in associated fields. Along with the HDMA violations and the violations of the 2019 consent order, the CFPB also alleges violations of the CFPA and requests that the court permanently enjoin the lender from committing future violations of HMDA, require the lender to take corrective action to prevent further violations of HMDA, injunctive relief, and the imposition of a civil money penalty.
HUD expands access to mortgages with ADUs
On October 16, HUD introduced a new policy that aims to make it easier for borrowers to finance Accessory Dwelling Units (ADUs) in their primary residences. ADUs are small living units built inside, attached to, or on the same property as, the main home. This policy change allows lenders to consider ADU rental income when assessing a borrower's eligibility for an FHA mortgage.
The new policies provide:
- Income Flexibility: Borrowers with limited incomes can use 75% of their estimated ADU rental income to qualify for an FHA-insured mortgage for properties with existing ADUs.
- New ADUs: For new ADUs that borrowers plan to attach to an existing structure, such as a garage or basement conversion, 50% of the estimated rental income can be used for qualification under FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program.
- Appraisal Requirements: The policy includes ADU-specific appraisal guidelines to accurately assess the market value of properties with ADUs, making it easier for appraisers to report on ADU characteristics and expected rental generation.
- New Construction: The policy also allows FHA mortgages to finance new homes built with ADUs, expanding ADU production beyond the rehabilitation of existing structures.
The White House concurrently released a statement on the policy, noting that it is allowing rental income from ADUs to qualify for FHA-insured mortgages. HUD added that FHA-approved lenders can start offering borrowers mortgages on properties with ADUs under the new policies effective immediately.
California enacts law to extend commercial financing cost disclosure requirement
On October 7, the California governor signed SB 33 to, among other things, continue to require covered providers offering commercial loans to disclose the total cost of financing expressed as an annualized rate indefinitely. Existing law currently required this disclosure only until January 1, 2024.
SB 33 is effective January 1, 2024.
Automotive management company settles with DOJ to resolve False Claims Act allegations
On October 11, an automotive management company settled claims by the Department of Justice alleging that the company had violated the False Claims Act by knowingly providing false information in support of its Paycheck Protection Program (PPP) loan forgiveness application.
According to the DOJ’s allegations, the automotive management company certified it was a small business with fewer than 500 employees when in fact it shared common operational control with dozens of automobile dealerships with more than 3,000 employees in total.
CFPB announces new advisory committee members
On October 5, the CFPB released new membership details for its advisory boards and councils, including the Consumer Advisory Board, Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council. The Bureau noted that under Dodd-Frank, it is tasked with establishing a Consumer Advisory Board to provide insights on various consumer finance matters. These board members represent different districts of the Fed and are recommended by Federal Reserve Bank presidents. The Community Bank Advisory Council and Credit Union Advisory Council guide the CFPB on financial issues concerning community banks and credit unions respectively. Meanwhile, the Academic Research Council contributes to shaping research plans and agendas, and offers feedback on research methodologies and data collection strategies.
Members of these advisory boards and councils serve voluntarily and do not receive compensation. They also cannot officially represent the CFPB or the Fed, and their selection does not imply endorsement of their respective organizations.
NY proposes amendments of debt collector rules
On September 30, the New York City Department of Consumer and Worker Protection (Department) published proposed amendments to its rules relating to debt collectors. The proposed amendments to its 2020 rules, which require debt collectors to inform consumers about language access services, come in response to the CFPB’s 2020 updates to the FDCPA, and the Department’s 2022 public hearing, among other things. The proposed rule (i) repeals a section requiring debt collection agencies to give consumers certain disclosures when collecting on time-barred debt; (ii) requires debt collection agencies to maintain an annual report identifying certain actions taken by the agency in any language; (iii) expands the list of required records to cover compliance with relevant laws and rules, as well as a monthly log of all debt collection-related communications by any medium between the agency and the consumer; and (iv) adds definitions relating to communications with consumers, such as “attempted communication,” “clear and conspicuous,” “covered medical entity,” “limited-content message,” “original creditor” and “originating creditor.”
CFPB shares concerns and actions regarding medical debt collection
On October 4, Seth Froman, the CFPB’s General Counsel and senior advisor to Director Chopra, delivered remarks at the New Jersey Citizen Action Education Fund’s Financial Justice Summit. He heralded the work and mission of the CFPB, and focused on the impact of medical debt. He emphasized the CFPB’s concerns that families are being “saddled with medical bills they should not – or do not – owe,” and mentioned a recent enforcement action ordering a medical debt collector to pay more than a million dollars in penalties and redress “because the collector continued to collect on debts without verifying that they were valid after consumers disputed them.” He further discussed the impact of medical bills on consumer credit, such that consumers have a “strong incentive to pay the medical bill, even when they think it’s not the right amount or don’t owe it at all.”
DOJ and RI-based bank settlement agreement regarding redlining claims
On September 27, the DOJ announced a $9 million settlement agreement with a Rhode Island-based community bank to resolve allegations that the bank engaged in a pattern or practice of lending discrimination by engaging in “redlining” in Rhode Island. The DOJ’s complaint claimed that from 2016 to at least 2021, the bank failed to provide mortgage lending services in majority-Black and Hispanic neighborhoods in Rhode Island. The DOJ also alleged that all of the bank’s branches were concentrated in majority-white neighborhoods, and that the bank did not take meaningful measures to compensate for not having a physical presence in majority-Black and Hispanic communities.
Under the proposed consent order, the bank will, among other things, (i) invest at least $7 million in a loan subsidy fund for majority-Black and Hispanic neighborhoods in Rhode Island to increase access to credit for home mortgage, improvement, and refinance loans, and home equity loans and lines of credit; (ii) invest $1 million towards outreach, advertising, consumer financial education, and credit counseling initiatives; (iii) invest $1 million in developing community partnerships to expand access to residential mortgage credit for Black and Hispanic consumers; (iv) establish two new branches, ensure at least two mortgage loan officers, and employ a “Director of Community Lending” in majority-Black and Hispanic neighborhoods in Rhode Island; (v) conduct a community credit needs assessment; and (vi) produce a fair lending status report and compliance plan and conduct fair lending training. The announcement cited the bank’s cooperation with the DOJ to remedy the identified redlining concerns.
Court infers receipt of validation notice to allow pro se plaintiffs’ FDCPA claim to survive
On September 19, the U.S. District Court for the Eastern District of New York granted in part and denied in part a complaint filed by two pro se plaintiffs who alleged that the defendant’s debt collection efforts related a balance due from a timeshare membership program violated the FCRA, TILA, and FDCPA. In reaching its decision, the court explained that complaints filed by pro se pleadings must be construed more liberally than those drafted by lawyers. Notwithstanding this more liberal approach, however, the court still determined that plaintiffs’ TILA and FCRA claims were insufficiently pled. With respect to the TILA claim, the court stated that plaintiffs failed to specify which provisions were allegedly violated and only alleged that “Defendant has computed and imposed an internal alleged account balance on plaintiff including principal balance, interest rates, fees and terms without property consumer transparency of mode of accounting verification methods,” which was insufficient to allege a TILA violation. The court noted that to the extent it could interpret plaintiffs’ complaint to implicate specific provisions of the FCRA, plaintiffs still failed to state claim under any of the potentially relevant provisions, either because there was no private right of action or there were no facts supporting any alleged claims.
By contrast, plaintiffs did allege specific provisions of the FDCPA that defendant’s conduct purportedly breached. While the court still concluded that plaintiffs failed to state a claim with regard to most of the cited FDCPA provisions, it determined that plaintiffs had plausibly stated a claim under 15 U.S.C. § 1692g, which, among other things, requires a debt collector to cease debt collection efforts if, within 30 days of receiving a validation notice from the debt collector, a consumer disputes the debt or any portion thereof.
Although the record did not reflect whether the defendant had sent plaintiffs a validation notice, the court, in liberally construing plaintiffs’ complaint, found it reasonable to “infer” that such notice had been provided to the plaintiffs. Specifically, the court reasoned that plaintiffs’ notarized letter to defendant, titled “Validation of Debt / Claim” was likely sent in response to a validation notice from defendant, and therefore, under Section 1692g, all collection activity should have ceased following receipt of plaintiffs’ letter.
FHFA OIG report reveals Federal Home Loan banks did not meet credit risk expectations
On September 21, FHFA Office of Inspector General (OIG) released a report on Federal Home Loan Bank Supervisory Activities in 2023 in Response to Market Disruptions (report), to evaluate the Division of Federal Home Loan Bank Regulation (DBR) risk assessment. DBR is responsible for supervising the Federal Home Loan (FHL) Bank System “to ensure the safe and sound operation of FHL banks.” The OIG addressed March bank failures and how the DBR scrutinized the FHL banks’ member credit risk management practices and, more broadly, into the system’s role in lending to troubled members. The report found that DBR examiners, in response to the increased risk environment, adjusted its supervisory activities and examination planning. Additionally, the OIG noted that DBR intends to conduct a comprehensive assessment of credit risk management across the entire FHL bank system to address concerns regarding systemic vulnerabilities. The report also revealed that in the review of examiner compliance, although DBR mostly followed procedure and requirements, “in certain instances, examiners did not describe primary worksteps in their pre-examination analysis memoranda, as required by DBR procedures.”
According to the report, FHFA also ordered an assessment of six FHL banks during or after the March market disruption, “in response to the abrupt increase in demand for FHLBank advances and the collapse of several member banks.” The report notably revealed that home loan banks’ credit risk management “fail[ed] to meet existing expectations.” As a result, DBR is preparing a supervisory letter for all the FHL banks and an advisory bulletin on member credit risk.