June 30, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Banking Law

FDIC Issues Final Rule Codifying Valid When Made Doctrine

By Robert W. Savoie, McGlinchey Stafford, PLLC

The FDIC has issued its final rule codifying the “valid when made” doctrine. The rule clarifies that the interest rate lawfully assessed by an originating depository institution may not be impacted by the sale, assignment, or other transfer of the loan or a change in state law. The FDIC also confirmed that an originating depository institution may apply the law of any state in which it maintains a branch, not simply the law of the state where the bank is chartered. Within the rule, the FDIC clarifies that one component of federal interest rate exportation authority is the right to assign the loans under the preemptive authority of Section 27 of the Federal Deposit Insurance Act.

As the FDIC noted, although banks’ power has traditionally been viewed as carrying with it the power to assign loans, certain courts have issued opinions that lack awareness of the broader context within which Section 27 was enacted and fail to address the significant ramifications of their decisions. The FDIC’s rulemaking makes this understanding an express one that carries with it the weight of the FDIC’s authority, which confirmed longstanding historical precedent. The FDIC also clarified the additional fees and charges included within the definition of interest under federal law.

The FDIC specifically called out that its rulemaking does not address the question of whether a state-chartered bank is a real party in interest (i.e., the true lender) with respect to a loan or has an economic interest in the loan under state law. Thus, the FDIC has not addressed regulatory actions seeking to assert that the originating bank is not the true lender. The FDIC also reiterated that it will not favor partnerships established with state-chartered depository institutions by non-depository entities for the sole purpose of evading a lower interest rate established under the law otherwise regulating the non-depository entity.

The rule becomes effective 30 days after publication in the federal register.

Consumer Finance

Federal Agencies and Enterprises Extend Foreclosure Moratoriums Again

By Shanna M. Boughton and Sanford Shatz, McGlinchey Stafford PLLC

The federal moratoriums on foreclosures and evictions have been extended through August 31, 2020, by Fannie Mae, Freddie Mac, the FHA, the VA, and USDA Rural Development. The moratoriums began on March 18, 2020, and have been extended during the COVID-19 pandemic.

The breadth and scope of the Agencies’ foreclosure moratoriums vary. For example, Fannie Mae’s moratorium applies to specific milestones: initiating any judicial or non-judicial foreclosure process, moving for a foreclosure judgment or order of sale, or executing a foreclosure sale. Freddie Mac’s moratorium appears to be broader as it requires servicers to “suspend all foreclosure actions,” including specific milestones. Similarly, the FHA’s moratorium appears to be broad – applying to “foreclosures in process,” while the VA’s moratorium applies to the initiation and completion of foreclosures in process.

Additional moratoriums or restrictions on foreclosures may apply for loans not covered by the above Agencies’ moratoriums. Servicers should review state and local guidance and regulations issued by the executive, legislative, and judicial branches of government, as well as any regulations or guidance issued by any administrative agencies, bureaus, or departments, before proceeding with the foreclosure process.

CFPB’s Interim Final Rule Converts Borrowers from Forbearance to Performance

By Sanford Shatz, McGlinchey Stafford, PLLC

On June 23, 2020, the Consumer Financial Protection Bureau issued an interim final rule: Treatment of Certain COVID-19 Related Loss Mitigation Options Under the Real Estate Settlement Procedures Act (RESPA) and Regulation X (the “Rule”). With regard to payments that were forborne or became delinquent as a result of a financial hardship due, directly or indirectly, to the COVID-19 emergency, the Rule permits borrowers who can resume their full contractual monthly payments to have their forborne payments added to the end of the loan term without needing to provide a complete loss-mitigation application.

The Bureau imposed three requirements for this option: that all forborne principal and interest payments be due at the end of the loan’s term, that no additional fees or interest be charged to the borrower, and that the work-out option fully resolves the borrower’s delinquency. Once the borrower accepts the offer, the servicer will not need to exercise reasonable diligence to obtain a complete loss mitigation application or provide the acknowledgment notice that would otherwise be required under Regulation X when a borrower submits a loss mitigation application.  Servicers will be required to comply with Regulation X’s other requirements.

This Rule, effective July 1, 2020, will enable borrowers whose COVID-19 financial hardship are resolved to resume their regular contractual payments without having to provide a complete loss-mitigation application, and permit servicers to convert loans from non-performing to full performing status, without being required to comply with all of the loss mitigation regulatory requirements that would otherwise apply.

NY COVID Law Imposes Forbearance and Loss Mitigation Requirements

By Jeffrey Barringer and Colin Quillinan, McGlinchey Stafford, PLLC

On June 17, 2020, New York Governor Andrew Cuomo signed legislation creating N.Y. Banking Law § 9-x, which relates to residential forbearances as a result of COVID-19. The legislation applies to regulated banking organizations and New York regulated mortgage servicers subject to supervision by the Department of Financial Services. This relief is limited to an individual whose primary residence is located in New York and is encumbered by a home loan, who has suffered a financial hardship related to COVID-19 during the covered period beginning March 7, 2020. However, the legislation does not apply to certain loans made, purchased, insured, or securitized by government agencies or instrumentalities.

Servicers are required to provide borrowers a forbearance of up to 180 days, with the option of extending for up to an additional 180 days. The legislation also dictates the long-term loss mitigation options that servicers are required to provide borrowers at the end of the forbearance period.

CFPB Creates Advisory Opinion Program

By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP

On June 18, 2020, the CFPB announced that it will establish a pilot Advisory Opinion Program (the “AO Program”) that will provide interpretive guidance in the form of advisory opinions in response to requests from regulated entities regarding uncertainties in the Bureau’s regulations.  Advisory opinions that are issued under the program will be posted on the Bureau’s website and published in the Federal Register.  Requests for advisory opinions may be submitted via email to advisoryopinion@cfpb.gov

According to the press release, the AO Program will not respond to every request from regulated entities; rather, the AO Program will select which requests are most appropriate for a public response based on the following four priorities, as well as other factors:

  1. Ensuring that consumers are provided with timely and understandable information to make responsible decisions;
  2. Identifying outdated, unnecessary or unduly burdensome regulations in order to reduce regulatory burdens;
  3. Creating consistency in enforcement of Federal consumer financial law in order to promote fair competition; and
  4. Ensuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

The Bureau’s announcement of the AO Program will be published in the Federal Register (see here and here), and includes a request for public comment. 

Bureau Releases Proposed LIBOR Transition Rule and Related Resources

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On June 4, 2020, the CFPB released a number of resources to help consumers and regulated entities prepare for the anticipated discontinuation of LIBOR after 2021.  These resources include:

  • A notice of proposed rulemaking (the “Proposal”) to amend Regulation Z to address the sunset of LIBOR. An unofficial redline was also released.  The proposed effective date of the rule is generally March 15, 2021, although some provisions would become effective October 1, 2021.  Comments on the Proposed LIBOR Transition Rule are due by August 4, 2020.
  • A summary Fast Facts document that describes the Proposal.
  • An update to the Bureau’s Consumer Handbook on Adjustable Rate Mortgages, which provides information to consumers about the features and risks of adjustable rate mortgage loans, many of which rely on LIBOR.
  • A set of LIBOR Transition FAQs to help regulated entities manage the LIBOR transition.

Bureau Statement Provides Relief from E-Sign Act Requirements During Pandemic

By Eric Mogilnicki and Graves Lee, Covington & Burling LLP

On June 3, 2020, the Bureau released a Statement on Supervisory and Enforcement Practices Regarding Electronic Credit Card Disclosures in Light of the COVID-19 Pandemic (the “Statement”).  The Statement is designed to help consumers:  (i) request a temporary reduction in APR or fees from credit card issuers in connection with an existing credit card account; or (ii) open a new credit card account.  In these circumstances, the credit card issuer is required to provide written disclosures under Regulation Z.  These disclosures may be provided electronically, but only if the credit card issuer fulfills the requirements of the federal E-Sign Act, including that the consumer electronically consents to the provision of electronic disclosures.

Because the requirements of the E-Sign Act can be cumbersome and make it harder to consumers affected by COVID-19 to quickly obtain relief from credit card issuers, the Statement provides that the Bureau will not take supervisory or enforcement action against credit card issuers who obtain oral consumer consent to the provision of electronic disclosures (where electronic consent would typically be required).  Consistent with the policy goals of the E-Sign Act’s electronic consent requirement, the Statement expects that credit card issuers will take reasonable steps to verify consumers’ electronic contact information.

Ninth Circuit Joins Sister Circuits in Rejecting “Intended Recipient” TCPA Defense

By Kevin Liu, Pilgrim Christakis LLP

On June 3, 2020, the Ninth Circuit affirmed the district court’s decision in N.L. v. Credit One Bank, N.A. The defendant’s vendors made 189 automated calls to the minor plaintiff’s cell phone. The defendant was trying to collect past-due payments from a customer, who it had consent to call using an automatic telephone dialing system. However, unbeknownst to the bank, that customer’s cell phone number had been reassigned to the plaintiff’s mother, who provided it to the plaintiff for his use—hence, the calls were unintentionally directed at the wrong person. At trial, the district court rejected the defendant’s proposed jury instructions, which propounded a “good faith” defense, and linked TPCA consent to the number dialed (rather than the called party). The jury found for the plaintiff, and the defendant appealed.

On appeal, the defendant argued that there is no TCPA violation if the “intended recipient” of the call consented to be called. The Ninth Circuit rejected this argument, joining the Seventh and Eleventh Circuits.  In so holding, the court noted that the consent provision (prohibiting calls that are made without consent) frames consent as that of the “called party”; in contrast, “intended recipient” does not appear anywhere in the statute. Further, in several places elsewhere in the TCPA, the called party is noted as the party “charged” for the call; while an “intended recipient” cannot be one who is “charged,” since they are no longer the subscriber of the phone number. Likewise, the section of the statute prescribing rules for systems that transmit artificial or prerecorded messages references “called party” as either the subscriber of the phone number, or the person who physically answered the call—here, the intended recipient is neither.

The Ninth Circuit also rejected the defendant’s policy arguments, noting that legislative history indicates that Congress enacted the TCPA to prohibit illegal phone calls except when the “receiving party” consented to receiving the call—once again, “receiving party” indicates the called party, rather than the intended recipient. The defendant also relied on the now-vacated 2015 FCC Order interpreting the TCPA, which provided a one-call safe harbor for callers that unknowingly dial reassigned numbers. The Ninth Circuit found this reliance actually pointed to the contrary—there would be no need for a safe harbor rule if a caller’s intent could defeat TCPA liability.

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.