Over the past year, the Consumer Financial Protection Bureau (“CFPB”) and other federal financial regulators have issued rules and guidance affecting the mortgage industry. The United States Supreme Court issued a unanimous decision providing guidance on the nuanced comparative analysis necessary for determining issues of federal preemption of state banking laws. The CFPB proposed revised rules for mortgage borrowers experiencing payment difficulties and advised regarding contracts for deed related to the Truth in Lending Act (“TILA”). This survey also catalogues new developments related to appraisal bias and automated valuation models.
In May 2024, the U.S. Supreme Court released its unanimous decision in Cantero v. Bank of America, N.A., in which the Second Circuit had ruled that a New York statute that required a minimum of 2 percent interest be paid on mortgage escrow accounts was preempted by the National Bank Act. The Court held that the court below had applied the wrong test to determine whether the New York law was preempted. It first noted that Congress had ruled out field preemption and had instead incorporated the Court’s decision in Barnett Bank of Marion County, N.A. v. Nelson into the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Thus, a state law that regulates banks is preempted only if it “discriminates against national banks as compared to state banks” or it “prevents or significantly interferes with the exercise by the national bank of its powers” in accordance with the Supreme Court’s analysis in Barnett Bank.
The Cantero Court found that the first part of the test was inapplicable because the New York law did not discriminate against federal banks. With respect to the second part of the test, whether the state law prevents or significantly impairs a national bank’s exercise of its powers, the Court stated that Barnett Bank “did not purport to establish a clear line to demarcate when a state law ‘significantly interferes,’” but instead analyzed Supreme Court precedents on that issue to determine whether a law “falls on the permissible or preempted side of the significant-interference line” because “those precedents furnish content to Barnett Bank’s significant-interference test—and therefore also to Dodd-Frank’s preemption standard incorporating Barnett Bank.” Moreover, a court “applying that Barnett Bank standard must make a practical assessment of the nature and degree of the interference caused by a state law” to determine whether it is preempted and must consider the cases on which Barnett Bank relied in making this analysis. The Court remanded the case to the Second Circuit for further consideration because it did not use the “nuanced comparative analysis” required by Barnett Bank and the Dodd-Frank Act.
In July 2024, the CFPB published a proposed rule to revise its 2013 mortgage servicing regulations that established rules for mortgage loan servicers dealing with borrowers that request assistance (“Proposed Loss Mitigation Rule”). Several key provisions would affect how mortgage servicers handle borrower requests for loss mitigation.
Currently, section 1024.41 of Regulation X provides certain protections for borrowers who have submitted a compete loss mitigation application more than thirty-seven days prior to a scheduled foreclosure sale. The Proposed Loss Mitigation Rule would “remove most of the application-based framework from § 1024.41” of Regulation X and replace it with a framework that protects consumers beginning on the date that they request loss mitigation assistance. The date of request is defined as “any oral or written communication, occurring through any usual and customary channel for mortgage servicing communications, whereby a borrower asks a servicer for mortgage relief.” A request for loss mitigation assistance would include a borrower who expresses an interest in loss mitigation; indicating that they have experienced a hardship and would like “assistance [from the servicer] with making payments, retaining their home, or avoiding foreclosure”; or “[i]n response to a servicer’s unsolicited offer of a loss mitigation option, a borrower expresses an interest in pursuing either the loss mitigation option offered or any other loss mitigation option.”
The Proposed Loss Mitigation Rule would also provide various protections against foreclosure and certain fees during the loss mitigation process. Under the proposed rule, if a borrower submits a request for loss mitigation assistance more than thirty-seven days prior to a foreclosure sale, the servicer must either take steps to ensure that there are no remaining loss mitigation options for the borrower; or make a loss mitigation determination, engage in regular attempts to reach the borrower regarding this determination, and not receive any communications from the borrower for a minimum of ninety days. Once one of these two “procedural safeguards” is met, the servicer may send the first notice or make the first filing required by state law to proceed with foreclosure. Between the time a borrower submits a request for loss mitigation assistance and either meets one of these procedural safeguards or the borrower is brought current, the servicer may not charge the borrower any fees other than those that would be permitted if the borrower had made “all contractual payments on time and in full under the terms of the mortgage contract.”
Currently, a servicer is required to notify the borrower of “which loss mitigation options, if any, it will offer to the borrower on behalf of the owner or assignee of the mortgage,” state the amount of time required to accept the option, and notify the borrower about appeal rights. The Proposed Loss Mitigation Rule would meaningfully expand the information that a servicer must provide to a borrower once the servicer makes any determination in response to a request for loss mitigation assistance. Servicers would need to provide consumers with the amount of time the borrower has to appeal; the specific reasons why the servicer chose to offer or deny each loss mitigation option; the “key borrower-provided inputs, if any, that served as the basis for the determination”; a “telephone number, mailing address, and website” where the borrower can access any non-borrower provided inputs used in the determination; a list of all available loss mitigation options that may remain available; a list of all loss mitigation options that were offered and remain available but the borrower has not yet accepted; information on all loss mitigation options available from the owner or assignee of the borrower’s loan; and if the borrower receives a loss mitigation offer, whether the borrower will remain eligible for the offer “if the borrower requests to be reviewed for other loss mitigation options prior to accepting or rejecting the offer.”
The Proposed Loss Mitigation Rule would alter the existing early intervention requirements for certain borrowers at section 1024.39 of Regulation X. In addition to the current written notice requirements, the proposed rule would mandate that servicers provide borrowers not only with the telephone number of assigned servicer personnel, as currently required, but would also require servicers to provide borrowers with the name of the current owner or assignee of the mortgage loan and a description of each type of loss mitigation typically offered by this entity; a telephone number, mailing address, and website to obtain a list of all loss mitigation options “that may be available from the owner or assignee of the borrower’s mortgage loan”; and information regarding how the borrower can request loss mitigation assistance.
In the preamble to the Proposed Loss Mitigation Rule, the CFPB notes that consistent with the preamble to its 2016 Mortgage Servicing Final Rule, it “expects mortgage servicers to assist borrowers with limited English proficiency.” While the CFPB did not set forth specific requirements, it noted its intention to require servicers to provide Spanish-language translations of certain written communications to all borrowers, to provide upon written request translation or interpretation services for certain communications and “translation and interpretation availability statements” informing borrowers how to request these servicers, and to provide upon request translation and interpretation services for any “languages the servicer knows or should have known were used in marketing to the borrower for that mortgage loan.” The CFPB requested public feedback on how to implement these requirements.
During the past few years, federal regulatory agencies have focused on allegations of bias relating to both home appraisals and so-called automated valuation models that seek to determine real estate values with limited or no human intervention. This trend continued as the Federal Financial Institutions Examination Council (“FFIEC”) issued its Statement on Examination Principles Related to Valuation Discrimination and Bias in Residential Lending (“Examination Statement”). In addition, a group of federal financial regulators released a final rule establishing quality control standards for the use of automated valuation models in mortgage lending.
In February 2024, the FFIEC issued an Examination Statement on behalf of its member federal regulators to communicate principles for the examination of supervised institutions’ residential property appraisal and evaluation practices. The Examination Statement not only highlighted that deficient real estate valuations can harm consumers, but also noted that deficient appraisals and property valuations can create safety and soundness risks for institutions. The FFIEC noted that consumer compliance examinations and safety and soundness focus on different areas: compliance examinations address a supervised institution’s compliance with consumer protection and anti-discrimination laws, while safety and soundness examinations target the institution’s financial conditions and operations. Accordingly, the Examination Statement provided separate attachments with distinct principles to guide supervised institutions and FFIEC members’ examiners through each type of examination.
The Examination Statement’s Consumer Compliance Examination Principles require examiners to consider whether the institution’s board and senior management have implemented compliance management systems that are “commensurate with the institution’s residential real estate lending risk profile.” The Examination Statement specifically cites the board’s and senior management’s third party oversight responsibilities, particularly the obligation to monitor “persons or entities that prepare valuation reports, third-party appraisers, and appraisal management companies.” More broadly, the Consumer Compliance Examination Principles also require an evaluation of the consumer compliance program—specifically policies and procedures related to collateral valuation review, training on potential discrimination in lending and valuation programs, monitoring and auditing practices used to identify and address potential discrimination, and the handling of consumer complaints alleging potential discrimination in home valuation.
Because deficient real estate valuations can affect the collateral support for a supervised institution’s mortgage holdings, and because noncompliance with applicable laws can indicate issues with an institution’s management, the Examination Statement also includes a set of Safety and Soundness Examination Principles. Examiners conducting a safety and soundness examination are directed to consider many of the same topic areas addressed in the Consumer Compliance Examination Principles, as well as the institution’s valuation review function, credit risk review function, and risks arising from real estate lending in relation to the institution as a whole.
In August 2024, the CFPB and five other federal regulatory agencies collectively published their Quality Control Standards for Automated Valuation Models final rule (“AVM Final Rule”). Largely adopting the requirements of the June 2023 proposed version of the same rule, the agencies emphasized that the AVM Final Rule “will allow the implementation of the standards to evolve along with changes in AVM technology” and that covered institutions “will have flexibility” in implementing parts of the rule.
The AVM Final Rule requires mortgage originators, defined to include anyone who takes a mortgage application, assists a consumer in obtaining or applying for a mortgage, offers or negotiates the terms of a mortgage, or represents to the public that they will provide any of these services, and secondary market issuers to adopt and maintain quality control standards that address five topics identified by the agencies in the rule. Under the AVM Final Rule, these quality control standards should be designed to provide a high degree of confidence in the accuracy of the valuation estimates produced by any automated valuation model, protect against the manipulation of data used in an automated valuation model, seek to avoid conflicts of interest, require random sample testing and reviews of automated valuation models, and ensure that any automated valuation models comply with applicable nondiscrimination laws.
The AVM Final Rule applies to any “automated valuation model,” which is broadly defined as “any computerized model used by mortgage originators and secondary market issuers to determine the value of a consumer’s principal dwelling collateralizing a mortgage.” However, the rule does not apply to the agencies themselves or to the use of automated valuation models to monitor the quality of mortgage or mortgage-backed securities, to review completed determinations of collateral value, or, if the models are used as a tool by a certified or licensed appraiser, to develop their own appraisal. While the AVM Final Rule will impose several requirements upon the industry, in light of the “flexibility” of the rule and the fact that many institutions already have some quality control measures in place, the agencies determined that the rule will take effect on October 1, 2025.
In August 2024, the CFPB published an interpretive rule asserting its view that a “contract for deed,” also known as a “land contract,” “land installment contract,” “land sales contract,” “bond for deed,” “agreement for deed,” or “buying on contract,” is a form of “credit” under TILA and Regulation Z, and if secured by a consumer’s home, is subject to the residential mortgage provisions of TILA. According to the interpretive rule, while the terms of a contract for deed can vary, these agreements generally require the buyer to make continuous payments to the seller for multiple years; the seller retains the deed until the contract is fully paid; the buyer is responsible for “many of the responsibilities of homeownership, including paying for taxes, insurance, home maintenance, and repairs”; and if the buyer misses a payment or otherwise breaches the agreement, the buyer will lose the home and the entire investment, including all payments to date.
The interpretive rule asserts that, based on case law that such a transfer creates a “grant of equitable title to the buyer” that results in a debt that the buyer must pay to the seller according to the terms of the contract, contracts for deed are “credit” under TILA and Regulation Z because they allow buyers to “acquire property and defer the payment.” Furthermore, the CFPB differentiated a contract for deed from standard “lease-based rental arrangements” because a residential lessee has fewer rights to the property than a contract for deed buyer, and the lessee does not have the same “ownership obligations” that occur with an equitable transfer of title.
The interpretive rule takes the position that such arrangements are generally “residential mortgage loans” under TILA and Regulation Z. It acknowledges that a “mortgage” and a “contract for deed” may be defined separately under state law. However, the rule notes that under TILA, a “residential mortgage loan” includes any credit transaction “secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real property that includes a dwelling.” It also notes that Regulation Z defines a “security interest” as “an interest in property that secures performance of a consumer credit obligation and that is recognized by State or Federal law.” Because the seller’s retention of title under a contract for deed “serves to ensure that the purchaser . . . fulfills the payment obligations,” the rule takes the position that a contract for deed is “functionally equivalent” to a mortgage and thus is subject to the “residential mortgage loan” provisions of TILA and Regulation Z.
Beyond applying TILA and Regulation Z to contracts for deed, the interpretive rule is congruent with three other actions taken by the CFPB. As noted in the rule, the argument that a contract for deed is “credit” under TILA and Regulation Z is consistent with the CFPB’s position in a 2020 consent order that contracts for deed were also “credit” under section 5481(7) of the Consumer Financial Protection Act. In May 2024, the CFPB issued an interpretive rule classifying buy now, pay later products accessed through a digital user account as credit cards subject to Regulation Z’s open-end credit protections. In June 2024, the CFPB released a proposed interpretive rule asserting that earned wage access products are “credit” subject to regulation under TILA and Regulation Z.
The views expressed in this survey are those of the author alone.
