Mortgage Banking Update - January 25, 2013

Ballard Spahr LLP

CFPB Generates Flurry of New Mortgage Banking Industry Rules

The Consumer Financial Protection Bureau has been a whirlwind of activity in recent weeks, issuing a number of final rules that will affect the mortgage banking industry. They include its highly anticipated ability-to-repay/qualified mortgage rule, which appears to respond at least partially to the industry’s desire for a safe harbor for qualified mortgages. They also include rules implementing Dodd-Frank mortgage servicing provisions, which will present significant implementation challenges for servicers, and changes to the existing loan originator compensation rule that include mixed results for the industry. In addition, the Bureau was among several agencies that adopted a joint final rule to implement the Dodd-Frank appraisal requirement for higher-priced mortgage loans under the Truth in Lending Act.

We will cover some of these rules in two upcoming webinars, “Top 10 Takeaways from the CFPB's Ability-To-Repay/QM, Servicing and Loan Originator Compensation Rules” on January 30, 2013, and “The Ability-To-Repay/QM Rule―Important Regulatory and Litigation Considerations” on February 5, 2013.

Read more about the new rules in our recent alerts:

CFPB Issues Final Rule on Loan Originator Compensation Requirements

Agencies Adopt Final Appraisal Rule for Higher-Priced Mortgage Loans

CFPB Issues Final Mortgage Servicing Rules

CFPB Adopts Mortgage Escrow Account Final Rule

CFPB Final Ability-To-Repay Rule Prompts Cautious Optimism from Industry

High-Cost Loan Final Rule Temporarily Averts FHA Loan Crisis

CFPB Issues Final ECOA Appraisal Rule

The Consumer Financial Protection Bureau has issued a final rule to implement Dodd-Frank amendments to the Equal Credit Opportunity Act that require creditors to provide to a first lien mortgage applicant a copy of all written appraisals and valuations developed in connection with the application. The final rule, which revises the existing Regulation B requirements for providing copies of appraisals to applicants, becomes effective on January 18, 2014. It will apply to first lien mortgage transactions for which a creditor receives an application on or after this date.

The final rule contains these key provisions:

  • The rule applies to applications for consumer or business purpose credit that are to be secured by a first lien on a residential structure containing one to four units, whether or not that structure is attached to real property. (Unlike the current Regulation B appraisal rule, the final rule does not apply to subordinate lien loans.)
  • A creditor must notify an applicant in writing within three business days of receiving an application that the applicant has a right to receive a copy of all written appraisals developed in connection with the application. Although it only requires creditors to give notice of an applicant’s right to a copy of “appraisals,” the rule also requires creditors to provide a copy of any non-appraisal valuations. For purposes of the rule, any estimate of a dwelling’s value developed in connection with an application (such as an automated valuation model report or broker price opinion) is considered a “valuation.”

    (While the CFPB’s final rule on appraisals for higher-priced mortgages requires creditors to notify an applicant within three business days of receiving an application of the right to a copy of an appraisal and to obtain an additional appraisal at the applicant’s expense, it imposes no similar requirements for non-appraisal valuations. To allow creditors to use revised Sample Form C-9 to satisfy both the Regulation B notice requirement and the higher-priced mortgages notice requirement, the form only refers to an “appraisal.”)
  • The copy of each appraisal and other written valuation must be provided promptly upon their completion, or three business days before consummation for closed-end credit or account opening for open-end credit, whichever is earlier. Unless otherwise prohibited by law, a creditor may charge a reasonable fee to reimburse the creditor for the costs of the appraisal or valuation itself, but not for photocopying, postage, or other costs associated with providing a written copy to an applicant.
  • Applicants may waive the timing requirement for providing copies but must be given a copy of all appraisals and other written valuations at or prior to consummation or account opening. If the applicant provides a waiver and the transaction is not consummated or an account is not opened, the copies must be provided within 30 days of when the creditor determines consummation or account opening will not occur.

- Barbara S. Mishkin

20 State Agencies Adopt Uniform State MLO Testing

In a move towards uniformity, the Conference of State Bank Supervisors (CSBS) announced that on April 1, 2013, 20 state agencies will begin to offer the Uniform State Test (UST) in connection with the licensing of mortgage loan originators. The UST will supplant the various state-specific testing components currently required by those state agencies.

The adoption of the UST will be the first major change to MLO testing requirements since such tests first began in July 2009. The UST will test applicants' knowledge of state-related content based on the SAFE Act and CSBS/AARMR Model State Law. The Model State Law is used by many states to implement the SAFE Act. The UST will cover the following testing topics: (1) department of financial institutions or mortgage regulatory commission; (2) state law and regulation definitions; (3) license law and regulation; and (4) compliance.

The UST will also replace the existing national test for MLOs, regardless of whether a state has adopted the new test. The new UST will be available to MLOs nationwide. Additionally, a 25-question "standalone" UST will be made available on April 1. This standalone test will allow currently licensed MLOs to meet the testing requirements of states that have adopted, or will adopt, the UST. The standalone test will only be available for approximately a year after its release.

In addition to the 20 state agencies adopting the UST on April 1, four more state agencies have indicated that they will adopt the UST in lieu of their state-specific testing components on July 1, 2013. Remaining state agencies will continue to require their state-specific testing components for MLO licensure.

The CSBS anticipates that additional state agencies will eventually adopt the UST. We will continue to monitor this move towards a more uniform and streamlined MLO licensing system.

- Matthew Saunig

Mortgage Foreclosure Is Debt Collection under the FDCPA, Sixth Circuit Holds

Lawyers whose principal business is mortgage foreclosure or who regularly handle mortgage foreclosures are “debt collectors” subject to the Fair Debt Collection Practices Act, the U.S. Court of Appeals for the Sixth Circuit has ruled. In its decision, issued on January 14, 2013, the Sixth Circuit refused to follow cases that have held mortgage foreclosure is not debt collection under the FDCPA because it involves the enforcement of security interests.

The FDCPA generally defines a “debt collector” as a person whose “principal business” is debt collection or “who regularly collects or attempts to collect” consumer debts. The Act contains a provision that, under certain conditions, deems “taking or threatening to take any nonjudicial action to effect dispossession or disablement of property” an unfair practice.

For purposes of this provision, the FDCPA’s “debt collector” definition includes persons enforcing security interests when that is the principal purpose of their business. Some courts have relied on this additional definition to hold that lawyers engaged in mortgage foreclosure are only subject to the FDCPA for purposes of the unfair practice provision and are not otherwise “debt collectors.”

The Sixth Circuit concluded that the additional definition should not be read to exclude the enforcement of security interests from debt collection. Rather, it should be read to extend the coverage of the FDCPA’s unfair practice provision to persons whose only role in the collection process is the enforcement of security interests, such as repossession agencies and their agents. It found that “[a] lawyer principally engaged in mortgage foreclosure does not meet this criteria, for he must communicate with the debtor regarding the debt during the foreclosure proceedings, regardless of whether the proceedings are judicial or non-judicial in nature.”

In the Sixth Circuit’s view, any activity whose purpose is to obtain payment of a debt “is properly considered debt collection” and “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt” (emphasis supplied).

The Sixth Circuit’s holding is consistent with decisions from other circuits that have found lawyers engaged in mortgage foreclosure can qualify as “debt collectors” under the FDCPA. Those circuits include the Second, Third, Fourth, and 11th Circuits.

The Consumer Financial Protection Bureau has made clear that it agrees with this interpretation. On January 2, 2013, the CFPB’s final rule defining larger participants of a market for consumer debt collection became effective. In its background discussion of the rule, the CFPB noted its agreement with cases holding that an attorney or other person who enforces security interests can qualify as a debt collector under the FDCPA. The Sixth Circuit’s decision could encourage the CFPB to examine law firms and other entities or persons that only handle mortgage foreclosures.

- Barbara S. Mishkin

State AG Lawsuit Not Removable under CAFA, Second Circuit Holds

The U.S. Court of Appeals for the Second Circuit has ruled that a parens patriae action brought by a state attorney general is not removable from state to federal court as a “class action” under the Class Action Fairness Act.

In Purdue Pharma, L.P. v. Commonwealth of Kentucky, the Kentucky Attorney General had filed a parens patriae action in state court alleging that the defendants had violated state law by misleading health care providers, consumers, and government officials about the risks associated with a prescription drug they manufactured and marketed. The AG sought recovery of prescription and health care costs incurred by the state and prescription costs incurred by consumers.

After the defendants removed the case to a Kentucky federal district court, it was transferred to a New York federal district court, which granted the AG’s motion to remand because the case failed to meet CAFA’s requirements. The defendants then filed a petition with the Second Circuit seeking leave to appeal the remand order. The Second Circuit denied that petition, finding that the order was proper.

Under CAFA, a “class action” can be removed to federal court if the proposed class contains at least 100 members, minimal diversity exists between the parties, and the aggregate amount in controversy exceeds $5 million. According to the Second Circuit, for a case to qualify as a “class action” under CAFA, it “must be filed under a statute or rule that is both similar to Rule 23 [of the Federal Rules of Civil Procedure] and authorizes the action to proceed ‘as a class action.’”

The Second Circuit found that none of the Kentucky statutes used by the AG to bring the substantive claims authorized a suit as a class action or required a suit to satisfy any of the conditions of Rule 23 class actions such as adequacy of representation, numerosity, commonality, typicality, or the requirement of class certification. Characterizing the case as filed by the AG on behalf of the sovereign and not by a class representative on behalf of similarly situated plaintiffs, the Second Circuit held that the case did not qualify as a “class action” because “[i]n form as well as function, parens patriae suits lack the equivalency to Rule 23 that CAFA demands.”

In ruling that a parens patriae suit is not removable under CAFA as a “class action,” the Second Circuit joins the Fourth, Seventh, and Ninth Circuits. The Fifth Circuit, however, has ruled that a parens patriae action is removable under CAFA as a “mass action.” To reach that result, the Fifth Circuit followed a “claim-by-claim” approach, under which it looked behind the pleadings and found that the state was bringing claims on behalf of individuals who, rather than the state, were the true parties in interest.

Rejecting the defendants’ argument that it should follow a similar approach, the Second Circuit observed that the Fifth Circuit’s holding only addressed CAFA’s “mass action” provisions and not the “class action” provisions at issue. While acknowledging that a claim-by-claim approach (versus a whole-complaint approach) might be relevant for purposes of determining diversity, the Second Circuit stated that it had no bearing on the question of whether a parens patriae suit qualifies as a “class action” under CAFA.

Because the defendants did not argue that the case qualified as a “mass action,” the Second Circuit declined to address whether the AG’s action could otherwise qualify as a “mass action.” Nevertheless, the court observed that CAFA’s definition of “mass action” excludes any civil action in which “all of the claims in the action are asserted on behalf of the general public (and not on behalf of individual claimants or members of a purported class) pursuant to a State statute specifically authorizing such action.”

Allowing the removal of attorney general parens patriae suits from state to federal court is very beneficial to defendants. It remains to be seen whether this circuit split will result in a request for rehearing en banc in the Second Circuit or a petition for certiorari to the Supreme Court by the defendants.

- Barbara S. Mishkin

Montana Adopts Procedure for Requesting Licensing Exemption

Montana recently adopted a procedure for requesting exemptions from its mortgage licensing requirements. In a regulation effective January 18, 2013, Montana adopted procedures whereby certain entities and individuals can request an exemption. Depository institutions, their subsidiaries that are regulated by a federal banking agency, and institutions regulated by the Farm Credit Administration can now request an exemption by using the NMLS' MU1R form. Additionally, registered MLOs who are employees of such entities can request an exemption from Montana's MLO licensing requirement by using the NMLS' MU4R form.

- Matthew Saunig

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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