Alston & Bird Consumer Finance Blog

Mortgage Loans

Federal Court Inspects Maryland’s Restrictions on Inspection Fees

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A&B Abstract:

Maryland’s inspection fee statute has been interpreted by the Maryland Court of Appeals and the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) to apply both at the time of origination and throughout the servicing of a residential mortgage loan.  More recently, a lower federal district court decision came to a different interpretation.

Maryland’s Inspection Fee Restriction

Maryland Commercial Law Section 12-121 provides that, subject to limited exceptions, a lender may not impose a “lender’s inspection fee” in connection with a loan secured by residential real property.   A “lender’s inspection fee” means a fee imposed by a lender to pay for a visual inspection of real property. A lender’s inspection fee may be charged only if the inspection is needed to ascertain the completion of (i) the construction of a new home; or (ii) repairs, alternations, or other work required by the lender.  A “lender” is defined as a licensee or a person who makes a loan subject to Maryland’s Interest and Usury subtitle. In turn, a “licensee” is defined as a person that is required to be licensed to make loans subject to Maryland’s Interest and Usury subtitle, regardless of whether the person is actually licensed.

Prior Guidance

Previously, the Court of Appeals of Maryland held, in Taylor v. Friedman, 689 A.2d 59 (Md. Ct. App. 1997), that, unless permitted by Section 12-121(c), the prohibition on inspection fees was not limited to inspections for closings, but extended to any inspections throughout the life of the loan. In 2014, the OCFR released an advisory opinion stating that Taylor remains good law in Maryland and applies to circumstances where a servicer orders a visual inspection of property following default on the terms of the mortgage.

Roos vs. Seterus

More recently, the U.S. District Court for the District of Maryland in Roos v. Seterus held, despite previous decisions indicating otherwise, that non-lenders may charge inspection fees to mortgagors.  The defendants in Roos argued that they did not charge illegal inspection fees because (1) the deed of trust specifically authorized inspection fees; (2) Section 12-121 is inapplicable to the defendants; and (3) Section 12-121 does not have a blanket prohibition on the imposition of inspection fees. The defendants believed that since they were a servicer, and the plain language of the statute only prohibited lenders from charging inspection fees, the statute did not prohibit them from charging inspection fees.  The court agreed with defendants that the plain meaning of the statute only prohibits a “lender” from imposing or collecting inspection fees. Although the court in Roos did not itself provide a definition of “lender,” the court pointed to a Montgomery Circuit Court case, Kemp v. Seterus, Inc., No. 441428-V, 2018 Md. Cir. Ct. LEXIS 9 (Md. Cir. Ct. Oct. 19, 2018), which addressed the issue. In that case, the court stated that “the meaning of the statute [wa]s plain; only ‘persons’ which make loans to ‘borrowers’ are lenders and thus covered by the statute.” The court in Roos adopted the Kemp court’s definition of lender, finding it well reasoned and applicable since it involved the same issue and defendant.

Takeaway

It is unclear if this decision will convince the OCFR to change its long-standing position or if plaintiffs will appeal this decision.  Moreover, we note that this decision was issued by a federal district court interpreting Maryland state law and, as such, will not have precedential value in Maryland state courts. While defendants may have prevailed in this federal district court case, servicers should still remain cautious in charging inspection fees when servicing a loan secured by residential real estate in Maryland.

* We would like to thank Associate, David McGee, for his contributions to this blog post.

Changes to the Department of Defense’s SCRA Website Database Could Impact Servicers

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A&B ABstract: Servicers should be aware of changes being made to the Department of Defense’s (“DoD”) Servicemembers Civil Relief Act (“SCRA”) website in response to a complaint that the DoD failed to protect the privacy of servicemembers’ personal information.

Discussion

The SCRA provides certain financial and legal protections to active duty service members.  Servicers are encouraged to identify and verify eligible populations of active duty servicemembers to ensure they are obtaining the relief benefits to which they are entitled.  Under scrutiny for failing to protect the personal information of servicemembers, the DoD is making changes to the SCRA website database that may impact how servicers identify and verify eligible servicemembers.

The Complaint

The complaint alleged that the DoD’s SCRA website violates the Administrative Procedures Act and the federal Privacy Act of 1974 (which regulates how the federal government may collect, maintain, use and disseminate personal information about citizens and permanent residents).

Specifically, the Vietnam Veterans of America, New York State Council, Vietnam Veterans of America Chapter 7, and Thomas Barden (“Plaintiffs”) alleged that the SCRA portal leaves a servicemember’s private information unprotected. (Private information on the site includes dates of active duty service; specific dates on which a reservist, guardsman or individual not currently on active duty has been called up for future active duty; the specific component of the military in which an individual served; and confirmation that the individual served on active duty.)  Further, Plaintiffs asserted that the DoD is violating the Federal Information Security Modernization Act by failing to comply with policies that strictly limit the use of social security numbers (“SSNs”).  Finally, Plaintiffs asserted that the SCRA website’s purpose is only to determine whether someone is protected by the SCRA; Plaintiffs had no objections to limited disclosure of information for legitimate SCRA purposes.

The Settlement Agreement

The parties reached a settlement agreement (“Agreement”) on October 1, 2019.  The Agreement requires the DoD to

make significant changes to the SCRA website to enhance security of the site and better protect the personal information of servicemembers while restricting access, pursuant to the website’s “Terms of Use,” to those individuals and entities who are using the website for its intended purpose, so as to ensure the website achieves its intended purpose.

On or before October 31, 2019, the Agreement requires all users to register for an account on the SCRA website in order to run searches (i.e., single-record or batch searches). DoD will collect the name, mailing address and company name of every user as part of the account creation process.

DoD Obligations under the Agreement

The Agreement also imposes a series of obligations on the DoD.   First, on or before October 31, 2019, the Agreement required the DoD to:

  • Implement analytics to monitor the use of the SCRA website in order to: (i) identify, among other things, patterns of misuse that would indicate a user is attempting to misuse the database; and (ii) flag accounts that are searching the same name against multiple SSNs (or vice versa); and
  • Adopt a procedure to investigate potential misuse and for deactivation of accounts.

Second, within three months after the date of the Agreement, the DoD will:

  • Implement Terms of Use Language as provided for in Appendix A of the Agreement (which restricts the purposes for which the site may be accessed, and sets penalties for violations), and require users to agree to the terms and certify under penalty of perjury that they are using the website for permissible purposes;
  • Add language to the SCRA website to discourage collection of SSNs for third-party users of the SCRA website, where the sole purpose for using the website is for SCRA verification; and
  • Post a reasonable notification on the SCRA website stating that changes are made to prohibit misuse, including for non-SCRA commercial purposes, with the language set forth in Appendix C of the Agreement.

Finally, the Agreement requires DoD to:

  • Publish a new Systems of Records Notice in the Federal Register that specifies the circumstances in which information may be disclosed through the SCRA website; and
  • Subject to applicable laws and regulations, provide quarterly reports to Plaintiffs for two years.

Specifically, the required reports must list: (i) the company name of active users, (ii) information on volumes of searches per active user, (iii) the number of suspected and terminated accounts, (iv) the company names of suspended and terminated accounts, so long as those company names would not identify individuals, and (v) a description of the back-end analytics that have been implemented, and the results thereof.

Takeaways

Based on the Terms of Use reflected in the Agreement, servicers may only use the SCRA website for purposes of ensuring that servicemembers receive SCRA protections.  Servicers may run multiple searches in the SCRA website throughout the life of a loan.  In fact, some investors require searches on a quarterly basis.  While servicers should be permitted to continue good faith searches conducted for purposes of ensuring SCRA protections are afforded, it is unclear whether excessive searches (even if conducted for good faith purposes) could nevertheless constitute misuse of the website and result in account termination.

To the extent that the DoD publishes the procedures it is obligated to adopt for investigation of potential misuse, such procedures should provide additional clarity.  In the meantime, servicers should review their existing policies and procedures for conducting SCRA searches to ensure appropriate guardrails are in place to prevent the unintentional misuse of the SCRA website.

CFPB Issues Final HMDA Rule Incorporating Reporting Exemptions

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A&B ABstract:  In a final rule issued on October 10, 2019, the CFPB amended Regulation C under the Home Mortgage Disclosure Act to incorporate exemptions created by the Economic Growth, Regulatory Relief, and Consumer Protection Act, among other changes.

Discussion:

Effective January 1, 2020, the Consumer Financial Protection Bureau issued a final rule under the Home Mortgage Disclosure Act (“HMDA”), addressing certain exemptions from HMDA’s reporting requirements.

Threshold Exemption for Reporting on Open-End Loans

The CFPB has extended to January 1, 2022, an increased threshold for reporting HMDA data on open-end loans.  Specifically, the rule maintains the threshold of 500 transactions below which a lending institution is not required to report loan data.  (Thus, an entity originating fewer than 500 transactions is exempt.)   However, if a financial institution that is under the 500-transaction threshold chooses to report any excluded applications for, or originations or purchases of open-end lines of credit, it must report all such transactions.

Incorporation of Partial Exemptions Under the Regulatory Relief Act

The final rule incorporates into Regulation C provisions of an August 2018 interpretive and procedural rule adopted pursuant to the Regulatory Relief Act.  Specifically, an insured depository institution or credit union covered by a partial exemption may report exempt data fields as long as it reports all data fields within any exempt data point for which it reports data.  Section 1003.3(d) makes a partial exemption available to an entity that, in each of the preceding two calendar years, originated fewer than 500 closed-end mortgage loans or 500 open-end lines of credit.

The final rule also include clarifications:

  • That only loans and lines of credit that are otherwise reportable under HMDA count towards the thresholds for the partial exemptions;
  • Of which data points the partial exemptions cover; and
  • On the applicability of the partial exemptions to insured depository institutions with less-than-satisfactory CRA examination histories.

Takeaway:

In its rule announcement, the CFPB indicated that it will address permanent coverage thresholds for both closed-end mortgage loans and open-end lines of credit in a separate final rule.  We will continue to monitor the rulemaking process.

South Carolina Revisiting Borrower Preference Requirements

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A&B ABstract: The South Carolina Department of Consumer Affairs  (“Department”) announced that it is soliciting comments on proposed Regulation 28-75, which would provide mortgage lenders with additional guidance on the state’s attorney and insurance agent borrower preference requirements.

Determination of Borrower Preferences

Section 37-10-102 of the South Carolina Consumer Protection Code requires a creditor to ascertain and comply with the consumer’s preference as to the legal counsel the consumer wants to hire to conduct the transaction. The requirement is not new – it was enacted in 1976 and amended in 1996 – but it is vigilantly enforced by state regulators.  Despite the Department’s issuance of numerous guidance documents (most recently in February 2017, as discussed in a previous client advisory), the requirement still presents compliance challenges to mortgage lenders.

According to regulators, satisfying Section 37-10-102 requires: (i) providing consumers the notice of the right to select an attorney and insurance agent within three days of an application; (ii) ascertaining these preferences before loan closing; and (iii) assuring that the borrower-chosen providers execute the loan closing. ‘

The Department recognizes a safe harbor, of sorts, if the lender provides the borrower with a form (based on Consumer Protection Code Administrative Interpretation 10.102(a)-8302) and the form is fully completed and signed and dated by the borrower.

The statute is designed to ensure that lenders do not improperly force or steer borrowers to an attorney. But what happens when a borrower states his or her preference to the lender, rather than including it on the form? Or if the borrower truly doesn’t have a preference?  Must a lender require a borrower to select an attorney when the borrower doesn’t have a choice?  The Department is poised to provide additional clarity to the industry. However, the Department’s announcement is light on details, merely noting that a future regulation may clarify creditors’ responsibilities and provide definitions.

Takeaway

Additional guidance from the Department is a welcome development.  Interested parties should submit written comments by 5 p.m. on October 29, 2019 to Kelly Rainsford, Deputy of Regulatory Enforcement, South Carolina Department of Consumer Affairs, P.O. Box 5757, Columbia, SC 29250.

Massachusetts Settlement Agreements Highlight AG’s Compliance Expectations

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A&B Abstract: In a series of 2019 settlement agreements, the Massachusetts Attorney General has publicly provided insights into her compliance expectations for residential mortgage servicers.  The settlements demonstrate a focus on compliance with the Commonwealth’s Act to Prevent Unlawful and Unnecessary Foreclosures, codified in part as M.G.L. Chapter 244, Section 35B (“Section 35B”) and its unfair and deceptive acts and practices law (the “UDAP law”), found in Chapter 93A of the Massachusetts General Laws.

Section 35B and Chapter 93A Expectations

Section 35B prohibits a creditor (defined to include a servicer) from causing publication of notice of a foreclosure sale upon “certain mortgage loans” unless it has first taken reasonable steps and made a good faith effort to avoid foreclosure.  To be considered to have taken reasonable steps and made a good faith effort to avoid foreclosure, a creditor must have provided a statutorily defined notice (“35B Notice”) at the time a borrower is in default.  Additionally, if certain criteria are met, a creditor must conduct a review to determine whether the borrowers are eligible for a loan modification prior to publishing a notice of foreclosure sale pursuant to M.G.L. ch. 244, Section 14. While the requirements may sound simple, they are complex and difficult to operationalize.

To avoid violations of Section 35B and the UDAP law, the Massachusetts Attorney General expects servicers to:

  • Accurately record, capture or note in the servicing system when borrowers exercise their right to pursue a loan modification under Section 35B by returning the mortgage modification options form (“MMO”), as required by 209 CMR 56.09;
  • Complete a timely review of borrowers’ loan modification applications, as required by Section 35B(c), and avoid causing undue delay in the loan modification review process;
  • Disclose to borrowers the servicer’s determination of the income, debts and obligations and the net present value assessment performed by the servicer in the review of the loan modification, as required by Section 35B(c);
  • Offer modifications, including short-term and interest-only modifications that reflect the borrower’s future ability to repay the modified mortgage loan according to its scheduled payments, as required by Section 35B(b);
  • Not deny loan modification applications on the basis that the borrower did not return sufficient documents to be reviewed, if the servicer did not adequately or timely communicate the requirements to the borrowers or identify when all such documents have in fact been submitted;
  • Provide borrowers with notice of their right to present a counter-offer after being offered a loan modification as part of a Section 35B review, as required by Section 35B(c);
  • Take reasonable steps and make a good faith effort to avoid foreclosure when a borrower requested a loan modification;
  • Not record affidavits pursuant to Section 35B(f) attesting compliance with the requirements of Section 35B where deficiencies exist  in the servicers’ Section 35B loan modification review process, including the failure to identify MMO forms returned by the borrower; and
  • Accurately and timely report accurate borrower response rates under Section 35B to the Massachusetts Division of Banks (“DOB”) as required by 35B(g).

Additional Chapter 93A Expectations

To avoid UDAP concerns, servicers should also:

  • Provide borrowers in default meaningful access to a single point of contact (“SPOC”), such that borrowers can (i) reach a person who can provide information about the modification application, foreclosure status or other account information, and (ii) adequately ensure accessibility to company representatives to ensure borrowers do not encounter connectivity issues, including busy signals, long hold times, and multiple transfers without reaching a live representative;
  • Provide successors-in-interest (“SIIs”) information about what documentation is required to access the account, provide SIIs accurate information as to the availability and requirements related to loss mitigation programs, and adequately note in borrower account files a confirmed SII, such that surviving spouses or other types of SIIs are not required to resubmit death certificates or other documentation, when a servicer already has  such documentation;
  • Proactively  communicate with limited English proficiency (“LEP”) borrowers in their native language to provide information related to the mortgage account, adequately notate in the borrower account files a borrowers LEP status such that LEP borrowers do not have to reestablish their language-access needs with each contact with a servicer, and do not make outgoing calls to previously confirmed LEP borrowers without first engaging reasonably available translation services, such that LEP borrowers (i) encounter an English-speaking representative, (ii) face unexplained holds while translation services are engaged, and (iii) become confused about the nature of the call and disconnect;
  • Allow borrowers to complete short sales by (i) approving, explicitly or implicitly, a listing price in connection with a short sale application only after confirming the loan’s investor would accept an offer received at that price, (ii) not countering or rejecting short sale offers that meet the approved listing price due to a failure to obtain investor proceeds requirements prior to explicitly or implicitly approving the listing price, (iii) having adequate processes to resolve disputes in valuation of a property, and (iv) having a standardized or consistent review process such that borrowers attempting to complete a short sale do not have to relist the property to meet the servicer’s requirements; and
  • For in-flight modifications, ensure that loss mitigation applications initiated by a prior servicer are continued and  identify and honor loan modifications offered by previous servicer.

Takeaway:  

These settlement agreements serve as a reminder that Massachusetts continues to be active in mortgage servicing issues and will use its broad and sometimes nebulous UDAP authority to enforce activities that aren’t specifically regulated under existing law.