Last Week, This Morning

November 4, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)^[1]" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On October 28, the Federal Housing Finance Agency and the Department of Housing and Urban Development jointly announced that the FHFA's latest update to its Uniform Appraisal Dataset now includes appraisal data from loan applications for single-family mortgages submitted to HUD's Federal Housing Administration. Previously, the UAD included only data on appraisals of properties where the mortgage loan would be acquired by Fannie Mae or Freddie Mac. FHFA Director Sandra L. Thompson states that "[o]ffering the public access to appraisal data for FHA-insured loans will bolster policymakers' efforts to identify and address potential inaccuracy, bias, and discrimination in the broader mortgage market."

In addition to the change in the scope of information in the UAD, the FHFA also updated several Fannie Mae and Freddie Mac policies in connection with single-family mortgages, including:

• expanding eligibility for appraisal waivers and inspection-based waivers by increasing the maximum loan-to-value ratio of purchase loans eligible for appraisal waivers from 80 to 90 percent and increasing the maximum LTV ratio of purchase loans eligible for inspection-based appraisal waivers from 80 percent to 97 percent;
• expanding eligibility for a Freddie Mac pilot program that offers lenders a fee-based alternative to repurchase requests for performing loans with defects; and
• advance notice of certain Fannie Mae and Freddie Mac pricing increases.

Amicus brief(ly): The federal agencies continue to tinker with appraisal rules and procedures with an eye toward combatting appraisal inaccuracies and bias. The FHFA points to transparency and fairness as the reason for including a broader range of appraisal information in the data release and suggests that the release of broader information will put "current and comprehensive" appraisal data in the hands of consumers and the marketplace. This seems like a positive step in achieving the agencies' goals.

The Federal Housing Administration recently requested feedback on a draft Mortgagee Letter entitled Nonjudicial Foreclosure Process for Mortgages with Secretary-held Liens.

On August 29 (and reported in our September 3 issue), the FHA released Mortgagee Letter 2024-17, which established optional interim procedures for releasing an FHA subordinate Secretary-held lien after a mortgagee has completed a nonjudicial foreclosure sale where there are no surplus funds available to satisfy HUD's subordinate lien. The provisions of that Mortgagee Letter applied to all FHA Title II Single Family forward mortgage programs and was implemented on September 4, 2024.

If finalized and implemented, this new draft Mortgagee Letter would replace the interim procedures published in Mortgagee Letter 2024-17.

Feedback on the draft Mortgagee Letter is due by November 25, 2024.

Amicus brief(ly): The FHA is cognizant that having the U.S. as a junior lienholder on residential real estate is disruptive, not just to the secondary market for junior-lien mortgage loans but to the state mortgage loan foreclosure systems that include rules for dealing with junior lienholders. To that end, replacing the rather short (but necessary at the time) Mortgagee Letter 2024-17 with the new proposed draft guidance is an important step toward making even clearer how mortgagees should proceed with nonjudicial foreclosures where HUD holds the junior lien on the foreclosed property. The mortgagee letters are important in light of an Eighth Circuit opinion from July 2023, holding that HUD's junior liens cannot be extinguished in a nonjudicial foreclosure proceeding because that does not constitute a "judicial" foreclosure sale required under federal law to discharge a lien held by the U.S. The impact of this more detailed draft guidance is identical when it comes to nonjudicial sales that yield no surplus to pay off HUD's junior lien - with documentation of the sale, HUD will release its lien. But mortgage lenders should review this draft mortgagee letter to get familiar with the procedures the FHA outlines and offer comments if there are ways to make the draft procedures more sensible and efficient.

On October 31, the Consumer Financial Protection Bureau announced that it entered into a consent order with a Florida state-chartered credit union over its transition to a new mobile and online banking platform in 2022. Although the credit union, one of the largest in the country with approximately $14.75 billion in total assets and over 980,000 members, anticipated that banking services would be inaccessible for several days during the conversion, services were unavailable for substantially longer that. The CFPB claimed that the ineffective rollout made it difficult for credit union members to perform basic banking functions for weeks, with some features unavailable for more than six months. The CFPB, which worked with the National Credit Union Administration in its investigation of the matter, ordered the credit union to ensure that all credit union members who were harmed by the platform's outages and limited functionality, including consumers who were unable to manage their accounts, were charged late fees when their online bill payments did not go through, or who were unable to access their funds, are made whole. The credit union is also required to pay a $1.5 million civil penalty to the CFPB's victims relief fund.

The CFPB blamed the credit union for setting an unrealistic deadline for the transition, despite warnings from its own development team. The consent order requires the credit union to create contingency plans to minimize the impact of future updates to its banking system on consumers' ability to use its banking platform, including providing sufficient customer service resources to address consumer problems and ensuring that upgrades and maintenance for consumer-facing banking systems are performed in a timely manner.

Amicus brief(ly): The facts alleged in this consent order are a tough read, especially for anyone who has gone through a major system conversion like the one the Florida credit union undertook. We do not get the credit union's side of the story from the consent order facts, but the CFPB tells a pretty vivid tale of an aggressive plan to transition the credit union's almost one million customers from one platform to another, with a relatively new vendor. Evidently, the credit union's implementation plan was flexible (or not well-defined) enough that its team allegedly changed the classification of over 150 "critical" defects to something less severe as the "go live" date approached, allowing the project to move forward without addressing those important issues. It took so long for the platform and smartphone app to function correctly that the CFPB called the impact on credit union members "unfair" as a result of their inability to perform basic transactions. If you are considering a platform change, there are lessons for you in this consent order. The unforced errors described were consequential and expensive.

The Pennsylvania Department of Banking and Securities recently issued an interpretive letter to Pennsylvania and out-of-state state-chartered banks, bank and trust companies, and savings banks announcing that it "will not take exception to certain additional activities being conducted by banks at limited purpose banking offices ('LPBO') established in conformance with the [Department's LPBO Statement of Policy located at 10 Pa. Code §§ 13.61-13.68]."

Specifically, in addition to the permissible activities that may be conducted at an LPBO under 10 Pa. Code § 13.63, "bank personnel at a[n] LPBO may: (i) conduct deposit production office activities consistent with those permitted for national banks; and (ii) make credit decisions, including final decisions, regarding loan applications." The interpretive letter also provides that "a bank employee's personal residence that is not open to the public and utilized for the purpose of working remotely will not be considered '[a]n office of a banking institution' within the meaning of the definition of 'limited purpose banking office' ...; thus, such residence would not be required to be established as a[n] LPBO."

Amicus brief(ly): In the age of remote and hybrid work, licensed lenders, servicers, and other participants in the financial services space have wrestled with existing laws to try and find a way to allow employees to spend some of their work hours at home. There are several concerns about those arrangements, not the least of which involve data and system security. But assuming a regulated company can sufficiently lock down systems, the concern not often or easily resolved in most state laws is that doing some business from a home office could make the home office a "branch" for licensing purposes, or it can run afoul of restrictions that say a licensee may only operate from a licensed office. Through and after the pandemic, state regulators have been working to better define the rules around what kind of work employees can perform remotely without turning home offices into "branch" offices. The lead story in this development is the Pennsylvania regulator's effort to keep state-chartered banks competitive with national banks by specifically authorizing deposit production office and loan production office activities out of offices that are not bank branches or specifically-authorized deposit production offices or loan production offices. This position is helpful to state banks that need to distribute that work to offices where they perform other back-office work.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.