In 2016 the Second Circuit Court of Appeals’(NY, Connecticut, and Vermont) recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. Apparently, the Court did not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party.
Issue – If left undisturbed, the Court’s decision would have had broad and alarming ramifications. The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.
The Supreme Court of the United States decided not to hear the case.
Proposed Legislation – On February 14, 2018 the House approved two bipartisan regulatory reform bills.
- R. 3299 (The Protecting Consumers’ Access to Credit Act of 2017) passed with a 245 to 171 vote. Providing a much-needed fix for confusion created by the Madden v. Midland Funding decision, it would codify the “valid-when-made” doctrine. This doctrine ensures that validly made loans remain valid when they are sold or assigned, thus promoting transparency and predictability in the secondary market, but it has come under question in the courts.
- The House also voted 271 to 145 to approve H.R. 3978 (the TRID Improvement Act of 2017), which would amend the Real Estate Settlement Procedures Act (Why in RESPA not TILA?) to require the Consumer Financial Protection Bureau (CFPB) to allow the accurate disclosure of title insurance premiums and any potential available discounts to homebuyers as part of the TILA-RESPA integrated disclosures. The CFPB does not currently permit these disclosures, which create inconsistencies in mortgage documents and confusion for consumers.
After passing in the House both bills moved to the Senate and currently are in the Committee on Banking, Housing, and Urban Affairs.
Title Insurance – Current Rule – The current CFPB requirement requires the amount disclosed for an owner’s title insurance premium is based on a basic owner’s policy rate, and not on an “enhanced” title insurance policy premium, except that the creditor may instead disclose the premium for an “enhanced” policy when the “enhanced” title insurance policy is required by the real estate sales contract, if such requirement is known to the creditor when issuing the Loan Estimate.
The premium for an owner’s title insurance policy for which a special rate may be available based on the simultaneous issuance of a lender’s and an owner’s policy is calculated and disclosed as follows:
- The title insurance premium for a lender’s title policy is based on the full premium rate, consistent with § 1026.37(f)(2) or (f)(3).
- The owner’s title insurance premium is calculated by taking the full owner’s title insurance premium, adding the simultaneous issuance premium for the lender’s coverage, and then deducting the full premium for lender’s coverage.
Conclusion – The bills have been in the Senate for two weeks without much action. Even if passed soon regulations will need to be developed (through the proposal, comment period, final regulations and delayed effective date process). In other words – nothing is expected to be finalized soon.