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  • AML Trends Signal Changing Times for Regional Banks
    October 7, 2015
    Michael F. Zeldin & Amy Davine Kim

    Recent activity involving state and federal bank regulators reflects an upswing in enforcement actions against regional and super-regional banks for Bank Secrecy Act/anti-money laundering compliance failures. Bank of Mingo, Bank of the Orient, First Community Bank of Lexington and Alma Bank, to name just a few, have all been the subject of enforcement actions. These actions indicate that the prudential regulators, as well as multiple law enforcement agencies, are approaching regional and super-regional banks with the same heightened scrutiny that they previously reserved for the largest multinational banks or foreign banks doing business in the United States. Regional and super-regional banks would be well-advised to pay close attention to these trends and to consider taking preventive measures now to ensure they are best positioned for their examinations.

    Originally published in Law360; reprinted with permission. 

  • FCC's Order for TCPA 'Clarity' May Raise More Questions Than It Answers
    August 25, 2015
    Stephen M. Ruckman & Andrew W. Grant

    On July 10, 2015, the Federal Communications Commission (‘‘FCC’’) released an omnibus Declaratory Ruling and Order (‘‘Order’’) aimed at ‘‘clarifying whether conduct violates the [Telephone Consumer Protection Act (‘‘TCPA’’)] and . . . detailing simple guidance intended to assist callers in avoiding violations and consequent litigation.’’ As the FCC acknowledges, confusion over what type of conduct violates the TCPA has fueled a substantial increase in TCPA litigation over the past several years, so more clarity and simple guidance would be welcome.

    Unfortunately, the 81-page order is anything but simple. Instead, its rulings create new litigation risks for good-faith callers that have valid business reasons for contacting consumers, with ‘‘clarifications’’ that make compliance more difficult. Its rulings also expand the circle of businesses facing potential TCPA litigation risks beyond callers—to calling platforms and apps and even to carriers.

    In short, the Order appears to raise more questions than it answers, even in the answers it provides.

    Originally published in BloombergBNA Telecommunications Law Resource Center; reprinted with permission. 

  • Individual and Coordinated Prosecutors Accelerate - Along With The Challenges
    August 14, 2015
    David Krakoff, Lauren Randell, Veena Viswanatha & Mehul Madia

    For years, federal and state prosecutors have touted their willingness to charge individuals as an essential deterrent to white-collar criminal action, often responding to criticism of prosecutions of corporate entities without any accompanying prosecution of related executives. And for years, those statements in large part remained just statements, without significant numbers of individual prosecutions backing them up. Despite ongoing criticism of the Department of Justice (DOJ) for its failure to prosecute major bank executives for their alleged role in the financial crisis, individual prosecutions have recently begun an inexorable rise, finally matching the rhetoric, particularly in the insider trading and foreign bribery spaces. While not all high-profile individual prosecutions have been successful, the increased risk of individual prosecution is undeniable.

    At the same time, as the interconnected global economy magnifies the effects of corporate actions around the world, US prosecutors are not the only ones facing pressure to bring enforcement actions against perceived multinational wrongdoers. Increasingly, US prosecutors are working in coordination with their foreign counterparts, sharing information and even, in certain cases, deferring to the enforcement actions of foreign prosecutors without an accompanying US action.

    Below we examine both of these trends, each of which amplifies the risks for a company or individual facing investigation and complicates the task of defending against those enforcement actions.

    Originally published in the American Bar Association's Criminal Justice Journal (Vol. 30, (2), Summer 2015). Reprinted with permission.

  • Marketing Services Agreements: Reinterpreting the Wheel
    August 5, 2015
    Jeffrey P. Naimon, Caitlin M. Kasmar, & Alexander D. Lutch

    Marketing services agreements (“MSAs”) have been standard mortgage industry practice for decades. While Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) prohibits entities and individuals from giving or receiving “any fee, kickback, or thing of value” pursuant to an agreement to refer settlement service business to any person, it also contains a safe harbor provision which appears to permit MSAs as long as the compensation paid is bona fide and in exchange for services performed (“nothing in this section shall be construed as prohibiting . . . the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”) .

    Federal regulators have historically interpreted Section 8 to permit MSAs, under which two or more entities—typically settlement service providers—enter into an arrangement whereby one company is paid to advertise (or provide other non-referral marketing services for) another company’s settlement services to its customers or the general public. Despite widespread usage in the industry and historical acceptance of MSAs by federal banking agencies, recent Consumer Financial Protection Bureau (“CFPB”) enforcement activity has led to new concerns about their viability going forward.

    Click here to read the full article at www.mortgagecompliancemagazine.com 

  • Regulators Turn Up Heat on Vendor Management
    August 3, 2015
    Elizabeth McGinn & Moorari Shah

    The vendor landscape for companies in the mortgage industry has shifted significantly in recent years. State and federal regulators have levied hefty and often unprecedented fines against a number of supervised institutions because of inadequate vendor-management policies and ineffective vendor oversight.

    The Consumer Financial Protection Bureau (CFPB), four years old as of July, has been particularly aggressive in its enforcement activities against companies for alleged failures to ensure that tasks performed by service providers comply with applicable laws and regulations.

    Equally vigilant are state regulators and the primary federal banking regulators — the Federal Reserve Board (FED) and the Office of the Comptroller of the Currency (OCC). These regulatory agencies also have demonstrated a laser-like focus in singling out companies for their lack of attentiveness to various risks presented to consumers and to financial markets when compliance responsibilities are outsourced to third-party service providers.

    This era of heightened regulatory scrutiny has resulted in several new realities for institutions that rely on external vendors.

    Click here to read the full piece at www.scotsmanguide.com (subscription required)

Knowledge + Insights

  • Special Alert: Third Circuit Gives FTC Green Light to Continue Enforcing Corporate Data Security
    September 1, 2015

    Last week, the U.S. Court of Appeals for the Third Circuit affirmed the Federal Trade Commission’s authority to hold companies accountable for their data security practices under Section 5 of the FTC Act (15 U.S.C. § 45(a)), which declares unlawful “unfair or deceptive acts or practices in or affecting commerce.” The unanimous ruling found that “deficient cybersecurity,” practices, which “fail to protect consumer data against hackers,” may be found to be “unfair” practices under the Act, subject to FTC enforcement. The FTC had sued Wyndham for allegedly deficient cybersecurity practices that enabled hackers to obtain payment card information from over 619,000 consumers.

    In affirming that the FTC has authority under Section 5 to pursue claims of inadequate data security, the Third Circuit explained that a company’s inadequate data security in the face of foreseeable intrusions falls within the plain meaning of “unfair.” The Third Circuit assured Wyndham that this authority does not enable the agency to dictate the type of locks on hotel room doors or the placement of guards on corporate premises. Nor does it have the authority to sue for every perceived deficiency, just as it would not have the authority to sue supermarkets simply for failing to consistently “sweep up banana peels.” However, the court pointed out that it matters how – and how many – consumers are affected by a company’s practice: “were Wyndham a supermarket, leaving so many banana peels all over the place that 619,000 customers fall hardly suggests it should be immune from liability under § 45(a).”

    Wyndham had also argued that it lacked fair notice that the FTC had the authority to assess data security practices under Section 5, but the Third Circuit disagreed, pointing out that the FTC has offered specific public guidance on data security over the years, and has filed multiple complaints and consent decrees “raising unfairness claims based on inadequate corporate cybersecurity” that put companies on notice of its enforcement authority in this space.

    The Third Circuit provided some guidance of its own on how can companies avoid FTC enforcement actions alleging unfairness in data security practices, stating that “the relevant inquiry here is a cost-benefit analysis . . . that considers a number of relevant factors, including the probability and expected size of reasonably unavoidable harms to consumers given a certain level of cybersecurity and the costs to consumers that would arise from investment in stronger cybersecurity.” The more sensitive consumer data a company collects, the more it must invest in sound data security safeguards.

    As a result, companies need to review their data security practices against both the standard enacted by Congress specifically to govern data security in the Gramm- Leach-Bliley Act and the much more general “unfairness” standard found in the FTC Act as well as other federal and state laws.

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Spotlight on the Military Lending Act, Part 2: Planning for Compliance
    August 18, 2015
    Benjamin K. Olson, Manley Williams, Andrew W. Grant

    Compliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017.  However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly.  Therefore, institutions should begin planning now.  The following are answers to three key questions that can help you start the planning process.

    1. Which products will be covered by the revised MLA regulations?

    The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today. Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:

    • Primarily for personal, family, or household purposes; and
    • Either subject to a finance charge or payable by a written agreement in more than four installments.

    However, the following types of credit are excluded:

    • Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
    • Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
    • Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
    • TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.

    Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending. The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products. Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations.

    2. How will I determine who is a covered borrower?

    If a product is covered by the MLA regulations, the next question is whether the borrower is also covered. Creditors must build the systems and train their employees to determine whether the consumer is a “covered borrower” at the time the consumer becomes obligated or establishes an account. To be a covered borrower, the consumer must be either:

    • A “covered member,” which is a member of the armed forces who is serving on: (1) active duty under titles 10, 14, or 32 of the United States Code under a call or order that does not specify a period of 30 days or fewer; or (2) active guard and reserve duty under 10 U.S.C. 101(d)(6); or
    • A “dependent” of a covered member as described in 10 U.S.C. 1072(2)(A), (D), (E), or (I), which includes: (1) a spouse; (2) a child under 21 (or 23 in certain circumstances); (3) a parent or parent-in-law dependent on the covered member for over one-half of their support and residing in the member’s household; and (4) certain persons over whom the covered member has legal custody.

    While a creditor is permitted to use its own method to determine whether a consumer is a covered borrower, the revised regulations provide a safe harbor if the creditor relies on:

    • Information obtained directly or indirectly from the DoD’s database; or
    • A “statement, code, or similar indicator” of the consumer’s status in a consumer report obtained from a nationwide credit bureau meeting certain criteria.

    3. What must be done for extensions of credit subject to the MLA?

    When a covered consumer credit product is provided to a covered borrower, the creditor must comply with both substantive restrictions and disclosure requirements.

    1. Substantive requirements

    The Military Annual Percentage Rate (“MAPR”) cannot exceed 36 percent on a closed-end loan or in any billing cycle for an open-end credit account. Accordingly, creditors must develop systems for calculating the MAPR.

    The MAPR is generally calculated consistent with the APR in Regulation Z (for open end transactions, the MAPR is calculated like the “effective APR”). However, while the Regulation Z APR includes only finance charges, the MAPR also includes credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other things. For certain credit card accounts, the MAPR excludes “bona fide” fees that are comparable to fees “typically imposed by other creditors for the same or a substantially similar product or service.”

    A number of additional restrictions apply to covered transactions:

    • For certain non-depository creditors, roll-overs and vehicle title loans are prohibited.
    • The covered borrower cannot be required to waive legal recourse under State or Federal law, submit to arbitration, or comply with “onerous” or “unreasonable” notice requirements.
    • The covered borrower cannot be required to establish an allotment to repay the obligation and certain limitations apply to the use of checks or other methods of access to a deposit, savings, or other financial account maintained by the covered borrower.
    • Prepayment penalties and restrictions on prepayment are prohibited.

    1. Disclosure requirements

    Creditors must also build systems and train their employees to provide certain written and oral disclosures.

    1. Written disclosures

    In addition to the applicable Regulation Z disclosures, a covered borrower must receive “a statement of the MAPR applicable to the extension of consumer credit” before or at the time the borrower becomes obligated on the transaction or establishes an account.

    However, rather than providing the numerical value of the MAPR, the following or a substantially similar statement may be included in the agreement with the covered borrower:

    Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).

    1. Oral disclosures

    The creditor must also orally provide the above MAPR statement and a “clear description of the payment obligation” (such as a Regulation Z payment schedule or account-opening disclosure) either in person or through a toll-free telephone number included on the application form or in a written disclosure.

  • Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens to Upset Secondary Credit Markets
    August 13, 2015

    Two months ago we issued a Special Alert regarding the decision of the Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which 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. We explained that the Second Circuit’s reasoning in Madden ignored long-standing precedent upholding an assignee’s right to charge and collect interest in accordance with an assigned credit contract that was valid when made. And, because the entire secondary market for credit relies on this Valid-When-Made Doctrine to enforce credit agreements pursuant to their terms, the decision potentially carries far-reaching ramifications for securitization vehicles, hedge funds, other purchasers of whole loans, including those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to marketplace lending industries and various types of on-line consumer credit.

    After the decision, Midland Funding, the assignee of the loan at issue, petitioned the Second Circuit to rehear the case either by the panel or en banc – a petition that was broadly supported by banking and securities industry trade associations in amicus briefs. On August 12, the court denied that petition.

    Click here to view the full special alert.

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Special Alert: CFPB Reports On The Findings From Its "Know Before You Owe" eClosing Pilot Project
    August 6, 2015

    In 2014, the Consumer Financial Protection Bureau (“CFPB”) initiated an eClosing pilot program. The eClosing pilot was intended to assist the CFPB in evaluating the use of electronic records and signatures in the residential mortgage closing process. The pilot program has now been completed and on August 5, 2015, the Consumer Financial Protection Bureau (“CFPB”) released a report detailing its findings (“Report”). In the Report, the CFPB indicates that eClosings present a significant opportunity to enhance the closing process for both consumers and the mortgage industry.

    The pilot program focused on the mortgage closing process and measured borrowers’ (i) understanding (both perceived and actual) of the process, (ii) perception of efficiency, and (iii) feelings of empowerment. The program also sought to quantify objective measures of process efficiency. The program was conducted over four months in 2014 with seven lenders, four technology companies, settlement agents, and real estate professionals. About 3000 borrowers participated in the study – roughly 1200 completed the CFPB’s survey.

    The CFPB sought to determine if an electronic closing process improved the borrowers’ (i) understanding of the transaction, (ii) perception of efficiency, and (iii) feeling of empowerment. These three criteria were measured in multiple ways. To gauge understanding, the borrower was asked about their perceived understanding of the terms and fees, costs, and their rights and responsibilities. To determine the borrower’s actual understanding of their mortgage, they were given an eight question quiz. Five questions were about mortgages generally and three about their mortgage, specifically. To evaluate the efficiency of the transaction, the CFPB measured the difference between eClosings and paper closings in terms of delays, errors in documents, and the time required between steps in the process. Borrowers were also asked about their perceptions concerning efficiency. Finally, in order to gauge the borrower’s feeling of empowerment, the CFPB asked about the borrower’s feelings of control, his or her role, and the role(s) of others in the process.

    Among the key findings of the survey cited by the CFPB:

    • eClosing borrowers felt more empowered, had better perceived and actual understanding of the transaction, and perceived the process as more efficient than a paper-based closing;
    • Delivery of closing documents prior to closing, in particular, improved consumer’s feeling of empowerment and enhanced their perceived and actual understanding of the transaction; and
    • eClosing borrowers tended to have shorter closing meetings and a shorter time frame from clearing the closing documents until the actual closing.

    The CFPB also stated that the eClosing pilot provided insights into practical issues affecting the success of the eClosing process, and expressed the hope that these insights would assist the mortgage industry in further improving the process. The CFPB’s observations included:

    • Certain documents were often still signed on paper because of technology platform limitations, questions about eSignature risks, and the limited availability of electronic notarization services.
    • Hybrid closings (part electronic and part paper) caused some confusion among lenders and investors, and more guidance from investors on the subject of hybrid closing would be desirable.
    • The large number of stakeholders in the mortgage lending process created coordination and acceptance challenges – some ancillary service providers were resistant to the process changes required by eClosings.
    • Mapping closing document packages to eClosing processes proved to be an ongoing challenge during the pilot.
    • Settlement agents and closing attorneys appeared to have a significant learning curve when first being introduced to eClosings.

    The Report signals the CFPB’s ongoing support for continued development and deployment of eClosing processes. The Report concludes:

    Borrowers experiencing eClosing scored higher on average than those experiencing paper closings on many of our measures of perceptions of empowerment, understanding, and efficiency, which suggests that eClosing can be a valuable option for consumers. In particular, eClosing seem to serve as a vehicle to help facilitate two other drivers of empowerment, understanding, and efficiency at closing: early document review and easy integration of educational materials.

    However, the Report also calls upon the mortgage industry, as it moves forward, to conduct further research on the impact of eClosings on the borrower’s experience.

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Spotlight on the Military Lending Act, Part 1: Did the Final Rule Improve on the Proposal?
    July 29, 2015
    Valerie L. Hletko, Benjamin K. Olson, Manley Williams & Andrew W. Grant

    On July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.

    Specifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.

    In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA. At a high level, industry comment letters fell into five categories:

    • The Department was asked to provide creditors with “a substantial time period” to implement the operational changes needed to comply with the regulation.
    • The Department was asked to take a more targeted approach to redefining “consumer credit,” either by focusing exclusively on certain predatory loans or by excluding certain products (such as credit cards) entirely or narrowing the requirements for such products. A link to BuckleySandler’s comment letter in this regard can be found here.
    • The Department was asked to exempt from the final rule certain institutions (such as all insured
      depository institutions).
    • The Department was asked to exempt certain charges, such as application or participation fees, from the MAPR calculation.
    • The Department was asked to broaden the safe-harbor methods for determining whether a consumer is a covered borrower.

    The final rule largely rejected the requests and instead retains the approach in the proposed rule. Three features stand out in this regard:

    • The final rule tracks the proposed rule regarding how the regulation defines the “consumer credit” products to which it applies.
    • The Department did not provide an exemption for insured depository institutions or insured credit unions.
    • While credit card issuers were given until October 3, 2017 to come into compliance, the Department gave other creditors until October 3, 2016, which is only 12 months from the October 1, 2015 effective date, to comply with the final rule, as opposed to “at least 18 months,” which some commenters requested.

    With that said, the final rule does contain some positive modifications that relieve onerous compliance burdens, including abandonment of the proposed requirement that a “bona fide” fee charged to a credit card account also be “customary.” These modifications are discussed below.

    Modifications or requests that the Department denied

    First, the Department rejected requests to change the scope of the definition of “consumer credit,” either by targeting only specific types or by excluding entirely certain types. The Department stated that, in its view, a broad definition of “consumer credit” was preferable, in part, because expanding the scope of products subject to MLA compliance would “preserve access to a wide range of products” while protecting covered borrowers. Next, the Department refused to exempt credit card accounts from the “consumer credit” definition because it determined that compliance with the CARD Act could not displace the benefits of the MLA. The Department expressed concern that lenders could exploit such an exemption by transforming high-cost open-end products into credit cards, which do not have a maximum interest rate under the CARD Act.

    Second, the final rule does not completely exempt insured depository institutions or insured credit unions. Broadly speaking, the arguments for exemption included that (i) failing to provide exemption would lead to the exclusion of service members from credit products and services, and (ii) a robust regulatory and supervisory framework already exists for such institutions. The Department responded that it was “confident that…[these institutions] could find appropriate methods to provide borrowers credit products that comply with the [MLA] interest-rate limit….” Next, the Department rejected the notion that the robust regulatory and supervisory regime for insured depository institutions justifies an exclusion from the MLA because that regime was not designed to lower the costs of credit for covered borrowers.

    Many commenters requested that the Department provide “a substantial period of time for compliance,” such as “at least 18 months,” because of the operational difficulties presented. The Department stated that creditors need only a “reasonable period of time” to modify their operations. Therefore, except for credit card accounts (discussed more fully below), creditors have only 12 months to comply with the requirements in the final rule.

    Modifications or requests that the Department granted

    In general, credit card issuers were the largest beneficiary of the Department’s modifications, notwithstanding that the Department declined to exempt credit card accounts from the final rule. First, the Department granted a complete exemption from the definition of “consumer credit” for credit extended to a covered borrower under a credit card account for a minimum of two years. The exemption expires on October 3, 2017.

    Second, the final rule continues to provide a qualified exclusion for credit card accounts from the MAPR calculation for a “bona fide” fee, but it modified the proposed rule to eliminate the requirement that the bona fide fee be “customary.” This provides relief from the operational difficulties and uncertainties associated with defining “customary,” and means that credit card issuers will have a wider berth for innovation in products and services without the risk of liability under the MLA insofar as fees could be deemed not “customary.”

    Finally, the final rule included the following positive modifications:

    • For insured credit unions and insured depository institutions, an application fee may be excluded from the computation of the MAPR for a short-term, small amount loan, subject to certain conditions.
    • The Department adopted a new “covered borrower” safe harbor to permit a creditor to “legally conclusively determine” that a consumer is a covered borrower by using information obtained in a “consumer report from a nationwide consumer reporting agency or a reseller who provides such a report.” The final rule retains the original safe harbor—permitting creditors to “legally conclusively determine” that a consumer is a covered borrower by using information obtained directly or indirectly from the MLA database—thereby giving creditors two safe-harbor options.
    • Removed the “actual knowledge” clawback from the “covered borrower” safe harbor, meaning that a creditor who concludes that a borrower is not a covered borrower after conducting a covered-borrower safe-harbor check using either the MLA database or a permissible consumer report will not be liable even if the consumer is a covered borrower.