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CFPB Mortgage Servicing Rule Published in Federal Register
Last week, the CFPB’s final rule amending the mortgage servicing provisions of Regulations X and Z was published in the Federal Register. The amendments were previously covered in BuckleySandler’s August 9 Special Alert. The majority of the final rule will take effect on October 19, 2017, exactly one year after its Federal Register publication date. Certain provisions related to successors in interest and bankruptcy periodic statements will become effective on April 19, 2018. The CFPB’s interpretive rule under the FDCPA addressing industry concerns and conflicts with the servicing rules in Regulations X and Z was simultaneously published in the Federal Register on October 19, 2016.
CFPB Director Cordray Delivers Remarks at MBA Conference
On October 25, CFPB Director Richard Cordray delivered remarks to the Mortgage Bankers Association (MBA). Cordray highlighted the CFPB's role in helping the housing economy to recover, including regulatory actions from 2014 to the present. Director Cordray also advised industry participants that they should expect more regulation and oversight over the coming year, explaining that the cost of compliance, though burdensome, was "inevitable" in light of the "far-reaching" effects of the financial crisis that Congress was trying to fix.
Director Cordray revealed three priority areas for enforcement and supervision in the next year: (i) consumer complaints, explaining that the CFPB will now require underperforming servicers to document the technology and process changes used to implement the agency’s recently released servicing regulations, because, among other reasons, the Bureau considers monitoring and addressing the process through which complaints are handled part of "a basic component" of any compliance effort; (ii) redlining, noting that the Bureau has identified “redlining” as a target for its supervisory work in the coming year, and has teamed up with the DOJ to bring “major enforcement actions” against institutions found to be discriminatory in their lending practices; (iii) RESPA violations, announcing that the CFPB will continue to adhere to its 2015 bulletin regarding marketing servicing agreements despite the recent PHH ruling. He further noted that the PHH case "is not final at this point" and that the Bureau "respectfully disagrees" with the finding.
ABA and CBA Lend Perspective on CFPB's Proposed TRID Revisions
On October 18, the American Banking Association (ABA) and Consumer Bankers Association (CBA) submitted a joint comment letter responding to a recent proposal by the CFPB seeking to codify informal guidance and clarifications to the Know Before Your Owe TILA-RESPA Integrated Disclosure (TRID) rule. Of particular concern among lenders and investors was the lack of clarity about liability for unintentional mistakes and technical noncompliance with TRID. To help address these concerns, the Associations urged the CFPB to, among other things, (i) publish the specific statutory provisions it relied upon for each disclosure item or requirement identified in the recent proposal; (ii) grant a “safe harbor” for model forms issued by the bureau; (iii) grant an extension of the “good faith” compliance examination policy pending the CFPB’s proscribed deadlines for the proposed rules; and (iv) develop a formal process to address ongoing compliance and legal issues related to TRID.
The Associations also expressed appreciation for “the numerous amendments offered in th[e] proposal,” including those allowing corrected closing disclosures to reset applicable good faith tolerances for creditors. The Associations further explained that their “preliminary analysis reflects that this proposed rule will resolve multiple ambiguities that banks deem significant” and “urged that the bureau . . . allow for the correction of previous non-compliance caused by the interpretive ambiguity that the bureau is now fixing” (emphasis added).
CFPB Releases Updated TRID Compliance Guide
On October 12, the CFPB issued an updated version of its small entity compliance guide on the Know Before You Owe TILA-RESPA Integrated Disclosure (TRID) Rule. The updated TRID compliance guide incorporates guidance from CFPB webinars on various topics, including (i) record retention; (ii) Loan Estimate and Closing Disclosure requirements, including format and delivery; (iii) good faith standards and determinations; (iv) disclosures related to seller-paid costs; and (v) construction loans. The newly released TRID compliance guide replaces the CFPB’s July 2015 guide. The CFPB also issued a separate revised guide for completing the Loan Estimate and Disclosure forms.
Special Alert: D.C. Circuit Panel Rejects CFPB's RESPA Interpretation and Alters its Structure in PHH Corp. v. CFPB
On October 11, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion vacating a $109 million penalty imposed on PHH Corporation under the anti-kickback provisions of the Real Estate Settlement Procedures Act (RESPA), concluding that the CFPB misinterpreted the statute and violated due process by reversing the interpretation of the prior regulator and applying its own interpretation retroactively. Furthermore, the panel rejected the CFPB’s contention that no statute of limitations applied to its administrative actions and concluded that RESPA’s three-year statute of limitations applied to any actions brought under RESPA.
In addition, a majority of the panel held that the CFPB’s status as an independent agency headed by a single Director violates the separation of powers under Article II of the U.S. Constitution. However, rather than shutting down the CFPB and voiding all of its regulations and prior actions, the majority chose to remedy the defect by making the CFPB’s Director subject to removal at will by the President. In effect, this makes the CFPB an executive agency (like the Department of the Treasury) rather than, as envisioned by the Dodd-Frank Act, an independent agency (like the Federal Trade Commission). (One member of the panel, Judge Henderson, dissented from this portion of the opinion on the grounds that it was not necessary to reach the constitutional issue because the panel was already reversing the CFPB’s interpretation of RESPA.)
The panel remanded the case to the CFPB to determine whether, within the three-year statute of limitations, the payments to PHH’s affiliate exceeded the fair market value of the services provided in violation of RESPA. The CFPB is expected to petition for en banc reconsideration by the full D.C. Circuit or to seek direct review by the United States Supreme Court. Therefore, final resolution of this matter may be delayed by a year or more.
Click here to read 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.
- Jeremiah S. Buckley, (202) 349-8010
- Joseph M. Kolar, (202) 349-8020
- John P. Kromer, (202) 349-8040
- Jon David D. Langlois, (202) 349-8045
- Jeffrey P. Naimon, (202) 349-8030
- Clinton R. Rockwell, (310) 424-3901
- Sasha Leonhardt, (202) 349-7971
- Sherry-Maria Safchuk, (310) 424-3917
- Steven vonBerg, (202) 524-7893
CFPB's Summer Edition of Supervisory Highlights Discloses Issues across Various Financial Markets
On June 30, the CFPB released its twelfth edition of Supervisory Highlights providing supervisory observations from its examiners in the areas of auto origination, debt collection, mortgage origination, small-dollar lending, and fair lending. In the area of auto origination, examiners determined that one or more institutions engaged in deceptive advertising practices related to the benefits of gap coverage products and the effects of payment deferrals, and failed to implement adequate compliance management systems. In the area of debt collection, examiners found that debt sellers sold thousands of debts that were unsuitable for sale because: (i) the accounts were in bankruptcy; (ii) the debts were the product of fraud; or (iii) the accounts had been paid in full. CFPB examiners further observed violations of the Fair Debt Collection Practices Act (FDCPA), determining that at least one collector falsely represented to consumers that a down payment was necessary in order to establish a repayment arrangement, when no such down payment was required by the collectors’ policies and procedures. For mortgage origination, CFPB examiners focused on compliance with provisions of CFPB’s Title XIV rules, the Truth in Lending Act (TILA), as implemented by Regulation Z, and the Real Estate Settlement Procedures Act (RESPA), as implemented by Regulation X, disclosure provisions, and other applicable consumer financial laws. According to the report, CFPB examiners found that one or more institutions violated TILA by miscalculating loan financing amounts, which resulted in a negative finance charge and an amount financed that was greater than the stated loan amount. The report also highlights (i) violations of RESPA’s prohibition against improper referral arrangements; (ii) failure to implement policies and procedures and to provide sufficient training related to the Fair Credit Reporting Act’s requirement to provide consumers with notice of any adverse action, such as denial of credit; (iii) failure to properly disclose interest on interest-only loans in violation of TILA; and (iv) weak oversight of compliance management systems. In the area of small dollar lending, CFPB examiners assessed compliance with the Electronic Fund Transfer Act (Regulation E), and found that the installment loan agreements of one or more entities failed to set out an acceptable range of amounts to be debited because they contained ambiguous or undefined terms in their descriptions of the upper and lower limits of the range. Finally, regarding fair lending, the report covers violations relating to the Home Mortgage Disclosure Act (Regulation C) and the Equal Credit Opportunity Act (Regulation B).
According to the report, the CFPB’s supervisory resolutions from January 2016 through April 2016 resulted in more than 257,000 consumers receiving approximately $24.5 million in restitution.
CFPB Takes Action Against Former Loan Officer for "Fee-Shifting" Practices, Alleges RESPA Violations
On May 26, the CFPB announced a consent order against a former mortgage loan originator of a San Francisco-based bank for allegedly violating Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The CFPB alleges that, from at least November 2013 through February 2015, the loan officer and an escrow company in California “engaged in a scheme in which they manipulated escrow fees, at [the loan officer’s] direction, by shifting them among loans in order to structure no-cost mortgage transactions.” The CFPB further contends that the loan officer referred settlement-services business for federally related mortgages to the escrow company in exchange for allowing him to dictate the escrow fees. According to the CFPB, the arrangement between the loan officer and the escrow company constituted providing a “thing of value” – prohibited under RESPA – because it allowed the officer to consistently deliver “no closing cost” loans to his clients, which “ultimately increased the number of loans he was able to close and, as a result, the commissions he earned.” The CFPB’s consent order imposes an $85,000 civil penalty and prohibits the loan officer from participating in the mortgage industry for one year.
CSBS and Multi-State Mortgage Committee Report on 2015 Supervisory Efforts
The Conference of State Bank Supervisors (CSBS) and the Multi-State Mortgage Committee (MMC) issued a report to state regulators regarding its 2015 review of the supervisory structure around examination and risk assessment of non-bank mortgage loan servicers. Notable servicing examination findings outlined in the report include: (i) violations and deficiencies related to loan transfer activity, noting that a “significant portion of servicing examination findings are tied to the mortgage servicing requirements implemented into the [RESPA] and [TILA] in January of 2014”; (ii) ineffective oversight of sub-servicer activity and insufficient third party vendor management; and (iii) ineffective examination management procedures on the part of mortgage servicers, leading to delayed examination processes, as well as impeded regulatory oversight. The report further outlines origination examination findings, emphasizing RESPA violations related to Mortgage Servicing Agreements (MSAs) which typically include payments for promotional advertising services performed on behalf of the mortgage company. According to the MMC, MSA-related violations carry high risk. Additional MMC 2015 observations outlined in the report include, but are not limited to, the following: (i) state license engagement of third party providers overseen by federal regulators resulted in an increase of state/federal communications and information sharing, fostering a stronger regulatory framework; (ii) lapses in loan originator education may lead to significant deficiencies at the company level; (iii) whistleblower information provided to the MMC in 2015 played a large role in uncovering prohibited activity; and (iv) technological systems with incorrect programming continue to cause lenders to charge borrowers statutorily prohibited fees. Finally, the report briefly touches on the CSBS’ and the NMLS’s Mortgage Call Report Analytics Tool – designed to provide detailed information about the loan portfolio and financial condition of a company – and the State Coordinating Committee’s coordinated efforts with the CFPB to include the development of the Coordinated Examination Guidance tool, which is intended to provide “suggested best practices for coordinated examinations and a step-by-step listing of action items to be completed during a coordinated examination.”
U.S. Court of Appeals for the D.C. Circuit Hears Oral Arguments Regarding CFPB's Interpretation of RESPA
On April 12, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case PHH Corporation v. CFPB. The primary issue in the case is whether the CFPB is constitutionally and statutorily authorized to assess a $109 million penalty against the petitioner, a nonbank mortgage lender (Lender), for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by referring customers to certain mortgage insurance companies that purchased mortgage reinsurance at fair market value from an affiliate of the Lender. According to CFPB Director Richard Cordray, this practice was a violation of Section 8’s prohibition on kickbacks for referrals, because the mortgage insurers allegedly only purchased mortgage reinsurance in order to receive customer referrals from the Lender.
In appealing the CFPB’s action, counsel for the Lender argued that the CFPB is attempting to effectively rewrite Section 8 to prohibit activities expressly permitted by the statute’s implementing regulation, Regulation X, as well as prior agency guidance and the plain language of the statute itself. According to the Lender, its mortgage reinsurance practices had long been understood to be legal, were widespread throughout the country, and aligned with existing HUD guidance. The Lender further argued that Section 8(c)(2) permits entities to refer business so long as the referrals are not compensated, and any payments are equal to the market value cost of services actually provided. In the Lender’s case, counsel argued that the mortgage reinsurance premiums could not have been compensation for referrals, because mortgage reinsurance premiums received by the Lender’s affiliate were equal to the fair market value of mortgage reinsurance services actually rendered. The Lender further argued that the CFPB improperly ignored RESPA’s statutorily-prescribed statute of limitations (SOL) of three years when, under Section 15, RESPA clearly applies the SOL to “any action” – which, in the Lender’s view, would include an administrative action. Finally, the Lender argued that the CFPB’s structure and funding under the Dodd-Frank Act was unconstitutional in that it violated the requirement for separation of powers by, among other things, (i) restricting the President’s removal power to “for cause” removal; (ii) concentrating power in one individual; and (iii) funding the CFPB outside of the Congressional appropriations process.
Counsel for the CFPB responded that, during the period in question, mortgage insurance companies only purchased reinsurance from affiliates of lenders who referred them business. According to the CFPB, this type of quid pro quo arrangement is a violation of Section 8 even if the reinsurance premiums were equal to the fair market value of a service rendered. Counsel for the CFPB said that, notwithstanding the fact that the Lender’s conduct was common throughout the financial services industry, it had never expressly been blessed by prior agency guidance, and resulted in the type of market distortion that RESPA was designed to prevent. The CFPB also defended its position that its administrative actions are not subject to an SOL by noting that the Consumer Financial Protection Act, which authorizes the CFPB to take enforcement actions against regulated entities, does not include an SOL for such actions. In response to the challenge to the constitutionality of its structure, the CFPB pointed to the diversity of agency structures throughout the executive branch, including single-headed agencies and agencies that do not rely on Congress for appropriations funding.
The panel consisted of Judges Kavanaugh, Randolph, and Henderson; Judge Henderson was not present.
Third Circuit Finds RESPA Claims in Captive Mortgage Reinsurance Case Untimely and Not Subject to Equitable Tolling
Last week, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s ruling that the class action plaintiffs had not satisfied the elements of equitable tolling where they filed their lawsuit several years after the applicable statute of limitations had expired. Cunningham v. M&T Bank Corp., No. 15-1412 (3d Cir. Feb. 19, 2016). The Court noted that claims under RESPA have a one-year statute of limitations, running from the date of the occurrence of the violation, which begin “at the closing of the loan,” citing In re Cmty. Bank of N. Virginia, 622 F.3d 275, 301–02 (3d Cir. 2010). The Court outlined three elements to establish equitable tolling, “(1) that the defendant actively misled the plaintiff; (2) which prevented the plaintiff from recognizing the validity of her claim within the limitations period; and (3) where the plaintiff’s ignorance is not attributable to her lack of reasonable due diligence in attempting to uncover the relevant facts;” and emphasized that each of the plaintiffs were provided a disclosure before closing about the captive reinsurance arrangement, and that after closing the plaintiffs took no steps to investigate whether the bank’s captive reinsurance program might violate state or federal law.