Legal Alert

Mortgage Banking Update - February 15, 2018

February 15, 2018

House Again Passes Legislation to Review Points and Fees

On February 8, 2018, the U.S. House of Representatives passed The Mortgage Choice Act, H.R. 1153, to revise the definition of "points and fees" for purposes of the Regulation Z ability to repay/qualified mortgage requirements and high-cost mortgage loan requirements. Although a voice vote was held on February 7, Chairman of the House Financial Services Committee Jeb Hensarling demanded a roll-call vote. The roll-call vote was 280 to 131.

The Act would amend the definition of "points and fees" for purposes of the requirements to exclude charges for title examinations, title insurance or similar purposes regardless of whether the title company is affiliated with the creditor. Currently for such charges to be excluded from points and fees the title company must not be an affiliate of the creditor. The Act also would make a conforming change to exclude escrowed amounts for insurance from points and fees. Currently, escrowed amounts for taxes are excluded from points and fees.

As we reported previously, last year the House passed the Financial CHOICE Act. The Act included the same amendments to the "points and fees" definition, but was never enacted into law. Prior bills including the same amendments have suffered the same fate.

The focus now shifts to the Senate. Because the Mortgage Choice Act would amend Dodd-Frank provisions, that can pose difficulty for Senate passage. With 52 Democrats joining with Republicans to pass the Act, this may indicate that the Act has a greater chance of success than Financial CHOICE Act. No Democrats voted for the Financial CHOICE Act, and that Act included more sweeping Dodd-Frank changes than the narrow changes included in the Mortgage Choice Act.

- Richard J. Andreano, Jr.

CFPB Launches New Formatting Tool for HMDA Reporting

On February 1, the CFPB announced the launch of the 2018 HMDA LAR Formatting Tool (the Tool). The Tool will help financial institutions create an electronic file to submit HMDA data collected in 2018 and reported in 2019. The Tool is not needed if the financial institution uses vendor or loan origination software to format their HMDA data into a pipe delimited text file, so this Tool will be most useful to those with small volumes of covered loans and applications.

The CFPB also announced minor updates to its 2018 Filing Instructions Guide, such as providing explicit instructions not to include leading zeros in data fields, and allowing an additional AUS result code produced by the Guaranteed Underwriting System.

- Pavitra Bacon

D.C. Circuit Rules CFPB's View of RESPA Was Wrong but Its Structure is Constitutional

On January 31, 2018, the en banc D.C. Circuit handed down its opinion in the PHH v. CFPB case, which we've discussed at length. It held, 7 to 3, that the CFPB's single-director-removable-only-for-cause structure is constitutional but that the CFPB’s interpretation of RESPA was wrong.

En Banc Court Reinstates Panel’s RESPA Ruling

The en banc Court reinstated the RESPA-related portions of the D.C. Circuit's October 2016 panel decision. The panel had held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD's prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The panel rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB's 2015 interpretation prohibited.

In remanding the case to the CFPB for further proceedings, the panel had admonished the CFPB by alternatively holding that—even assuming that the CFPB's interpretation was permitted under any reading of RESPA—the CFPB's attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that "the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation." The en banc Court cited the panel's due process analysis with approval.

The panel's RESPA decision remanded the case to the CFPB to determine whether PHH violated RESPA under the longstanding interpretation previously articulated by HUD. The en banc Court's reinstatement of that aspect of the panel decision led it to order that the case be remanded to the CFPB for further proceedings.

Statute of Limitations Continues to Apply to RESPA Cases Before CFPB

At the administrative stage of the case, the CFPB argued that no statute of limitations applies to any CFPB administrative action. The panel soundly rejected that argument, holding that RESPA's three-year statute of limitations applies to any RESPA claims that the CFPB brings, whether administratively or otherwise. That aspect of the panel decision, because it pertains to RESPA, is also reinstated by the en banc Court's ruling.

CFPB's Structure Deemed Constitutional

The panel of the D.C. Circuit had also held that the CFPB's structure was unconstitutional because it improperly prevented the President from "tak[ing] Care that the Laws be faithfully executed." Rejecting this holding, the en banc Court held that "[w]ide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions." In other words, the en banc Court found (wrongly, in our view) that it wasn't even a close call.

In reaching this conclusion, the en banc Court considered two questions: First, it asked whether the "means" that Congress employed to make the CFPB independent was permissible? That is, were the independence-creating tools used ones that the Supreme Court approved of, such as for-cause removal or budgetary independence? The en banc Court found that the Supreme Court approved each of the "means" Congress used to achieve CFPB "independence" individually. It reasoned then, that those "means" could all be combined in a single agency without running afoul of the U.S. Constitution.

Second, the en banc Court asked whether "the nature of the function that Congress vested in the agency calls for that means of independence?" In answer to the second question, the en banc Court found it was consistent with historical practice to grant financial regulators like the CFPB such independence.

The en banc Court went further, however, and dismissed the panel's other constitutional concerns under the heading "Broader Theories of Unconstitutionality." For example, it rejected the panel’s concern that having a powerful unaccountable CFPB Director was a threat to individual liberty. It suggested that such an argument "elevat[ed] regulated entities' liberty over those of the rest of the public." "It remains unexplained why we would assess the challenged removal restriction with reference to the liberty of financial services providers, and not more broadly to the liberty of the individuals and families who are their customers," it said. In doing so, it seems to have forgotten that Dodd-Frank gives the CFPB Director broad powers to go after individuals, "mom-and-pop" businesses, and large "regulated entities."

Lucia Issue Regarding ALJ Appointment Not Addressed

Notably, the en banc Court in PHH specifically "decline[d]to reach the separate question whether the ALJ who initially considered this case was appointed consistently with the Appointments Clause." That was the issue in Lucia, which we have blogged about extensively. In that case, Raymond J. Lucia challenged the manner in which the SEC appointed administrative law judges (ALJs), arguing that ALJs are "inferior officers" who must be appointed by the president, a department head, or the courts under the Appointments Clause of the U.S. Constitution. The Supreme Court recently agreed to hear Lucia.

- Theodore R. Flo

State Regulators Agree to Multistate Licensing Process for Money Service Businesses

The Conference of State Bank Supervisors (CSBS) announced yesterday that seven states have agreed to a multistate compact that, according to the CSBS, "standardizes key elements of the licensing process for money services businesses (MSB)."

The seven states are Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas, and Washington. The CSBS expects other states to join the compact. Under the compact, if one participating state has reviewed key elements of a company's operations in connection with the company’s application for money transmitter license (IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act), the other participating states will accept that state's findings.

The CSBS describes the compact as "the first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for [F]intechs." It is expected to significantly streamline the MSB licensing process.

- John D. Socknat and Stacey L. Valerio


Wisconsin Using the NMLS Uniform Authorized Agent Reporting

On February 1, 2018, the Wisconsin Department of Financial Institutions started using the NMLS Uniform Authorized Agent Reporting (UAAR) functionality to fulfill agent reporting requirements. Licensees must upload Wisconsin-located agents in NMLS by April 1, 2018.

The UAAR allows licensed money transmitters and money services businesses to file a single report of their authorized agent locations via the NMLS to these state agencies. More information can be found here.

2017 SRR Annual Report Available

The State Regulatory Registry (SRR) has published its annual report, "Transforming Supervision by Engaging People and Investing in Technology." The report discusses NMLS performance, highlights, and new developments. The full report can be found here.

Proposed Changes to the Mortgage Call Report, Proposal 2018-1

The NMLS has requested comments to the proposed changes to the Mortgage Call Report (MCR) as contained in Proposal 2018-1. Examples of the proposed changes include, but are not limited to, the following:

  • Licensed companies would only have to complete certain fields of the MCR that are directly relevant to the licensee.
  • The MCR definitions and instructions have been updated to provide clarity and uniformity.
  • A Supplemental State-Specific Form (SSSF) would be added so that states could request filers provide certain state-specific information that would satisfy requirements of their jurisdiction.

Comments to Proposal 2018-1 due by April 13, 2018 and can be submitted to the NMLS via email to

- Wendy T. Novotne

Copyright © 2018 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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