D.C. Circuit Holds CFPB Structure Unconstitutional, Interpretation of RESPA Not Entitled to Deference

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The D.C. Circuit yesterday issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly owned) mortgage reinsurer, the court made several landmark rulings.

First, it held that the CFPB's single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the "critical check" of presidential control or the "substitute check" of a multi-member governance structure necessary to protect individual liberty against "arbitrary decisionmaking and abuse of power." The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.

It also rejected the CFPB's argument that statutes of limitations do not apply to its administrative enforcement actions. The court's holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. "[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing."

In addition, the court held that the plain language of RESPA permits captive mortgage reinsurance arrangements like the one at issue in the PHH case, if the mortgage reinsurers 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 court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB's 2015 interpretation prohibited. We have blogged about the CFPB's erroneous interpretation of the RESPA provisions at issue in this case.

Finally, the court further 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."

Notably, the court explicitly declined to address the CFPB's claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB's view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court's decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.

The opinion of the court also did not address one aspect of the CFPB Director's prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director's approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.

Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.

- the Consumer Financial Services and Mortgage Banking Groups

CFPB Approves FHLMC/FNMA Revised Uniform Residential Loan Application, Collection of HMDA Ethnicity and Race Information in 2017

In a notice published in the Federal Register, the CFPB announced that it has given its "official approval" to a revised and redesigned Uniform Residential Loan Application (2016 URLA) and to the collection of expanded Home Mortgage Disclosure Act (HMDA) information on ethnicity and race in 2017.

2016 URLA. The 2016 URLA approved by the CFPB was issued by the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association (FNMA) and is included as an attachment to the CFPB’s notice. The notice indicates that the CFPB's staff has determined that the relevant language in the 2016 URLA complies with the provisions in Regulation B, which implements the Equal Credit Opportunity Act, that limit requests by creditors for certain information in applications, such as information about race and other protected characteristics, a spouse, marital status, or income from alimony and certain other sources. The CFPB stated that while a creditor’s use of the 2016 URLA is not required under Regulation B, a creditor that uses the 2016 URLA without any modification that would violate these Regulation B provisions would be in compliance with such provisions.

The CFPB noted that a version of the URLA dated January 2004 is included in appendix B to Regulation B as a model form and describes the safe harbor provided in appendix B for creditors that use the model form. The CFPB also noted that the Official Staff Commentary to Regulation B provides that creditors can use a previous version of the URLA dated October 1992 without violating Regulation B. The CFPB stated that its official approval "is being issued separately from, and without amending" the Official Staff Commentary and that it will consider whether to address the treatment of outdated versions of the URLA in the commentary at a later date.

Expanded HMDA Information Collection. The amendments to Regulation C, which implements the HMDA, finalized in 2015 will require financial institutions covered by the HMDA to permit applicants to self-identify using disaggregated ethnic and racial categories beginning January 1, 2018. In the notice, the CFPB stated that before such date, such inquiries would not be allowed under Regulation B Section 1002.5(a)(2), which limits inquiries by creditors about race or other protected characteristics. Believing there will be significant benefits to permitting creditors to ask consumers to self-identify before January 1, 2018, the CFPB gave approval for a creditor "at any time from January 1, 2017, through December 31, 2017…at its option, [to] permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule." A creditor adopting that practice "shall not be deemed to violate" Section 1002.5(a)(2) and "shall also be deemed to be in compliance with  Regulation B § 1002.5(a)(2) even though applicants are asked to self-identify using categories other than those explicitly provided in that section."

The notice also includes instructions for creditors to use to submit information concerning ethnicity and race collected under the approval in connection with applications received from January 1, 2017, through December 31, 2017. The instructions distinguish between applications on which final action is taken during the 2017 calendar year and those on which final action is taken on or after January 1, 2018.

For applications on which final action is taken during the 2017 calendar year, a financial institution is directed to submit the information on ethnicity and race using only the aggregate categories and codes provided in the filing instructions guide for HMDA data collected in 2017, even if the financial institution has permitted applicants to self-identify using disaggregated categories pursuant to the approval. For applications on which final action is taken on or after January 1, 2018, a financial institution is given the option to submit the information on ethnicity and race using disaggregated categories if the applicant provided such information instead of using the transition rule adopted by the 2015 HMDA final rule or to submit the information using the transition rule.

- Richard J. Andreano, Jr.

HUD Issues Statement on Applicability of Disparate Impact Liability to Insurance Industry

The U.S. Department of Housing and Urban Development (HUD) has announced it will continue to address disparate impact liability for discriminatory insurance practices on a case-by-case basis. HUD addressed concerns from the insurance industry in concluding that categorical exemptions for insurance practices from disparate impact liability are "unworkable and inconsistent with the broad fair housing objectives and obligations embodied in the Fair Housing Act."

HUD issued the statement in response to a 2014 federal court decision in Property Casualty Insurers Association of America v. Donovan, where the court required HUD to provide a reasoned explanation for its decision to refuse to enact a rule granting safe harbor exemptions to insurers from disparate impact liability. Instead, HUD chose to resolve cases through adjudication on a case-by-case basis. HUD's failure to provide a reasoned explanation for its decision to prefer adjudication over an exemption rule, the court held, constituted an arbitrary and capricious decision that violated the Administrative Procedures Act. The court criticized HUD for only providing a one-paragraph response to the concerns raised by the insurance industry regarding the application of disparate impact liability to insurance practices.

To satisfy the Donovan court's mandate, HUD now has issued this eight-page statement of responses to insurance industry concerns and comments on the matter. HUD provided two overarching reasons for why it would not create the safe harbor exemptions sought by the insurance industry. First, it claimed it would be "practically impossible" to define the scope of the exemptions with sufficient precision given the diversity of potential discriminatory effects claims. Second, HUD balanced that the exemptions sought would undermine the remedial purpose and effectiveness of the FHA in a way that outweighed any of the insurer concerns.

As background context, the U.S. Supreme Court recently recognized disparate impact liability as cognizable under the FHA. Disparate impact (also called "discriminatory effects") liability arises when facially neutral policies have an unintentional yet discriminatory effect on a protected class where the insurance company has no substantial, legitimate, nondiscriminatory interest for advancing the policy. For example, an insurer's policy of using certain risk factors in underwriting could lead to disparate impact liability if it causes a discriminatory effect on protected classes.

In response to comments that disparate impact liability could threaten the actuarial standards underpinning the insurance market, HUD reassured insurance providers that "practices that an insurer can prove are risk-based, and for which no less discriminatory alternative exists, will not give rise to discriminatory effects liability." HUD refers to the third step of the burden-shifting approach to disparate impact liability here by referencing that a policy will not violate the FHA if there is no less discriminatory alternative that the insurer could pursue in achieving its legitimate business interest. HUD did not provide specific examples of a less discriminatory alternative in the insurance context.

Although HUD's recent statement addresses the deficiencies in its stance raised by the Donovan court, other court battles ensue over the application of disparate impact standards to insurance. In American Insurance Association v. HUD, two homeowners insurance trade associations challenge the application of disparate impact standards to insurance on many of the same grounds that commenters raised in HUD's recent statement. Both HUD and the insurance associations moved for summary judgment and the motions are currently pending before the court. Regardless of the outcome, it is clear that the issue of the application of disparate impact liability under the FHA could soon again be before the Supreme Court for an opportunity for much needed clarity and resolution.

- Michael P. Cianfichi, Amy M. Glassman, and Michael W. Skojec

District Court Holds That a Late Assignment to a Securitized Trust Is Voidable, Not Void, and Does Not Permit a Claim for Wrongful Foreclosure

The U.S. District Court for the Northern District of California has issued an opinion in Spangler v. Selene Finance, LP, rejecting a borrower’s allegation that an assignment of a deed of trust recorded after a foreclosure sale was void and not merely voidable. In doing so, the court narrowly construed the California Supreme Court’s 2016 decision in Yvanova v. New Century Mortgage and joined a growing number of courts rejecting the California Court of Appeal's decision in Glaski v. Bank of America, N.A., which held that an assignment after the closing date of a securitized trust was void. Glaski defined the closing date as the date established in the trust document after which the trust may no longer accept loans.

The borrower, Spangler, alleged that she obtained a mortgage loan in 2007. After an earlier trustee’s sale and assignment were rescinded, the loan was foreclosed at a trustee’s sale on January 28, 2016. The trustee’s deed upon sale was recorded on February 4, 2016. The following day, on February 5, an assignment of the deed of trust to the foreclosing beneficiary, a securitized trust, was recorded. The assignment was executed more than six months before the sale, on June 29, 2015. Spangler sued for wrongful foreclosure, alleging that the assignment to the trust was void, because it occurred after the trust’s closing date. Spangler’s complaint specifically cited Yvanova as providing the basis for the wrongful foreclosure claim. 

The court rejected Spangler’s allegations and dismissed the complaint without leave to amend. First, the court rejected the argument that an assignment of a deed of trust only becomes effective when recorded, noting that there is no recording requirement for a deed of trust or an assignment of a deed of trust. 

The court then addressed the question of whether the assignment to the securitized trust was void because it took place after the trust’s closing date. The court rejected Spangler’s argument that Yvanova stands for the proposition that a wrongful foreclosure action can be based on an assignment that occurs after the trust’s closing date. The court found that "Yvanova does not hold that a late assignment creates a void foreclosure." The court -quoted Yvanova’s statement that it "express[es] no opinion" on "whether a postclosing date transfer into a . . . securitized trust is void or merely voidable."  

The court emphasized that although Yvanova acknowledged that in Glaski, a panel of the California Court of Appeal held that a late assignment to a securitized trust was void, not voidable, the Supreme Court refused to comment on the correctness of that holding. The court agreed with a series of federal district court decisions finding that Glaski is an "outlier and not widely accepted law." The court further noted that Glaski was based on a New York decision that was subsequently overturned on appeal. The court concluded that "because an act in violation of a trust agreement is voidable—not void—under New York law, which governs the Pooling and Servic[ing] Agreement," Spangler lacked standing to bring a wrongful foreclosure claim.  

- Anthony C. Kaye, John D. Sadler, and David J. Reed

Did you know?

by Wendy Tran

Montana Reduces Renewal Fees and Revises Rule

The Montana Department of Administration adopted a temporary rule to reduce its licensing renewal fees by 50 percent for 2017 for the following licenses: mortgage broker entity, mortgage broker branch, mortgage lender entity, mortgage lender branch, mortgage loan originator, mortgage servicer entity, and mortgage service branch. This temporary rule expires on March 1, 2017.

In addition, a new rule has been adopted to clarify that the definition of "regularly engage" under the Montana Mortgage Act means: (1) a person who advertises in any manner is holding themselves out to the public as being able to act as a mortgage loan originator, mortgage broker, mortgage lender, or mortgage servicer in Montana. By so doing, the person expects to engage in the business of a mortgage loan originator, mortgage broker, mortgage lender, or mortgage servicer in Montana; or (2) if a person licensed through the NMLS as a mortgage loan originator, mortgage broker, mortgage lender, mortgage servicer, or similar designation in another state acts as a mortgage loan originator, mortgage broker, mortgage lender, or mortgage servicer in Montana, they are regularly engaging in business in Montana. This new rule is effective starting October 15, 2016.

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