Kerfuffle on Statute of Limitations Issue in PHH Case

The CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case on June 7. In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings. The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter. It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable, PHH argues. Next, the letter pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings. That “would destroy the certainty that Section 2614 was intended to provide,” it argued. PHH also reminded the court of the CFPB director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions. It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not. The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

- Theodore R. Flo

En banc D.C. Circuit Split Leaves Intact Panel Ruling That SEC ALJs Are Not Inferior Officers

On June 26, 2017, the en banc D.C. Circuit was equally divided on the question of whether SEC administrative law judges (“ALJs”) are “inferior officers.” This leaves intact the D.C. Circuit panel decision in Lucia, which held that SEC ALJs are not officers and do not have to be appointed by the President. Because SEC ALJs are not appointed that way, a different decision may have called into question virtually every SEC ALJ decision ever issued.

Because it was an SEC ALJ who rendered the initial PHH decision, there was talk that a different decision in Lucia may have given the en banc D.C. Circuit a way to decide the PHH case in PHH’s favor without addressing the constitutional issues surrounding the CFPB’s structure. Indeed, in its final merits brief at the panel level, PHH raised the same argument at issue in Lucia. While the panel decision in PHH did not address the issue, in his concurrence, Judge Randolph stated that the problem with the ALJ’s appointment “itself rendered the proceedings against petitioners unconstitutional.” It may be that the Lucia issue ends up being decided in the PHH case, which has an 11-judge panel that cannot split evenly.

- Theodore R. Flo

Trade Associations Voice Support for Commission to Run CFPB

A group of 22 trade associations sent a letter last month to the chairmen and ranking members of the Senate and House Appropriations Committees expressing their “strong support” for creation of a five-member bipartisan commission to lead the CFPB. The trade associations include the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, Mortgage Bankers Association, and the Real Estate Services Providers Council, Inc.

In their letter, the associations assert that a “Senate-confirmed, bipartisan commission will provide a balanced and deliberative approach to supervision, regulation, and enforcement for consumers and the financial institutions the CFPB oversees by encouraging input from all stakeholders.” They claim that “[t]he current single director structure leads to regulatory uncertainty and instability…leaving vital consumer protection subject to dramatic political shifts with each changing presidential administration.”

The Financial CHOICE Act passed by the House this month would amend the Dodd-Frank Act to continue the CFPB’s single director structure but allow the President to remove the director without cause. The Treasury report issued this month recommends an amendment to Dodd-Frank that either makes the director removable at-will by the President or restructures the CFPB’s leadership as a multi-member commission or board.

Instead of an amendment to Dodd-Frank, the trade associations express support for changing the CFPB’s leadership structure through the appropriations process, in particular by including language making the change in the FY 2018 Senate and House Appropriations Bills.

- Barbara S. Mishkin

Treasury Report on U.S. Financial System Recommends Extensive Mortgage Lending Reforms

The U.S. Treasury Department recently issued a report titled “A Financial System That Creates Economic Opportunities-Banks and Credit Unions.” In addition to recommended changes for the CFPB, the report devotes substantial attention to the residential mortgage industry.

The report cites the size of the housing market, contributing approximately 18 percent to the U.S. GDP, and constituting a debt market second in size only to the U.S. Treasury market. Accordingly, the report states that tight mortgage lending conditions in the private sector warrant careful review of regulations that may be holding back access to credit.

Treasury’s review produced the following findings, presented verbatim below:

  • The revised regulatory regime disproportionately discourages private capital from taking mortgage credit risk, instead encouraging lenders to channel loans through federal insurance or guarantee programs, or Fannie Mae or Freddie Mac;
  • Regulatory requirements have significantly and unnecessarily tightened the credit box for new mortgage originations, denying many qualified Americans access to mortgages;
  • Increased regulatory requirements have significantly increased the cost of origination and servicing activities, which, when passed on to borrowers in the form of higher mortgage rates, have decreased the number of Americans that can qualify for mortgages;
  • Some regulatory regimes or approaches are viewed by industry participants as having inadequate transparency and mutual accountability, thus creating uncertainty and risk aversion among lenders in serving certain market and client segments; and
  • Capital, liquidity, and other prudential standards, in combination with a wide range of capital market regulations, have inhibited both private originate-to-hold lenders as well as lenders focused on origination and secondary sale in the private-label securitization market.

According to the report, the aim of Treasury’s recommendations is to properly calibrate the regulation of mortgage lending to be more efficient, effective, and appropriately tailored. Treasury further states that its recommendations also serve the goal of avoiding the recurrence of flawed practices in the U.S. residential mortgage market that contributed to the financial crisis. The recommendations for the residential mortgage market include the following:

  • Mortgage Loan Origination
    • Adjust and clarify the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule and eliminate the “QM Patch” for GSE-eligible loans (the temporary exemption for loans eligible for purchase by the GSEs). The goal of this recommendation would be to subject all market participants to the same set of requirements, and provide greater flexibility to the QM parameters.
    • Modify Appendix Q of the ATR/QM rules to simplify the standards and release clear, binding guidance for its use and application.
    • Revise the points and fees cap for QM loans, by increasing the dollar loan amount threshold for application of the 3 percent cap.
    • Increase the maximum asset threshold for making small creditor QM loans.
    • Clarify the TRID rule through notice and comment rulemaking and/or through the publication of more robust and detailed FAQs in the Federal Register.
    • Modify the TRID rule to allow for a more streamlined waiver for the mandatory waiting periods, and to permit lenders to cure errors in a loan file within a reasonable period after closing.
    • Improve flexibility and accountability for the Loan Originator Compensation rule, in particular to allow for post-closing corrections of non-material errors.
    • Delay implementation of the new HMDA reporting requirements until borrower privacy is adequately addressed and the industry is in a better position to implement the requirements.
  • Mortgage Loan Servicing
    • Place a moratorium on additional Mortgage Servicing Rules, while the industry updates its operations to comply with existing regulations and transitions from the HAMP program to alternative loss-mitigation options.
    • Improve alignment and consistency among the CFPB, prudential regulators, and state regulators, in both regulation and examinations, to help decrease the cost of servicing.
  • Private Sector Secondary Market Activities
    • Repeal or revise the residential mortgage risk retention requirement. If the requirement is revised rather than repealed, designate one agency from among the six rule-writing agencies to be responsible for interpreting the rule.
    • Enhance investor protections for private label mortgage-backed securities.
    • Clarify limited assignee liability for secondary market investors, in connection with origination errors that are not apparent on the face of the disclosure statement and not asserted as a defense to foreclosure.
    • Evaluate the impact that the Basel III capital and liquidity rules would have on the secondary market, and adjust them to reduce complexity and avoid punitive capital requirements.

- Reid F. Herlihy


Arizona Adds Consumer Finance and Debt-Related Licenses to NMLS

On July 1, the Arizona Department of Financial Institutions will start receiving new applications for the following licenses on NMLS:

  • Advance Fee Loan Broker License
  • Escrow Agent License
  • Premium Finance License
  • Sales Finance License

Current licensees are encouraged to submit transition applications on NMLS. More information can be found here.

Hawaii Adds Mortgage Servicer Change of Control Provisions

Hawaii has added provisions regarding the criteria used by the commissioner when reviewing a change of control application submitted by mortgage servicers. The commissioner shall approve an application requesting approval of a proposed change of control if, after investigation, the commissioner determines that:

  • The person or group of people who will obtain control will be in compliance with this chapter upon approval of the application;
  • The person or group of people who will obtain control has the competence, experience, character, and general fitness to control the licensee or person in control of the licensee in a lawful and proper manner; and
  • The interests of the public will not be jeopardized by the change of control.

In addition, a provision has been added explaining that an individual is presumed to control an entity if that person is an executive officer of the entity, or a director, general partner, or managing member who directly or indirectly has the right to vote 10 percent or more of a class of voting securities of the entity or has the power to sell or direct the sale of 10 percent or more of a class of voting securities of the entity. “Executive officer” means a president, chairperson of an executive committee, senior officer responsible for the business of the subject entity or organization, chief financial officer, or any other person who performs similar functions related to the subject entity or organization.

These provisions become effective September 1, 2017.

Nevada Revises Mortgage Lending Provisions

Nevada revised provisions related to mortgage lending, including, but not limited to:

  • The requirement that continuing education courses for mortgage brokers and mortgage agents include at least three hours on Nevada laws and regulations has been eliminated.
  • To renew a mortgage broker license, a licensee must submit proof of attending at least eight hours—instead of the previous requirement of 10 hours—of certified continuing education courses during the 12 months preceding the date the license expires.
  • The requirement for annual examination of mortgage brokers and mortgage bankers has been eliminated. Instead, the Commissioner may conduct periodic standard examinations at his discretion.
  • The Commissioner may waive the requirement that mortgage brokers and mortgage bankers submit a monthly report of their activities in cases where substantially similar information is available from another source.

These provisions are effective January 1, 2018.

Nevada Institutes Mortgage Company License

Nevada revised provisions of law that currently regulate mortgage bankers and mortgage brokers, including, but not limited to:

  • Mortgage brokers and mortgage bankers are now both included in the term “mortgage company.” The term “mortgage company” means a person who, directly or indirectly:

(a) Holds himself or herself out for hire to serve as an agent for any person in an attempt to obtain a loan which will be secured by a lien on real property;

(b) Holds himself or herself out for hire to serve as an agent for any person who has money to lend, if the loan is or will be secured by a lien on real property;

(c) Holds himself or herself out as being able to make loans secured by liens on real property;

(d) Holds himself or herself out as being able to buy or sell notes secured by liens on real property; or

(e) Offers for sale in Nevada any security that is exempt from registration under state or federal law and purports to make investments in promissory notes secured by liens on real property.

The term includes a wholesale lender. The following language has been removed: “[t]he term does not include a person who is licensed as a mortgage banker, as defined in NRS 645E.100, unless the person is also licensed as a mortgage broker pursuant to this chapter.”

  • “Applicant” means a person who applies for licensure as a mortgage company.
  • The term “mortgage agent” is changed to “mortgage loan originator.”
  • “Commercial mortgage loan” means a loan primarily for a business, commercial, or agricultural purpose that: (1) directly or indirectly is secured by a lien on commercial property; and (2) is created with the consent of the owner of the commercial property.
  • On January 1, 2020, any person who holds a license as a mortgage broker or mortgage banker will hold a mortgage company license.

These provisions are effective January 1, 2020.

Texas Changes RMLO Pre-Licensing Education Requirements

The time period in the requirement that an individual retake the pre-licensing education requirements prescribed by the SAFE Mortgage Licensing Act if he or she fails to maintain a residential mortgage loan originator license for at least five consecutive years has changed. Instead, the time period will be established by the rulemaking authority.

This provision is effective January 1, 2018.

- Wendy T. Novotne

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