Mortgage Banking Update - April 13, 2018
A federal district court in Kentucky recently handed the CFPB its second defeat in the agency's lawsuit against Borders & Borders PLC and the law firm's principals by denying the CFPB's motion for reconsideration. Significantly, the court based its decision on grounds that are completely different than the basis for its original decision to grant the defendants’ motion for summary judgment.
As previously reported, the CFPB filed suit against the law firm and its principals in October 2013, claiming that they violated the referral fee prohibition under the Real Estate Settlement Procedures Act (RESPA) in connection with the establishment and operation of joint venture title insurance agencies (Joint Ventures) with the principals of real estate and mortgage brokerage companies. The CFPB asserted that Borders paid kickbacks to the principals of the real estate and mortgage brokerage companies that were disguised as profit distributions from the Joint Ventures, and that the kickbacks were for the referrals by the real estate and mortgage broker companies to Borders of consumers needing loan closing services.
Central to the CFPB's position was its assertion that the Joint Ventures were not entitled to the affiliated business arrangement safe harbor under RESPA section 8(c)(4), which permits referrals and payments of ownership distributions among affiliated parties if the three statutory conditions of the safe harbor are met. The CFPB claimed that the Joint Ventures were not entitled to the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA. Being a bona fide provider of settlement services is not one of the three statutory conditions. It is a concept developed by the U.S. Department of Housing and Urban Development, which had the responsibility for RESPA before the CFPB.
In its original decision, the court determined that a violation of the RESPA section 8(a) referral fee prohibition was established by the CFPB because the Joint Ventures referred loan closing business to the law firm, and the firm provided a thing of value to the Joint Ventures in connection with the assignment of title work to the companies. However, the court also determined that the three statutory conditions of the affiliated business arrangement safe harbor were met, so there was a safe harbor from the violation. The court, apparently following the decision of the U.S. Court of Appeals for the Sixth Circuit in Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th 2013), refused to impose a bona fide settlement service provider condition on the ability to qualify for the affiliated business arrangement safe harbor.
The CFPB asked for reconsideration in August 2017. In denying the CFPB's motion for reconsideration, the court found that there was no underlying violation of the RESPA section 8(a) referral fee prohibition. The CFPB had alleged that the nominal assignment of title work by the law firm to the Joint Ventures was a thing of value. According to the CFPB, the law firm did most of the actual title work for the matters nominally assigned to the Joint Ventures. The court determined that the nominal assignments of title work did not constitute a thing of value based on the following reasoning:
"The court continues to believe that this "nominal assignment" is insufficient to constitute a 'thing of value' because consumers were not obligated to follow the suggestion of Borders & Borders. Indeed, consumers had 30 days after the closing to decide whether to use the Title LLC suggested by Borders & Borders, or to use a different title insurance underwriter. If the consumer chose to purchase insurance from another underwriter, the JVP involved with the case received nothing. This potential benefit is insufficient to constitute a 'thing of value' because it is entirely conditioned on the third-party consumer's choice."
The court also concluded that even if the law firm provided a thing of value to the Joint Ventures when nominally assigning the title work, the safe harbor of RESPA section 8(c)(2) applied. RESPA section 8(c)(2) permits the payment of a bona fide salary or compensation for goods or facilities actually furnished or for services actually performed. In this part of the opinion, the court discussed the PHH case against the CFPB and found it to be analogous. In determining that the section 8(c)(2) safe harbor applied, the court reasoned as follows:
"Here, consumers made payments to the Title LLCs, which subsequently distributed profits to the JVPs in accordance with their ownership interest. However, these payments were not made in exchange for referrals, but in exchange for title insurance, which the consumers actually received. These payments are presumed to be bona fide because there is no evidence that the consumers paid above market value for the title insurance."
In determining that the law firm did not provide a thing of value to the Joint Ventures, it appears that the court focused on the referral of title business itself as the alleged thing of value, and not the related CFPB assertion that the law firm actually performed most of the title work for the Joint Ventures. In determining that, even if there was a thing of value, the section 8(c)(2) safe harbor applied, it appears that the court focused on the title insurance received by consumers for the payment of premiums, and not the CFPB assertion that the Joint Ventures did not actually perform the title work.
While the CFPB can still pursue the case, we will have to wait and see if under the leadership of Acting Director Mulvaney the CFPB elects to continue its challenge to the Joint Venture arrangements.
The CFPB has issued its Consumer Response Annual Report that provides an analysis of the approximately 320,200 complaints received by the CFPB between January 1 and December 31, 2017. (In 2016, the CFPB received about 291,400 complaints.)
The report provides data on the most common types of complaints for each product and the handling of complaints. Unlike prior annual reports, however, the new report contains no information on the median amount of monetary relief paid for different complaint types by companies that reported such amounts. (Companies have the option to report an amount of monetary relief.)
Of the 320,200 complaints received in 2017, about 81% were received through the CFPB's website, 5% via telephone calls, 8% via referrals from other agencies and regulators, and the balance via mail, e-mail and fax. Based on the CFPB's breakdown of the number of complaints received in each category, credit reporting (100,000), debt collection (84,500), and mortgages (37,300) accounted for 69% of all 2017 complaints.
For credit-reporting complaints, 55% involved incorrect information on credit reports and 20% involved the credit reporting company's investigation.
39% of debt-collection complaints involved continued attempts to collect debts not owed, 22% involved debt validation (such as not receiving enough information to verify the debt), 13% involved communication tactics, 11% involved taking or threatening illegal action, 10% involved false statements or representations, and 4% involved improper contact or sharing of information.
For mortgage complaints, 41% involved making payments (such as issues involving servicing, posting of payments, and escrow accounts), 37% involved problems relating to inability to pay (such as issues involving loan modifications, collections, or foreclosures), and 12% involved applying for a loan or refinancing an existing mortgage.
We recently blogged that the CFPB apparently has decided to put its monthly complaint reports on hold, having issued its last such report in October 2017.
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
More than 100 bills or resolutions related to sexual harassment and workplace misconduct have been introduced during the 2018 state legislative session, according to the National Conference of State Legislatures. This legislative effort—fueled, in part, by the grassroots #MeToo movement that began in Fall 2017—continues the nationwide focus on workplace sexual harassment. This is yet another area in the increasing trend of state and local legislative activism with the potential to create a patchwork of laws and regulations that will change how employers address and resolve allegations of sexual harassment.
There are common themes to be gleaned from the proposed state legislation—including the limitations on the use of confidentiality agreements and mandatory arbitration agreements in resolving claims of workplace harassment. In New Jersey, Pennsylvania, and Washington state, lawmakers are seeking to limit an employer's ability to condition continued employment or settle a claim of workplace harassment on the employee's agreement to remain quiet about the details or existence of the claim. In South Carolina, lawmakers are proposing to eliminate an employer's ability to require mandatory arbitration for workplace sexual harassment claims.
In February 2018, California legislators introduced nearly two dozen bills addressing issues similar to those addressed in other states' proposed legislation. These California bills add to the 2017 legislation, which expanded sexual harassment training requirements, by requiring employers to provide training to supervisors and managers on the prevention of sexual harassment, abusive conduct, and harassment based on gender identity, gender expression, and sexual orientation.
Most recently, on March 30, the New York Legislature passed anti-sexual harassment legislation—Senate Bill S7507C—which Governor Andrew Cuomo is expected to sign into law shortly. Key provisions include:
- Prohibiting non-disclosure (i.e. confidentiality) provisions in settlement agreements involving a claim of sexual harassment—whether or not formally filed in court or with an agency—unless the complainant requests that the settlement remain confidential.
- Prohibiting mandatory arbitration of sexual harassment claims, "except where inconsistent with federal law." This prohibition applies retroactively, invalidating existing agreements that require arbitration of sexual harassment claims. It is not clear whether the Federal Arbitration Act (FAA) preempts this provision, but a bill is pending in the U.S. Senate to amend the FAA to prevent mandatory arbitration of sexual harassment claims.
- Extending protection against sexual harassment to non-employees, such as independent contractors, consultants, and vendors, and establishing liability for "agents" or "supervisors" who knew or should have known that non-employees were subjected to sexual harassment.
- Directing the New York State Department of Labor (NYSDOL), in consultation with the Division of Human Rights, to draft model anti-sexual harassment policies and training programs. Employers must either adopt the model policy and training program set by the NYSDOL, or establish a policy and training program that equals or exceeds the agency's minimum standards.
- Mandating interactive, annual sexual harassment training, of no less than two hours in length.
- Requiring employers that submit competitive bids for any state contract provide certification that they have created and implemented a sexual harassment policy, and that they provide annual sexual harassment prevention training to all of their employees; effective January 1 of the year following signature of the bill.
The expanding world of state legislation suggests that employers should take a closer look at their current policies and practices when it comes to responding to, and resolving, allegations of sexual harassment. It will be important for employers to ensure that their handbooks, arbitration agreements, confidentiality agreements, and severance agreements comply with the various state laws.
Effective June 1, 2018, the West Virginia Division of Financial Institutions will adopt the National State MLO Test with Uniform State Content. Mortgage loan originator license applicants will no longer be required to take and pass a West Virginia-specific test component. With West Virginia's adoption of the Uniform State Test, Minnesota is the only state that still requires mortgage loan originator license applicants to pass both the national test and a state-specific test.
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