Mortgage Banking Update - July 10, 2018
On June 29, 2018, the California Commissioner of Business Oversight warned California residential mortgage lenders and servicers that their failure to file annual reports could lead to enforcement actions. The same day, the California Department of Business Oversight issued its annual report for calendar year 2017 on the operation of licensed lenders and servicers. The report relied on mandatory self-reported data from lenders and servicers. However, 8% fewer licensees filed reports for 2017 than for 2016. The Commissioner called the decline "disturbing" and warned that the Department would take appropriate action under the law to deal with licensees that do not file their reports.
California's Residential Mortgage Lending Act requires licenses for any person "engage[d] in the business of making residential mortgage loans or servicing mortgage loans." Cal. Fin. Code § 50002(a). Banks, savings and loan associations, savings banks, and credit unions that are federally chartered or chartered in other states, among other entities, are exempt from licensure. Cal. Fin. Code § 50002(c). All licensed lenders and servicers must annually file a report with the California Department of Business Oversight. Cal. Fin. Code § 50307.
Failure to report immediately authorizes an audit by the Department of Business Oversight. Cal. Fin. Code § 50307(c). Ordinarily, audits only occur once every four years. Cal. Fin. Code § 50302(a). If the Department discovers any violation of the Residential Mortgage Lending Act, it may suspend or revoke any licenses. Cal. Fin. Code § 50327. Other possible penalties include fines, censure, suspension for up to one year, and total bars on working as a lender or servicer. Cal. Fin. Code §§ 50318(a), 50500–50501, 50513.
According to the Department's 2017 report, both the total number and dollar amount of non-bank mortgage lending declined by nearly 30% in 2017. Overall mortgage market activity followed a similar but less dramatic trend, with the total number of brokered loans declining by 24.3% and the aggregate dollar amount of brokered loans down 14.3%. Interestingly, foreclosures and consumer complaints also declined. There were 27.7% fewer foreclosures in 2017 than 2016. Finally, aggregate servicer activity increased by 2.13%.
- David Mooers-Putzer and Constantinos Panagopoulos
In an SEC filing dated June 22, 2018, Zillow Group announced that it was no longer under investigation by the Consumer Financial Protection Bureau (CFPB) for RESPA and UDAAP compliance concerning its co-marketing program. Zillow Group disclosed the existence of the investigation in May 2017.
According to the SEC filing, Zillow Group received a letter from the CFPB on June 22 stating that the agency "had completed its investigation, that it did not intend to take enforcement action, and that the Company was relieved from the document-retention obligations required by the Bureau’s investigation."
The completion of the investigation leaves unanswered what concerns the CFPB may have had with Zillow Group's co-marketing program, and whether the investigation was terminated because the concerns were addressed to the CFPB's satisfaction or for other factors.
On June 21, 2018, Judge Loretta Preska of the Southern District of New York (SDNY) issued a decision finding that the CFPB's single-director-removable-only-for-cause structure is unconstitutional. In doing so, the SDNY held that Title X of Dodd-Frank—which created the CFPB and established its regulatory, supervisory, and enforcement authority—should be stricken in its entirety.
The SDNY went further in finding that Acting Director Mick Mulvaney's ratification of the CFPB's decision to bring the lawsuit was inadequate to cure the constitutional deficiencies. The decision was issued in response to the motion to dismiss filed by the defendants in the CFPB's and New York Attorney General's case against RD Legal Funding, LLC.
This decision is in direct conflict with the U.S. Court of Appeals for the District of Columbia Circuit's en banc decision in the PHH case, which held that the CFPB's structure is constitutional. Adopting portions of two dissenting opinions in the en banc decision, the SDNY found that, not only is the CFPB's structure unconstitutional, but the proper remedy would be to strike all of Title X, rather than just its for-cause removal provision.
Although the SDNY dismissed the CFPB from the RD Legal Funding case, it allowed the New York Attorney General's claims to proceed. Because part of the case remains active, the CFPB cannot appeal the decision unless the SDNY certifies that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure. Assuming such a certification by the SDNY, the CFPB could appeal to the U.S. Court of Appeals for the Second Circuit.
We soon will blog in further detail about the implications of the SDNY decision.
The CFPB recently issued a statement regarding the partial exemption from Home Mortgage Disclosure Act (HMDA) reporting requirements for certain lower mortgage-volume depository institution lenders that were adopted in the Economic Growth, Regulatory Relief, and Consumer Protection Act.
As we reported previously, the act exempts depository institutions and credit unions from the new reporting categories added by Dodd-Frank and the HMDA rule adopted by the CFPB regarding (1) closed-end loans, if the institution or credit union originated fewer than 500 such loans in each of the preceding two calendar years, and (2) home equity lines of credit (HELOCs), if the institution or credit union originated fewer than 500 HELOCs in each of the preceding two calendar years. The HELOC change will not initially affect reporting because, for 2018 and 2019, the threshold to report HELOCs is 500 transactions in each of the preceding two calendar years under a temporary CFPB rule.
The act's partial exemption from reporting the new HMDA data does not apply if the institution received a rating of "needs to improve record of meeting community credit needs" during each of its two most recent Community Reinvestment Act (CRA) examinations, or "substantial noncompliance in meeting community credit needs" on its most recent CRA examination.
The CFPB advises in its recent statement that it expects later this summer to provide further guidance on the applicability of the partial exemption to HMDA data collected in 2018. The CFPB also advises that the partial exemption will not affect the format of 2018 Loan Application Registers (LARs) and that:
- LARs will be formatted according to the previously-released 2018 Filing Instructions Guide for HMDA Data Collected in 2018 (2018 FIG).
- If an institution does not report information for a certain data field due to the partial exemption, the institution will enter an exemption code for the field specified in a revised 2018 FIG that the CFPB expects to release later this summer.
- All LARs will be submitted to the same HMDA Platform
The CFPB also notes that a beta version of the HMDA Platform for submission of data collected in 2018 will be available later this year for filers to test.
In Financial Institution Letter FIL-36-2018 and in OCC Bulletin 2018-19 the Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency, respectively, issued similar guidance to institutions.
In its June 21 decision in Lucia v. Securities & Exchange Commission, the U.S. Supreme Court ruled that administrative law judges (ALJs) used by the SEC are "Officers of the United States" under the Appointments Clause in Article II of the U.S. Constitution because they exercise "significant authority pursuant to the laws of the United States." Under the Appointments Clause, the power to appoint "Officers" is vested exclusively in the President, a court of law, or the head of a "Department."
In Lucia, the plaintiff, Raymond Lucia, challenged the validity of an SEC administrative proceeding in which the ALJ issued a decision finding that he had violated securities laws. Mr. Lucia argued that because the ALJ in his case was appointed by SEC staff rather than the Commission itself, the ALJ's appointment violated the Appointments Clause and made the administrative proceeding invalid. The Supreme Court adopted Mr. Lucia's view, holding that because ALJs perform a number of tasks—conducting trials, managing discovery, writing opinions often adopted as final—the ALJ in his proceeding qualified as an "Officer" under the Appointments Clause, and the ALJ's appointment by SEC staff did not satisfy the Appointments Clause.
The Lucia decision will impact all federal agencies that use ALJs for administrative proceedings, including the CFPB and the federal banking agencies. Regarding the CFPB and federal banking agencies, we make the following observations:
CFPB. The CFPB's Rules of Practice for Adjudication Proceedings were modeled on the SEC's Rules of Practice and give an ALJ conducting a CFPB administrative proceeding substantially the same authority as an ALJ used in a SEC proceeding. (The Rules of Practice are the subject of one of the series of RFIs issued by the CFPB.) For example, applying the Supreme Court's Lucia analysis, a CFPB ALJ, as does a SEC ALJ, has "the authority needed to ensure fair and orderly adversarial hearings" (for example, to punish an attorney's discovery violations or other contemptuous conduct with exclusion or suspension) and the CFPB Director can decline to review an ALJ decision that has not been appealed. As a result, it is very likely that a CFPB ALJ would be deemed an "Officer" for purposes of the Appointments Clause.
It is worth noting that in the D.C. Circuit's order granting the petition for rehearing en banc in PHH, one of the issues the court ordered the parties to address was what the appropriate disposition would be in PHH if the court were to hold in Lucia that the ALJ was an "Officer." The initial decision was issued in 2014 by an ALJ who was on loan to the CFPB from the SEC pursuant to an agreement between the CFPB and SEC. In its opening en banc brief, PHH argued that if the Supreme Court were to hold that the ALJ in Lucia was improperly appointed, then the ALJ in its case was also an "Officer" whose appointment violated the Appointments Clause. In its en banc decision in PHH, the D.C. Circuit specifically "decline[d]to reach the separate question whether the ALJ who initially considered this case was appointed consistently with the Appointments Clause."
The CFPB's website currently shows the name of an ALJ, Christine Kirby. The CFPB solicited applications for an ALJ in 2015 and presumably Ms. Kirby was appointed as a result of that solicitation while Richard Cordray was still CFPB Director. Our research indicates that all federal agencies hire ALJs through a merit-selection process administered by the Office of Personnel Management (OPM). An agency may select an ALJ from the top three ranked applicants. It is unclear who at the CFPB would have been responsible for selecting and hiring Ms. Kirby from the list of candidates presented by OPM. Clearly, anyone other than Mr. Cordray would not have qualified as the "head of a Department" for purposes of the Appointments Clause.
However, even if Ms. Kirby had been hired by former Director Cordray, it is not certain that the CFPB Director would qualify as the "head of a Department." The Dodd-Frank Act provided that "[t]here is established in the Federal Reserve System, an independent bureau to be known as the [BCFP]." Under Supreme Court decisions that have addressed the meaning of the term "Department," it is unclear whether an establishment's status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a "Department" or whether it must also be self-contained. While compelling arguments can be made that that the CFPB's status as an independent agency should be sufficient to render it a "Department," Congress' decision to house the CFPB in the Federal Reserve means that the CFPB's status as a "Department" is not free from doubt.
Other than PHH, Integrity Advance is the only CFPB enforcement matter shown on the CFPB's website in which a decision was issued by an ALJ. Integrity Advance appealed from the ALJ’s recommended decision and argued in its appeal that the ALJ's appointment violated the Appointments Clause. (The ALJ was on loan to the CFPB from the Coast Guard.) On March 14, 2018, Acting Director Mulvaney issued an order directing that the case be put on hold and stating that he would determine how the appeal should proceed after the Supreme Court issued its decision in Lucia.
Federal Banking Agencies. It appears that the Fed, OCC, FDIC, and NCUA do not have their own ALJs but instead use the same ALJs who are hired by the Office of Financial Institution Adjudication (OFIA). (The OPM's website indicates that the OFIA currently has two ALJs.) OCC regulations describe the OFIA as "the executive body charged with overseeing the administration of administrative enforcement proceedings for the [four agencies]." In 2017, the U.S. Court of Appeals for the Fifth Circuit ruled that a bank official seeking to stay a FDIC order pending review had shown a likelihood of success on the merits of his argument that the FDIC ALJ was an "Officer" whose appointment violated the Appointments Clause. (The Fifth Circuit subsequently stayed its review pending the Supreme Court's decision in Lucia.)
Assuming the ALJs used by the banking agencies would be deemed "Officers" for purposes of the Appointments Clause, the validity of their appointments would depend on (1) how ALJs are hired by the OFIA (i.e. are they hired by OFIA or other agency staff or by one or more agency heads), and (2) if ALJs hired by the OFIA are hired by one or more agency heads, whether those agencies qualify as "Departments" for purposes of the Appointments Clause. For example, the OCC might not qualify as a Department because it is housed in the Treasury Department.
If the ALJs used by the banking agencies were unconstitutionally appointed, it would raise the question of how the agencies must deal with past decisions issued by those ALJs. Lucia did not overturn all prior decisions issued by SEC ALJs. Instead, the Supreme Court held that only parties who made timely constitutional challenges could request new hearings, which must be overseen by a different ALJ. Last year, the SEC formally ratified the staff appointments of current ALJs to limit the impact of a negative decision in Lucia, but the Supreme Court explicitly sidestepped the question of whether that ratification was effective. The CFPB and banking agencies will have to take steps to ensure that they use properly appointed ALJs in future administrative proceedings.
In connection with the 2018 American Association of Residential Mortgage Regulators (AARMR) Annual Conference to be held in Boston, an open meeting with the NMLS Ombudsman will be held Tuesday, July 31, 2018, from 9:00 a.m. to 12:00 p.m. ET. Conference registration is not required to attend the Ombudsman meeting. The Ombudsman is accepting suggested agenda items until July 16, 2018. Agenda items can be submitted by emailing email@example.com. Individuals who submit discussion items must attend the meeting to present their issue.
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