Legal Alert

Mortgage Banking Update - March 21, 2019

March 21, 2019

Inside the Beltway: Chairwoman Waters Introduces Bill to Reverse Mulvaney Actions

House Financial Services Committee Chairwoman Maxine Waters recently introduced the "Consumers First Act," H.R. 1500, a modified version of a bill she introduced in the last session of Congress when Mick Mulvaney was still serving as CFPB Acting Director. The bill is scheduled to be marked up in the Committee on March 26.

The bill calls on the CFPB to "promptly reverse all anti-consumer actions taken during Mr. Mulvaney's tenure, including the actions identified by this legislation to ensure that the agency is fully complying with its statutory purpose, objectives, and functions to protect all consumers, including communities of color and vulnerable populations."

Section 2 of the bill, titled "Findings; Sense of Congress," is essentially an attack on President Trump's appointment of Mr. Mulvaney as Acting Director and Mr. Mulvaney's "misguided actions," examples of which are listed in the bill. This section states that while the bill "is a direct response to address many of the misguided decisions that have been orchestrated under Mr. Mulvaney's leadership at the Consumer Bureau that have been exposed to the public, as of the date of the bill's introduction….this legislation should not be viewed as an exhaustive list to fix all the damaging actions that may have occurred at this agency since the departure of former Director Cordray in November 2017, particularly since detailed information revealing the full scope, nature, and extent of the current flawed operation of the agency, and the adverse impact resulting from these actions, may not yet be publicly available."

The bill's provisions include amendments to the Dodd-Frank Act that would:

  • Replace references to the "Bureau of Consumer Financial Protection" with "Consumer Financial Protection Bureau" and require the CFPB to refer to itself in any public communication, including on any website, as the "Consumer Financial Protection Bureau" or "CFPB";’
  • Place limitations on political appointees who serve as CFPB employees;
  • Require all consumer complaints to be publicly available on a Bureau website;
  • Eliminate the CFPB Director's ability to limit the powers and duties of the Office of Fair Lending and Equal Opportunity as set forth in Dodd-Frank to only those powers and duties delegated by the Director;
  • Establish an Office of Students and Young Consumers, "which shall work to empower students, young people, and their families to make more informed financial decisions about saving and paying for college, accessing safer and more affordable financial products and services, all matters related to private education loans…, and repaying student loan debt, including private education loans." The Office would be directed to "assist in all supervisory, enforcement, and regulatory matters of the Bureau related to the functions of the Office"; and
  • Establish detailed membership requirements for the CFPB’s advisory groups

While Democratic control of the House creates the possibility for the bill to be passed by the House, there is no realistic likelihood of the bill’s passage by the Senate.

Legislation to change the CFPB's leadership from a single Director to a five-person, bipartisan commission would be more likely to garner some Republican support, and could provide improved structural stability. Indeed, any intended continuity that the CFPB Director's five-year term might provide under the current construct could quickly disappear if the issue of whether the CFPB's structure is constitutional reaches the U.S. Supreme Court and the Republican presidential candidate loses in 2020. If the Supreme Court were to agree with the Department of Justice that the current structure is unconstitutional and rule that the proper remedy is to make the Director removable at will, a Democratic president would be free to replace Director Kathy Kraninger well before the end of her five-year term.

- Timothy Jenkins

Be sure to check for our podcast on this subject expected on or about April 4, 2019.

SCOTUS: Law Firm Engaged Only in Nonjudicial Foreclosure Proceedings Is Not a Debt Collector Under FDCPA

A law firm hired to pursue a nonjudicial foreclosure under Colorado law was not a "debt collector" under the Fair Debt Collection Practices Act (FDCPA), the U.S. Supreme Court ruled unanimously on March 20, 2019,  in Obduskey v. McCarthy & Holthus LLP. The decision, however, expressly leaves open the question of whether the FDCPA applies to judicial foreclosures.

The FDCPA defines a "debt collector" as "any person…in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or asserted to be owed or due another." It also provides that "[f]or the purposes of section 1692(f) of this title, [the] term [debt collector] also includes any person…in any business the principal purpose of which is the enforcement of security interests." Section 1692(f) prohibits a "debt collector" from taking nonjudicial action to effect dispossession or disablement of property under specified circumstances.

In Obduskey, the U.S. Court of Appeals for the 10th Circuit ruled that the law firm was not a "debt collector" under the FDCPA because a nonjudicial foreclosure does not automatically result in the right to collect a deficiency judgment against the mortgagor and was, therefore, not an attempt to collect a debt. Contrary to this analysis, the U.S. Courts of Appeals for the Fourth, Fifth, and Sixth Circuits held that the FDCPA applies to nonjudicial foreclosure proceedings because every foreclosure action is undertaken for the purpose of obtaining payment on the underlying debt.

As an initial matter, the Supreme Court was unwilling to distinguish between direct and indirect attempts to collect a debt for purposes of applying the FDCPA's "debt collector" definition. It observed that "even if nonjudicial foreclosure were not a direct attempt to collect a debt, because it aims to collect on a consumer's obligation by way of enforcing a security interest, it would be an indirect attempt to collect a debt." (emphasis provided)

Instead, the Court based its decision primarily on the language in the FDCPA's debt collector definition that states for purposes of section 1692(f), a "debt collector" also includes those engaged in the enforcement of security interests.  According to the Court, this language was a "serious, indeed an insurmountable, obstacle to subjecting [the law firm] to the main coverage of the Act." In the Court's view, "giving effect to every word [of this language] narrows the [broader definition of debt collector] so that the debt-collector-related prohibitions of the FDCPA (with the exception of § 1692f(6)) do not apply to those who, like [the law firm], are engaged in no more than security-interest enforcement." (emphasis provided)

The Supreme Court gave two additional considerations that supported its conclusion. First, the Court found it possible that Congress may have chosen to treat the enforcement of security interests differently from "ordinary debt collection" to "avoid conflicts with state nonjudicial foreclosure schemes." Second, the Court found support in the FDCPA's legislative history, observing that the FDCPA′s present language appeared to have "all the earmarks of a compromise" between one version of the FDCPA that would have expressly included as a "debt collector" those principally engaged in the enforcement of security interests and another version that would have totally excluded such persons from the "debt collector" definition.

As support for its position, the plaintiff pointed to the FDCPA′s venue provision, which requires a "debt collector" who brings a legal action on a debt against a consumer to "enforce an interest in real property securing the consumer′s obligation" to bring such action in the judicial district where the property is located. The plaintiff argued that since this provision made clear that a person who judicially enforces a real property-related security interest is a debt collector, someone who nonjudicially enforces such an interest must also be a debt collector. After commenting that the venue provision had no direct application to the case because it involves nonjudicial foreclosure, the Supreme Court stated "whether those who judicially enforce mortgages fall within the scope of the primary definition [of a debt collector] is a question we can leave for another day."

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

Passive Debt Buyers Beware: Third Circuit Broadens FDCPA Liability Under the 'Principal Purpose' Definition

Persons or entities that engage third parties to collect consumer debts they acquired when the debts were in default, known as "passive debt buyers," are "debt collectors" subject to the Fair Debt Collection Practices Act (FDCPA) and "should bear the burden of monitoring the activities of those they enlist to collect debts on their behalf," according to a panel of the U.S. Court of Appeals for the Third Circuit. Barbato vs. Crown Asset Management is the Third Circuit's second recent decision addressing the FDCPA's application to debt buyers, and further chips away at a debt buyer's defenses to FDCPA claims that appeared to remain available following the U.S. Supreme Court's 2017 decision in Henson vs. Santander Consumer USA Inc. Further, these decisions highlight the need for debt buyers to reevaluate their business practices, discuss the implications of these decisions with third parties performing collection work, and establish procedures to monitor the third party's collection efforts.

In Henson, the Supreme Court held that the plain language of the "regularly collects or attempts to collect debts . . . owed or due . . . another" portion of the FDCPA's "debt collector" definition focuses on third-party collection agents working for a debt owner. The Court found the debt buyer in Henson did not trigger this portion of the definition by collecting debts for its own account. Significantly, Henson left open the question of whether a debt buyer would qualify as a "debt collector" under the portion of the FDCPA definition that makes an entity a "debt collector" if the "principal purpose" of its business "is the collection of any debts."

In Barbato, the plaintiff's credit card debt was sold to Crown Asset Management, which engaged Turning Point Capital, Inc., to collect the debt. The plaintiff filed a lawsuit in federal district court against Crown and Turning Point (under its new name, Greystone Alliance, LLC) alleging FDCPA claims against both defendants based on collection letters and voicemail messages the plaintiff received from Turning Point. The letters allegedly neglected to inform her how to exercise her validation rights and the voicemail messages allegedly failed to indicate that the calls were from a debt collector. Following Greystone's dismissal from the case, the plaintiff and Crown filed cross-motions for summary judgment to resolve, among other issues, whether Crown was a "debt collector" under the FDCPA.

Before Henson was decided, the district court denied Crown's summary judgment attempt, ruling that because Crown's "principal purpose" was debt collection and it acquired the plaintiff's debt after default, Crown was a "debt collector" under the FDCPA. Once armed with the Supreme Court's Henson decision, however, Crown sought reconsideration of its summary judgment motion, arguing that since it owned the plaintiff's debt but outsourced collection, it was a debt buyer/creditor and not a "debt collector." Rejecting Crown's arguments, the district court reaffirmed that Crown was a "debt collector" under the FDCPA's "principal purpose" definition. Following the district court's certification, the Third Circuit granted Crown's petition for an interlocutory appeal.

The Third Circuit panel framed the issue as "whether an entity that acquires debt for the 'purpose of . . . collection' but outsources the actual collection activity qualifies as a 'debt collector.'" In the Third Circuit's view, Crown's business met the FDCPA's "principal purpose" definition and it "[could not] avoid the dictates of the FDCPA merely by hiring a third party to do its collecting." Crown argued that Congress only intended the FDCPA to cover an entity that actually collected debts (i.e., made phone calls and sent letters) as opposed to passive debt purchasers.

The Third Circuit disagreed, emphasizing that Crown's business focused on obtaining revenue by liquidating consumer debts and, therefore, fell within the FDCPA's "principal purpose" definition. The Third Circuit stressed Congress's use of the noun "collection" in the FDCPA's "principal purpose" definition, without specifying "who must do the collecting or to whom the debt must be owed." Acknowledging that the Supreme Court in Henson "went out of its way" not to address whether debt buyers could also qualify as debt collectors under the "principal purpose" definition, the Third Circuit stated that "[a]s long as a business's raison d’etre is obtaining payment on the debts that it acquires, it is a debt collector. Who actually obtains the payment or how they do so is of no moment."

Seven months before the Barbato decision, a Third Circuit panel ruled in Tepper v. Amos Fin., LLC that debt buyers can qualify as "debt collectors" under the FDCPA's "principal purpose" definition. The Third Circuit rejected the debt buyer's argument that by holding that a debt buyer that collected defaulted debts for its own account was not a "debt collector," Henson rendered it a "creditor"and thus foreclosed the possibility of it also being a "debt collector." Barbato creates additional FDCPA risk for passive debt buyers by taking Tepper a step further and rejecting the argument that debt buyers who outsource collection are not "debt collectors" because they do not engage in overt collection activities.

Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.

House Financial Services Committee Hearing on CFPB Highlights Continuing Partisan Divide

The hearing on the CFPB held by the House Financial Services Committee on March 7, 2019, highlighted the continuing partisan divide over the CFPB's implementation of its consumer protection mission but with Democratic and Republican committee members switching roles from those taken at the hearings at which former Director Cordray appeared. While Republicans took on the role of CFPB Director Kathy Kraninger's champions, Democrats assumed the role of her critics.

The overall theme of Democratic members was praise for the CFPB’s activities under Director Richard Cordray's leadership and the need for Director Kraninger to undo the actions taken by Mick Mulvaney during his tenure as CFPB Acting Director. (Numerous references were made to the Consumers First Act introduced on Wednesday by Chairwoman Maxine Waters, which would amend the Dodd-Frank Act to reverse Mr. Mulvaney’s actions.) The overall theme of the Republican members was renewed criticism of Director Cordray's "regulation by enforcement" approach and the Bureau's unaccountability to Congress due to its leadership structure and funding, with several Republican members voicing support for the creation of a bipartisan commission to replace the single Director structure.

As might be expected, Democratic members took aim at the Bureau's proposal to eliminate the ability to repay (ATR) provisions of its payday loan rule, its decision to discontinue MLA compliance examinations, the decline in CFPB enforcement activity, the elimination of the Office of Students and Young Consumers (which was folded into the Office of Financial Education together with the Student Loan Ombudsman), and the transfer of the Office of Fair Lending from the Supervision, Enforcement, and Fair Lending Division to the Director's Office. In response to criticism from Democratic members about the length of time (six months) that the Student Loan Ombudsman position has been vacant, Ms. Kraninger indicated that she has acted as quickly as possible to complete the steps necessary for refilling the position and that the job opening had been posted on March 6, 2019. (Ms. Kraninger was unwilling to agree with Democratic members that there is a student loan "crisis.") She also indicated that a new Assistant Director to head the Office of Servicemembers would be announced shortly.

Ms. Kraninger resisted the suggestion of Democratic lawmakers that the changes made by Mr. Mulvaney to the two offices would make them less effective in carrying out their responsibilities. In fact, she indicated that the Office of Fair Lending has been strengthened by its placement in the Director's Office. She also gave no comfort to Democratic members regarding continued public disclosure of consumer complaint data. (During his tenure as Acting Director, Mr. Mulvaney had signaled that he planned to discontinue the CFPB's policy of publicly disclosing complaint data.)

With regard to the Bureau's proposal to eliminate the ATR requirement from its payday loan rule, Ms. Kraninger repeated several times that the Bureau's focus will be on the sufficiency of the evidence and legal support for the Bureau's determination that it is an unfair or abusive practice to make payday loans without regard to a consumer's ATR and that she had an "open mind" on the issue. In response to comments from Republican members critical of the CFPB's decision not to revisit the payday loan rule's payment provisions, Ms. Kraninger indicated that the Bureau would be responding to a petition it has received seeking changes to the payment provisions. (Presumably she was referring to the rulemaking petition to exempt debit card payments that was referenced in the Bureau's payday loan rule proposal.)

Despite expressions of outrage from Democratic members, Ms. Kraninger held steadfast to her view that the CFPB lacks authority to examine financial institutions for MLA compliance and referred lawmakers to the proposed legislation submitted by the CFPB that would amend the Dodd-Frank Act to expressly provide such authority. She also indicated that the Bureau's primary goal would be prevention of harm through use of the CFPB's rulemaking and supervisory authorities, with enforcement to focus on "bad actors" who have not self-reported or sought to correct their improper conduct.

In response to urging from Republican members for the CFPB to abandon any pending enforcement actions where there is no showing of actual consumer harm, Director Kraninger indicated that she planned to review the factual basis for the pending actions. Ms. Kraninger also promised that the CFPB would engage in a thorough five-year lookback at its mortgage rules, and expressed her willingness to discard any provisions that are not achieving their objectives.

In her written and live testimony, Ms. Kraninger indicated that she would be setting priorities for the Bureau as well as the "tone" for how the Bureau operates and would emphasize stability, transparency, and consistency. Consistent with the Bureau's Fall 2018 rulemaking agenda, Ms. Kraninger indicated that the Bureau was considering possible pre-rulemaking activities regarding the meaning of "abusive" under section 1031 of the Dodd-Frank Act. Although the CFPB's overdraft rulemaking activities were designated "inactive" in its Spring 2018 rulemaking agenda, Ms. Kraninger indicated in response to a question from a Democratic member that the Bureau was continuing to look at overdrafts.

The five members of the panel that followed Director Kraninger gave live testimony that closely tracked their written testimony. The panel members were:

  • Hilary Shelton, Director & Senior Vice President for Advocacy and Policy, National Association for the Advancement of Colored People
  • Linda Jun, Senior Policy Counsel, Americans for Financial Reform
  • Jennifer Davis, Government Relations Deputy Director, National Military Family Association
  • Seth Frotman, Executive Director, Student Borrower Protection Center (Mr. Frotman was formerly the CFPB's Student Loan Ombudsman and has been a vocal critic of the Bureau since his departure.)
  • Scott Weltman, Managing Shareholder, Weltman, Weinberg & Reis Co., L.P.A (Mr. Weltman's law firm defeated a lawsuit filed against it by the CFPB that alleged the law firm's debt collection letters violated the FDCPA and CFPA.)

- Barbara S. Mishkin

FFIEC Adopts Policy Statement Updating the Uniform Report of Examination

The Federal Financial Institutions Examination Council (FFIEC)—the interagency body tasked with setting uniform principles and standards for the examination of financial institutions by federal regulators, including the Consumer Financial Protection Bureau—has adopted a Policy Statement designed to streamline the information presented in examination reports (ROE). While the agencies represented by the FFIEC will make any individual adjustments deemed necessary for their existing ROE guidance, financial institutions should be aware of the new format outlined in the Policy Statement which sets forth minimum expectations for what should be included in all ROEs.

In the Policy Statement, the FFIEC explicitly rescinds and replaces the 1993 Interagency Policy Statement on the Uniform Core Report of Examination. The Policy Statement is the latest in a series of FFIEC announcements related to their Examination Modernization Project which was launched to identify and assess ways to improve the effectiveness, efficiency and quality of examination processes, particularly through the use of technology, and to reduce unnecessary regulatory burden on community financial institutions. The Policy Statement list of minimum expectation for ROEs includes:

  • Identifying information about the institution and agency;
  • A statement on the confidentiality of information;
  • Conclusions presented in the order of importance;
  • A brief narrative on the financial institution’s condition and risk profile, including assigned regulatory component and composite ratings;
  • A discussion of the adequacy of the financial institution’s risk management practices;
  • Prominent notice of any issues of supervisory concern or warranting corrective action; and
  • Signatures of the board of directors acknowledging receipt and review.

As with the recent FFIEC's guidance regarding Home Mortgage Disclosure Act rules (as discussed in our prior blog post), the Policy Statement is an important resource for financial institutions interacting with the FFIEC member agencies.

- Elanor A. Mulhern

FTC and CFPB Reauthorize MOU

The FTC and CFPB have reauthorized their memorandum of understanding. According to the FTC's press release, "the agreement reflects the ongoing coordination between the two agencies under the terms of the Consumer Financial Protection Act, and is designed to coordinate efforts to protect consumers and avoid duplication of federal law enforcement and regulatory efforts."

The first MOU, signed in 2012, had an initial term of three years, and was reauthorized in 2015 for an additional three-year term. Although some definitional and organizational changes were made to the new MOU, it does not appear to have any material substantive differences from the 2015 MOU. However, unlike the prior two MOUs, which each had a three-year term, the new MOU provides that it "will remain in effect unless superseded by the signed, mutual agreement of the agencies."

- Barbara S. Mishkin

Democrats Criticize Director Kraninger at Senate Banking Committee Hearing

Director Kathy Kraninger was sharply criticized by Democrats at the hearing on March 12, 2019, on the Bureau's semi-annual report held by the Senate Banking Committee.

Ms. Kraninger's opening remarks and written testimony repeated nearly verbatim her opening remarks and written testimony to the House Financial Services Committee on March 7, 2019. She indicated once again that the Bureau's primary goal would be prevention of harm, that the Bureau would focus its enforcement activities on "bad actors," and that she would emphasize stability, transparency, and consistency.

Like their Democratic counterparts on the House committee, Democratic members were highly critical of the Bureau's proposal to eliminate the ability to repay (ATR) requirement in its payday loan rule, its decision to discontinue MLA compliance examinations, and the decline in CFPB enforcement activity with regard to fair lending and student loan servicing. Several Democratic members also criticized the Bureau's continued employment of Eric Blankenstein as Policy Associate Director of the Bureau's Office of Supervision, Enforcement, and Fair Lending. Mr. Blankenstein is alleged to have made racially offensive comments in 2016.

As she did during her House appearance, Ms. Kraninger held steadfast to her view that the CFPB lacks clear authority to examine financial institutions for MLA compliance and referred lawmakers to the proposed legislation submitted by the CFPB that would amend the Dodd-Frank Act to expressly provide such authority.

With regard to the Bureau's proposal to eliminate the payday loan rule's ATR requirement, Democratic members called into question the sufficiency of the CFPB's basis for its proposal and highlighted the more than $7 billion in additional revenue that the CFPB has estimated lenders would receive as a result of eliminating the ATR requirement. Despite Ms. Kraninger’s statement that she would approach the rulemaking with an "open mind," Democratic members expressed skepticism as to whether the Bureau would objectively consider the evidentiary record.

In response to a question from Senator Doug Jones regarding the Bureau's use of the disparate impact theory in future fair lending cases, Ms. Kraninger referenced the CFPB's Fall 2018 rulemaking agenda, which indicated in its preamble that the future rulemaking under consideration included the requirements of the Equal Credit Opportunity Act regarding the disparate impact doctrine. Ms. Kraninger declined to express her personal views on the doctrine but indicated that she was involved in internal discussions regarding potential pre-rulemaking activities.

As might be expected, Senator Elizabeth Warren was perhaps Director Kraninger's harshest critic, highlighting the lack of new Bureau fair lending and student lending enforcement actions filed since Director Richard Cordray's departure. Senator Warren concluded her questioning with the comment that if Ms. Kraninger had "any decency," she "would do [her] job or resign."

In addition to the questions asked by Democratic members about topics also covered at the House hearing, Senator Mark Warner asked Ms. Kraninger about the CFPB's "GSE patch" for qualified mortgages. The "patch" is an exemption created by the CFPB's QM rule from its 43 percent debt-to-income ratio cap for mortgages eligible for purchase by Fannie Mae or Freddie Mac. It is a temporary measure that is set to expire in January 2021 or on the day the GSEs exit conservatorship, whichever occurs first. Senator Warner stressed the need for the CFPB to take steps to address the patch to avoid potential adverse consequences to the mortgage market should the patch expire.

Like their Republican counterparts on the House committee, Republican members renewed their criticism of Director Cordray's "regulation by enforcement" approach. They also expressed continuing concern over the Bureau's data collection practices, praised former Acting Director Mulvaney’s creation of an Office of Cost Benefit Analysis, and voiced support for the Bureau's use of such an analysis in carrying out its authorities.

- Barbara S. Mishkin

CFPB Winter 2019 Supervisory Highlights Focuses on Deposits, Mortgage Loan Servicing, and Remittances

The CFPB's Winter 2019 Supervisory Highlights discusses the Bureau's examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances. We discussed the Bureau's auto loan servicing findings in a separate blog post. Here, we focus on the Bureau's additional findings.

Although issued under Director Kraninger's leadership, the Winter 2019 Supervisory Highlights covers examinations generally completed between June and November 2018 when Mick Mulvaney was Acting Director. It represents the CFPB's second Supervisory Highlights covering supervisory activities conducted under Mr. Mulvaney's leadership. Like the Summer 2019 Supervisory Highlights, the Winter 2019 issue contains the following language in its introduction:

It is important to keep in mind that institutions are subject only to the requirements of relevant laws and regulations. The information contained in Supervisory Highlights is disseminated to help institutions and better understand how the Bureau examines institutions for compliance with those requirements. In addition, the legal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations. A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different circumstances.

Also like the Summer 2019 Supervisory Highlights, the new issue's introduction and the Bureau's press release about the report does not include any statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities. (The report does, however, include summaries of the terms of five consent orders entered into by the Bureau, including its settlements with Cash Tyme, a payday retail lender, and Cash Express, a small-dollar lender.)

Key findings include:

Deposits. CFPB examiners found that one or more institutions engaged in deceptive acts or practices by representing that payments made through their online bill-pay service would be debited no sooner than the date selected by the consumer and failing to disclose (or disclose adequately) that the debit might occur earlier than that date when the payee only accepted a paper check. Such paper checks were sent by the institution several days before the consumer's designated payment date, at the institution's discretion, and would be debited from the consumer's account when presented and cashed by the payee. As a result, the debit could have occurred earlier or later than the designated date. In response to the Bureau's findings, the institutions "undertook a revision" of their consumer-facing materials and "undertook a plan to remediate consumers" who were charged an overdraft fee due to a paper check being negotiated before the consumer's designated payment date.

Mortgage Servicing. CFPB examiners found:

  • Servicers engaged in unfair practices by charging late fees greater than those permitted by the mortgage notes. In one example, the FHA mortgage note permitted late fees based on a percentage of the overdue principal and interest only. However, the servicer charged late fees based on a percentage of the full periodic payment of principal, interest, taxes, and insurance. The overcharges were the result of programming errors in the servicing platform and "lapses in service provider oversight." In response to the findings, servicers conducted a review to identify and remediate affected borrowers and changed their policies and procedures "to assist in charging the late fee authorized by the mortgage note."
  • Servicers engaged in deceptive practices by misrepresenting the conditions for the cancellation of private mortgage insurance (PMI). One or more servicers were found to have told borrowers requesting PMI cancellation that such requests were declined because the borrowers has not reached the 80% loan to value requirement for cancellation. While the relevant amortization schedules did not yet reach 80% LTV, the borrowers had in fact reached 80% LTV by making additional principal curtailment payments. Although the borrowers had not satisfied additional conditions necessary for PMI cancellation, the servicers did not identify those conditions as the reasons for denying the borrowers' cancellation requests. In response to the Bureau's findings, the servicers "changed templates, as well as policies and procedures, to ensure that PMI cancellation notices state accurate denial reasons."
  • One or more servicers were found not to have satisfied the Regulation X requirement for a servicer to exercise "reasonable diligence" in obtaining documents and information to complete a loss mitigation application. The servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who had expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation. However, the servicers had not notified the borrowers that their forbearance offers were based on an incomplete application evaluation and did not contact the borrowers, near the end of the forbearance period, to inquire whether they wanted to complete the applications to receive a full loss mitigation evaluation. In response to the Bureau's findings, the servicers "used enhanced processes, such as a centralized queue, to track borrowers receiving short-term forbearance programs and subsequently notify them that additional loss mitigation options may be available and that they could apply for such options over the phone or in writing."
  • In examinations reviewing servicing of Home Equity Conversion Mortgage loans, examiners criticized the notices sent by servicers to successors of deceased borrowers informing them that they could qualify for an extension of time to delay or avoid foreclosure to enable them to purchase or market the property and directing them to return a form indicating their intentions for the property. While the notices listed several documents that might be needed to evaluate whether the successor qualified for an extension, it did not direct them to submit such documents within a certain timeframe to be eligible for an extension. The Bureau found that the servicers had assessed foreclosure fees, and in some instances had foreclosed on properties, where successors had returned the form indicating that they intended to purchase or market the property but had not returned the documents necessary for an evaluation. While examiners did not find this to be a legal violation, they observed that it could pose a risk of a deceptive practice by creating an impression that the statement of intent was all that was needed to delay foreclosure. In response to the Bureau's findings, the servicers "planned to improve communications with successors, including specifying the documents successors needed for an extension and the relevant deadlines."

Remittances. CFPB examiners found that one or more supervised entities violated the remittance rule’s error resolution requirements by failing to refund fees and, as allowed by law, taxes to consumers whose remitted funds were made available to designated recipients later than the date of availability stated in the entity's remittance disclosures and the delay was not due to any of the rule’s excepted events. The CFPB cited the violations, even though the delays at issue were due to a mistake by a non-agent foreign payer institution. The CFPB reminded companies that "neither the relationship between a remittance transfer provider and the institution disbursing the funds to the designated recipient, nor the particular entity that is at fault for the delayed receipt of funds, is relevant to whether the remittance transfer provider must refund fees and taxes to the consumer." In response to the Bureau's findings, the entities are making the mandated refunds.

- Reid F. Herlihy & James Kim

This Week's Podcast: Diversity and Inclusion: An Update for Financial Institutions

In this week’s podcast, we review the four key focus areas of the 2015 diversity and inclusion standards adopted by the Offices of Minority and Women Inclusion at the CFPB and other federal financial regulators, identify issues regulated entities should consider in addressing those areas and deciding whether to conduct D&I self-assessments, and discuss the evolving Congressional and regulatory D&I landscape since 2015, including recent letters sent to regulated entities regarding D&I efforts and self-assessments and D&I benefits for letter recipients to consider.

Presented by - Alan S. Kaplinsky & Dee Spagnuolo

Click here to listen to the podcast.

- Barbara S. Mishkin

Fifth Circuit Hears Oral Argument in All American Check Cashing

On March 12, 2019, the U.S. Court of Appeals for the Fifth Circuit heard oral argument in All American Check Cashing's interlocutory appeal from the district court's ruling upholding the CFPB's constitutionality.

All American Check Cashing and the other appellants sought the interlocutory appeal after the district court denied their motion for judgment on the pleadings in a lawsuit filed by the CFPB that alleges the appellants engaged in abusive, deceptive, and unfair conduct in connection with making certain payday loans, failing to refund overpayments on those loans, and cashing consumers' checks. Citing the U.S. Court of Appeals for the District of Columbia Circuit's en banc PHH decision, the district court rejected the defendants' argument that the CFPB is unconstitutional based on its single-director-removable-only-for-cause structure. It subsequently agreed to certify the constitutionality issue for interlocutory appeal to the U.S Court of Appeal for the Fifth Circuit, which accepted the appeal. (The district court also rejected All American Check Cashing's three other grounds for its motion for judgment on the pleadings: the CFPA violates due process because it fails to give fair notice of the conduct it proscribes; the CFPA violates the non-delegation doctrine because Congress did not clearly delineate the general policy for, or the boundaries of delegated authority to, the CFPB; and the CFPA violates principles of federalism because the CFPB based several of its CFPA claims on alleged violations of state law by All American Check Cashing.)

The Fifth Circuit panel hearing the oral argument consisted of two judges appointed by President Reagan, Judge Jerry Smith and Senior Judge Patrick Higginbotham, and a third judge appointed by President Obama, Judge Stephen Higginson. The panel's questions and comments provided no clear clues as to how individual judges were leaning. Most of the questioning was devoted to exploring each party's arguments as to why U.S. Supreme Court precedent provided support for its position on the CFPB's constitutionality.

In its briefs, the CFPB relied primarily on the argument that because Acting Director Mulvaney was removable at will by the President and ratified the CFPB's decision to bring the lawsuit against the appellants, any constitutional defect that may have existed with the CFPB's initiation of the lawsuit was cured. While it also argued that the CFPB's structure is constitutional under existing Supreme Court precedent, the CFPB did so as a fallback argument.

In the oral argument, however, the CFPB's counsel made the constitutionality of the CFPB's structure his principal argument, using the ratification argument only for purposes of arguing why All American Check Cashing would not be entitled to judgment on the pleadings in the CFPB's lawsuit if the panel were to conclude that the CFPB's structure is unconstitutional and strike the for-cause removal provision. The CFPB's counsel argued that Acting Director Mulvaney's ratification would satisfy All American Check Cashing's right to have the complaint filed by a CFPB Director removable at will, and that by Director Kraninger also becoming removable at will, the company's right for the lawsuit to be prosecuted by a Director removable at will would be satisfied.

To the extent the panel members provided any clues as to how they might rule, their questions and comments suggested significant concern about the potential far-reaching consequences of a ruling striking all of Title X of the CFPA (as sought by All American Check Cashing) rather than one striking only the for-cause removal provision.

At the end of January, an en banc Fifth Circuit heard oral argument in the rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight. It determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director "for cause" but "leave intact the remainder of HERA and the FHFA's past actions."

Petitions for rehearing en banc were filed by both the plaintiffs and the FHFA. The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs. Their petition for rehearing en banc sought reconsideration of the panel's rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA's unconstitutional structure did not impact the agreement's validity.

The FHFA's petition for rehearing en banc sought reconsideration of the Fifth Circuit's ruling that the FHFA's structure is unconstitutional. In addition to arguing that the panel's constitutionality ruling conflicts with Supreme Court precedent and the D.C. Circuit's en banc PHH decision, the FHFA argued that the plaintiffs do not have Article III standing to bring a separation of powers challenge.

In the All American Check Cashing oral argument, both parties were asked whether the panel should hold its decision until the en banc court issues its decision in Collins v. Mnuchin, with one judge observing that the en banc court could "overrule" their decision in All American Check Cashing. All American Check Cashing's counsel urged the panel not to hold its decision because the en banc court might not reach the constitutionality issue. The CFPB's counsel however indicated that it may be appropriate for the panel to wait to issue its decision if panel members knew that the en banc court will reach the constitutionality issue.

A recording of the oral argument is available here.

Two other cases involving a challenge to the CFPB’s constitutionality are currently pending in the circuit courts. In RD Legal Funding, which is pending in the U.S. Court of Appeals for the Second Circuit, the CFPB and New York Attorney General filed their opening briefs at the end of last week. In Seila Law, which is pending in the U.S. Court of Appeals of the Ninth Circuit, oral argument was held on January 9, 2019.

- Alan S. Kaplinsky

Did You Know?

North Dakota Modifies Surety Bond Requirements

North Dakota has modified the surety bond requirements under the Money Brokers Act. Presently, the law requires a surety bond in an amount not less than $25,000. N.D. Cent. Code Section 13-04.1-04.01(1). Effective August 1, 2019, the new minimum amount of the bond will be $50,000.

Nebraska Amends Licensing and Record Retention Requirements

Nebraska has amended its licensing requirements under the Residential Mortgage Licensing Act effective September 7, 2019. They include:

  • Requiring a criminal background investigation via the NMLS for any principal officer, partner, member or sole proprietor , and any individual acting in the capacity of the manager of an office location in connection with a mortgage banker's license application;
  • Temporary authority provisions effective November 24, 2019, for registered mortgage loan originators and licensed mortgage loan originators licensed in another state employed by a mortgage banker licensed in Nebraska; and
  • Limiting an inactive mortgage loan originator license to one renewal while in inactive status unless certain conditions are met;

In addition, the legislation extends record retention requirements for mortgage bankers from three years after the date the residential mortgage loan is funded or the loan application is denied or withdrawn to five years after the after the date the residential mortgage loan is funded or the loan application is denied or withdrawn.

- Stacey L. Valerio

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