Mortgage Banking Update - October 3, 2019
In this issue:
- Inside the Beltway – Will Impeachment Trump Housing Finance Reform?
- CFPB Addresses RESPA Issue in Its First No-Action Letter Under the Revised Final Policy
- This Week’s Podcast: Implementing the CFPB’s Proposed Debt Collection Rule: Operational and Legal Issues
- New Plot Twist: CFPB Agrees Its Structure is Unconstitutional; Ballard Spahr to Hold Oct. 22 Webinar
- CFPB Issues HMDA Guides
- Congress Votes to Extend National Flood Insurance Program
- Federal Banking Agencies Increase Transaction Value Appraisal Exemption
- CFPB Summer 2019 Supervisory Highlights Looks at GAP Products, Credit Card Practices, Debt Collection, Furnishing Information to Consumer Reporting Agencies, Reverse Mortgages
- Did You Know?
- Looking Ahead
We continue to gauge the potential for Congress to act on the administration’s housing finance plan and/or pass their own before adjourning for the year. When Congress returned from August recess, members faced an ambitious agenda, including wrapping up the fiscal year 2020 appropriation bills. On September 19, the House of Representatives passed a continuing resolution (CR) that would fund the government through November 21. The Senate passed the CR on September 26, and President Trump signed it into law the next day. While this bought Congress some time to act on non-budgetary items, the remaining limited number of legislative days and the policy differences between the Senate and the House made it highly unlikely at the time that legislation would move in this session of Congress.
Speaker Pelosi’s announcement last week that the House will proceed with a formal impeachment inquiry into President Trump’s involvement with Ukraine and potential interference in the 2020 election is likely the last nail in the GSE (government-sponsored entity) coffin for the remainder of this year. Six different House committees have been selected to participate in the inquiry, including the House Financial Services Committee, chaired by Maxine Waters, who has voiced support for impeaching President Trump since the beginning of his presidency. She has yet to publicly announce a Committee hearing on housing reform, and Congress has adjourned for the next two weeks. So the earliest Committee activity would be the end of October or early November. However, the impeachment inquiry will consume a good amount of the Committee’s attention for the foreseeable future, and it will take an already highly partisan House atmosphere to almost unprecedented levels. This would appear to doom GSE reform prospects for 2019. The Speaker has indicated she hopes to conclude impeachment proceedings by year-end. Depending on the outcome, this could open the door for congressional consideration of some policy initiatives, including GSE reform, early next year.
In the meantime, the administration is moving ahead with its housing finance reform plan. On September 30, 2019, the administration announced that the U.S. Treasury Department and the Federal Housing Finance Agency reached an agreement to modify the Preferred Stock Purchase Agreements allowing Fannie Mae and Freddie Mac to retain $25 billion and $20 billion in capital reserves, respectively. The administration’s reform plan includes other options that will increase the GSEs’ capital reserves, so we can expect additional activity on what is an important step for the GSEs to exit conservatorship.
As we wait for Congress to return to Washington later in October, we will be closely monitoring developments that signal any change in the prospects for reforming the housing finance system this year. We will also track and report on additional administrative changes that do not require congressional action.
In its first No-Action Letter under the new revised policy, the CFPB addresses a long-standing issue under the Real Estate Settlement Procedures Act regarding certain payment arrangements between mortgage lenders and housing counseling agencies. We previously reported on the CFPB issuing its final No-Action Letter policy and other innovation policies. (The CFPB issued just one No-Action Letter under its policy prior to its revision.)
RESPA section 8 prohibits the giving or receiving of anything of value pursuant to any agreement or understanding that business incident to or a part of a real estate settlement service shall be referred to any person. An exemption from the prohibition permits the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.
The U.S. Department of Housing and Urban Development (HUD) has a Housing Counseling Program (Program) that it administers pursuant to its authority to work with public or private organizations to provide information, advice, and technical assistance, including counseling and advice to tenants and homeowners with respect to property maintenance, financial management, and such other matters as may be appropriate to assist them in improving their housing conditions and in meeting the responsibilities of tenancy or homeownership. Housing counseling agencies can apply for approval to participate in the Program and must meet the Program requirements set forth in HUD regulations and other HUD materials. The Program requirements include consumer protections. Additionally, under the requirements, if a counseling agency enters into a Housing Counseling Funding Agreement pursuant to which a lender will provide funding for counseling services, the terms of the agreement must be set forth in a Memorandum of Understanding (MOU) between the parties. HUD regulations permit lenders to pay agencies for counseling services through a lump sum or on a case-by-case basis, provided the level of payment does not exceed a level that is commensurate with the services provided and is reasonable and customary for the area. Any payment arrangement between the lender and agency must be disclosed to the agency’s client (i.e., the consumer).
In its application for a No-Action Letter on behalf of more than 1,600 counseling agencies participating in the Program, HUD notes that both lenders and counseling agencies perceive that entering into a Housing Counseling Funding Agreement presents a compliance risk under RESPA. This results in lenders being reluctant to enter into the agreements, and agencies must seek alternative sources of funding to provide counseling. HUD explains that the PHH Corp. v. CFPB decision created uncertainty regarding the interaction of the RESPA referral fee prohibition and the exemption permitting compensation for goods, facilities, or services that are provided. The particular issue identified by HUD is whether a mortgage lender may condition its payment to a housing counseling agency on the consumer making contact with the lender or closing a loan with the lender.
HUD provides this interesting background on efforts of stakeholders to obtain guidance from the CFPB:
“HUD understands that while the PHH case was on appeal to the full D.C. Circuit, the Bureau in early 2017 gave informal, oral guidance to a group of interested outside stakeholders (i.e., housing counseling intermediaries, mortgage lenders, and their outside counsel) on how RESPA section 8 applied to Housing Counseling Funding Agreements. HUD received feedback that the stakeholders did not believe the guidance alleviated the regulatory uncertainty because it did not directly address the key interpretive issues regarding application of RESPA section 8(c)(2), which the Bureau said it could not address while the PHH case was pending.”
HUD sought more definitive guidance from the CFPB by requesting a No-Action Letter. The CFPB No-Action Letter defines “Recipients” of the letter as housing counseling agencies that participate in the Program to the extent they are in compliance with all the Program requirements. The No-Action Letter provides that unless or until terminated by the CFPB as described in the letter:
“[T]he Bureau will not make supervisory findings or bring a supervisory or enforcement action against any Recipient under”
(a) its authority to prevent unfair, deceptive, or abusive acts or practices, or
(b) section 8 of the Real Estate Settlement Procedures Act (RESPA) and section 1024.14 of Regulation X.
“for including and adhering to a provision in the MOU between the Recipient and the mortgage lender reflecting the terms of the Housing Counseling Funding Agreement that conditions the lender’s payment for housing counseling services on the consumer making contact or closing a loan with the mortgage lender even if that provision or the parties’ adherence thereto could be construed as a referral (as such term is used in RESPA section 8(a) and defined in Regulation X § 1024.14(f)); provided that, the level of payment for the housing counseling services does not exceed a level that is commensurate with the services provided, and is reasonable and customary for the area.” (Footnotes omitted.)
The No-Action Letter identifies only Recipients as parties that may reasonably rely on the CFPB commitment in the letter. Thus, lenders are not included among the parties who may so rely. However, the CFPB provides a No-Action Letter template that may be used by lenders to seek a No-Action Letter. Among the certifications that a lender would have to make in applying for a No-Action Letter is that the client of the housing counseling agency could choose between comparable products of at least three different lenders.
In this podcast, we team with Bridgeforce, a leading financial services consultancy, to discuss how companies can prepare their operations should the CFPB’s proposed debt collection rule become final. We look at the operational approaches available to companies in implementing the rule and legal considerations raised by each, the need for an assessment of assets before selecting an approach and the role of legal advice, and the role of future planning.
Click here to listen to the podcast.
The long-running saga that is the litigation over whether the CFPB’s single-director-removable-only-for-cause structure is constitutional took a new twist on Tuesday with the CFPB’s announcement that it has determined that its structure is unconstitutional.
On October 22, 2019, from 12 to 1 p.m. (ET), Ballard Spahr will hold a webinar, “The CFPB’s Constitutionality Goes to the Supreme Court: What It Means.” Click here to register.
The announcement was made in identical letters sent by Director Kraninger to House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell. In the letters, Director Kraninger advised the lawmakers that in response to Seila Law’s petition for a writ of certiorari seeking U.S. Supreme Court review of the Ninth Circuit’s ruling that the CFPB’s structure is constitutional, the DOJ, on the Bureau’s behalf, has taken the position that the Bureau’s structure violates the U.S. Constitution’s separation of powers.
In its response, the DOJ urges the Supreme Court to grant the petition and resolve the constitutional issue by finding that existing Supreme Court precedent does not require the Court to uphold the Bureau’s constitutionality because the Dodd-Frank removal provision is distinguishable from those previously upheld by the Court. The DOJ argues (and Director Kraninger agrees in her letters) that the appropriate remedy is to sever the for-cause removal provision. The DOJ suggests that because the CFPB now agrees that its structure is unconstitutional, the Supreme Court may “wish to consider appointing an amicus curiae to defend the judgment of the [Ninth Circuit]” if it grants review. The briefs on Seila Law’s petition have been distributed for the Supreme Court’s October 11 conference.
While the constitutionality issue has loomed over the Bureau nearly since it opened its doors for business, it has now descended upon the Bureau as a very dark cloud. Although Director Kraninger suggests in her letters to Ms. Pelosi and Mr. McConnell that it will be business as usual at the Bureau and states that she will continue “to defend the Bureau’s actions,” she also indicates that she has “directed the Bureau’s attorneys to refrain from defending the for-cause removal provision in the lower courts.” At a minimum, her instructions are likely to cause the courts hearing pending cases (which are listed in Director Kraninger’s letters) to stay those cases until the Supreme Court rules on Seila Law’s petition for review and, if granted, its appeal. But even more significantly, her instructions could effectively bring the CFPB’s enforcement activities to a halt. Companies that are recipients of CFPB CIDs or PARR letters or otherwise targeted by the CFPB in new or threatened enforcement actions can be expected to raise the constitutionality issue to challenge the CFPB’s actions, and Director Kraninger’s instructions create uncertainty as to what position CFPB attorneys will take when faced with such challenges.
The CFPB’s change in position is also likely to result in stays from the Fifth and Second Circuits in, respectively, All American Check Cashing and RD Legal. The CFPB has filed letters with the Fifth and Second Circuits indicating that it now agrees with the defendants in both cases that the Bureau’s structure is unconstitutional but does not agree that the entire CFPA should be struck down. Instead, the CFPB believes severance of the for-cause removal provision is the appropriate remedy.
The Fifth Circuit heard oral argument in March 2019 and last month directed the parties to file letter briefs regarding what action the Fifth Circuit panel should take in light of the en banc Fifth Circuit’s decision in Collins v. Mnuchin. Briefing has been completed in RD Legal, and the Second Circuit has scheduled oral argument for November 21, 2019.
The CFPB recently issued the 2020 Filing Instructions Guide for Home Mortgage Disclosure Act (HMDA) data. The Guide applies to HMDA data collected in calendar year 2020 that must be reported to the government in 2021.
The CFPB also issued for the first time a Supplemental Guide for Quarterly Filers. As the title suggests, the Supplemental Guide provides guidance for those HMDA reporting institutions that are required to file HMDA data quarterly. The quarterly data filing requirement begins in 2020 and applies to HMDA reporting institutions that reported a combined total of at least 60,000 applications and covered loans, excluding purchased covered loans, for the preceding calendar year. In addition to the standard annual filing, these reporting institutions will need to file HMDA data for the first three quarters of a calendar year.
The U.S. Senate recently voted to approve legislation previously passed by the U.S. House of Representatives to extend the National Flood Insurance Program (NFIP) until November 21, 2019. The NFIP was scheduled to expire on September 30, 2019, without an extension. The extension is included in a stopgap spending bill, and according to press reports President Trump is expected to sign the bill into law.
As we previously reported, last November the FDIC, Federal Reserve Board, and Comptroller of the Currency (the federal banking agencies) proposed a rule to implement a rural residential property appraisal exemption under the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Growth Act) and also increase the appraisal exemption based on transaction value from $250,000 to $400,000. The federal banking agencies recently released a final rule to adopt the exemptions.
The exemptions relate to the requirement under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) for appraisals in connection with federal related transactions, which basically are real estate-related financial transactions for which the federal regulator of a financial institution requires the services of an appraiser.
The exemption based on a transaction value of $400,000 or less is available for residential real estate transactions, which is defined as a real estate-related financial transaction that is secured by a single 1-to-4 family residential property. The $250,000 appraisal threshold was set in 1994. As required by FIRREA to increase the threshold to $400,000, the federal banking agencies (1) determined that increasing the appraisal threshold for residential real estate will not threaten the safety and soundness of financial institutions, and (2) received concurrence from the CFPB that such threshold level provides reasonable protection for consumers who purchase 1-to-4 unit single-family residences. A copy of the concurrence letter from the CFPB was released along with the final rule.
The federal banking agencies implemented the rural residential property appraisal exemption by simply referencing the statutory exemption added to FIRREA by the Growth Act. A property qualifies for the statutory exemption if the following conditions are satisfied: The property is located in a rural area; the transaction value is less than $400,000; the institution retains the loan in portfolio, subject to exceptions, and; not later than three days after the Closing Disclosure is given to the consumer, the mortgage originator or its agent has contacted not fewer than three state-licensed or state-certified appraisers, as applicable, and documented that no such appraiser, as applicable, was available within five business days beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator or its agent. Note that the increase of the appraisal transaction value exemption for residential transactions to $400,000 significantly reduces the practical effect of the rural residential property exemption.
Although under both the transaction value and rural residential property exemptions an appraisal will not be required, an institution still will need to obtain an appropriate evaluation of the real property collateral that is consistent with safe and sound banking practices.
The final rule also implements a requirement under the Dodd-Frank Act that appraisals are subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP).
The final rule will be effective the day after publication in the Federal Register, except for the evaluation requirement for transactions exempted by the rural residential property exemption and the requirement to subject appraisals to appropriate review for compliance with USPAP. These requirements are effective January 1, 2020.
The CFPB has released the Summer 2019 edition of its Supervisory Highlights. The report discusses the Bureau’s examination findings in the areas of automobile loan originations, credit card account management, debt collection, furnishing, and mortgage originations.
Key findings include the following:
Auto loan originations. Auto lenders were found to have engaged in an abusive practice by selling GAP insurance to consumers whose low loan-to-value ratios meant they would not benefit from the product. The remedial and corrective action taken by the lenders in response to these findings included reimbursing consumers for the cost of the product and establishing an LTV minimum for GAP product sales.
Credit card account management. CFPB examiners found:
- Entities violated the Regulation Z requirement for card issuers to clearly and conspicuously make certain disclosures in advertisements if they contain certain triggering terms. The entities used hyperlinks in online advertisements that were not labeled in a way that referred to the triggered disclosures. Consumers would have to click on the hyperlink and then navigate through an online application before reaching the triggered disclosures or click on multiple hyperlinks with the triggered disclosures appearing only after completing an application.
- Entities violated the Regulation Z prohibition on offsetting credit card debts with funds the consumer has on deposit with the issuer by not satisfying the requirements for obtaining a consensual security interest in such funds. Those requirements include the consumer’s awareness that granting a security interest is a condition for the card (or more favorable terms) and the consumer’s specific intent to grant a security interest in the deposit account. Issuers were found to have offset funds on deposit without sufficient indication of the consumer’s awareness and intent to grant a security interest by enforcing a security interest where the consumer had not signed an authorization form or the form could not be located.
- Entities engaged in deceptive acts or practices in violation of the CFPA by sending collection letters that suggested they could repossess consumers’ automobiles or foreclose on their homes when the issuers did not repossess any vehicles or foreclose on any mortgages in connection with delinquent card accounts and it was against the issuers’ policies to do so.
- Entities engaged in deceptive acts or practices in violation of the CFPA by orally representing to consumers that secured credit cards would automatically be upgraded to unsecured cards on a specific timeframe if the card accounts were maintained in good standing or that secured cards subject to an annual fee would be periodically reviewed for upgrade. The issuers in fact did not upgrade secured accounts on a preset timeframe, and upgrades were conditioned on additional factors. Plus, accounts subject to an annual fee were not reviewed for a year or more without additional disclosures or modification of marketing materials.
Debt collection. One or more debt collectors were found to have violated the FDCPA prohibition on falsely representing the character, amount, or legal status of a debt by claiming and collecting interest not authorized by the underlying contracts.
Furnishing. CFPB examiners found:
- One or more furnishers violated the FCRA requirement for completing an investigation of dispute after receiving notice from a consumer reporting agency by failing to complete investigations within the required time frame.
- One or more furnishers violated the FCRA requirement to promptly notify a CRA and provide corrected or additional information if the furnisher determines previously furnished information is not complete or accurate by failing to promptly send corrections or updates to all applicable CRAs after making such as determination.
- One or more furnishers violated the FCRA prohibition on furnishing information to a CRA without notice that such information is disputed by continuing to furnish information about deposit accounts for several months after receiving consumer disputes without notifying the applicable nationwide specialty CRA that the furnished information was disputed.
- One or more furnishers violated the Regulation V requirement to establish and implement reasonable written policies and procedures regarding the accuracy of information furnished to CRAs by failing to implement such policies and procedures for deposit account information furnished to a nationwide specialty CRA that were not appropriate to the nature, size, complexity, and scope of the furnishing activities. For example, existing policies did not address compliance with FCRA dispute requirements and there were no policies and procedures for training, monitoring, or conducting internal audits of business units’ responsibilities to forward disputes of disputed information, or to conduct investigations of consumer disputes alleging account abuse caused by fraud. One or more furnishers also violated the Regulation V requirement to consider and incorporate, as appropriate, the guidelines in Appendix E of Regulation V.
Mortgage originations. CFPB examiners found one or more creditors violated Regulation Z by:
- Disclosing inaccurate APRs on closed-end reverse mortgages by using a unit-period of one month instead of one year to calculate the APR.
- Disclosing inaccurate APRs on closed-end reverse mortgages with a life expectancy set-aside by using a unit-period of one month instead of six months to calculate the APR.
- Disclosing improperly calculated total annual loan costs by not using a one-year unit-period for closed-end and open-end reverse mortgages with a line of credit.
CFPB Publishes FAQs on Temporary Authority
The CFPB recently published SAFE Act FAQs addressing temporary authority.
The CFPB identifies the following categories of loan originators under the SAFE Act, as amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), effective November 24, 2019.
- Registered Loan Originators;
- State-Licensed Loan Originators; and
- Loan Originators with Temporary Authority, which the CFPB describes below:
“As of November 24, 2019, certain loan originators have temporary authority to act as a loan originator in a state for a limited period of time while applying for a state loan originator license in that state. Not all loan originators are eligible for temporary authority. Temporary authority applies to loan originators who were previously registered or state-licensed for a certain period of time before applying for a new state license. Additionally, loan originators are eligible for temporary authority only if they have applied for a license in the new state, are employed by a state-licensed mortgage company in the new state, and satisfy certain criminal and adverse professional history requirements described in the SAFE Act. More information about these requirements can be found in the SAFE Act, 12 USC § 5117.”
The FAQs also address where loan originators can exercise temporary authority:
“Beginning on November 24, 2019, a loan originator that satisfies the Loan Originator with Temporary Authority eligibility criteria may act as a loan originator in a state where the loan originator has submitted an application for a state loan originator license, regardless of whether the state has amended its SAFE Act implementing law to reflect the EGRRCPA amendments.”
The FAQs provide that state transitional licensing is not impacted by the EGRRCPA. Per the FAQs: “The EGRRCPA amendments to the SAFE Act will not affect the permissibility of transitional licensing under the SAFE Act and Regulation H, which was addressed in the Bureau’s Bulletin 2012-05. The EGRRCPA amendments do not impact the ability of a state to consider or rely on a prior state’s findings when considering a State-Licensed Loan Originator’s license application, as discussed in the Bureau’s 2012 bulletin. The EGRRCPA amendments establish temporary authority, which provides a way for eligible loan originators who have applied for a new state loan originator license to act as a loan originator in the application state while the state considers the application.”
MBA’s Accounting & Financial Management Conference
San Diego, CA | November 19-21, 2019
Speaker: Richard J. Andreano, Jr.
Copyright © 2019 by Ballard Spahr LLP.
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.