Mortgage Banking Update - December 19, 2019
In this issue:
- SCOTUS Sets March 3 Oral Argument in Seila Law
- Seila Law and CFPB File Briefs in U.S. Supreme Court
- SCOTUS Denies Certiorari Petition Filed by All American Check Cashing
- This Week’s Podcast: HUD’s Proposed Changes to Its Fair Housing Act Disparate Impact Rule
- SCOTUS Rules Discovery Rule Does Not Apply to FDCPA Claims
- CFPB Issues Special Edition of Supervisory Highlights Focused on Consumer Reporting
- Federal Banking Agencies and CFPB Issue Interagency Statement on Use of Alternative Data in Credit Underwriting
- CFPB Proposes Amendments to Remittance Rule
- Not in Time for Christmas: Former Director Cordray Authors Book on CFPB
- Google Updates Financial Products and Services Policy to Restrict Advertising of Debt Relief Services
- CFPB Ombudsman’s Office Releases Its Eighth Annual Report
- Did You Know?
The U.S. Supreme Court has scheduled oral argument in Seila Law on March 3, 2020.
The question presented in Seila Law’s petition is whether the CFPB’s single-director-removable-only-for-cause structure violates the separation of powers in the U.S. Constitution. In its Order granting Seila Law’s certiorari petition, the Supreme Court directed the parties to also brief and argue the question whether the Dodd-Frank Act’s for-cause removal provision can be severed from the Act if the Bureau’s structure is found to be unconstitutional.
Seila Law’s brief on the merits and the CFPB’s brief on the merits had to be filed by December 9, 2019. Paul D. Clement, who was appointed amicus curiae by the Supreme Court to defend the Ninth Circuit’s judgment, must file his brief on the merits by January 15, 2020. Court rules allow 30 days for the filing of reply briefs.
Other amicus curiae briefs, on both or either question before the court, must be filed within seven days after the party supported files its merits brief.
A decision from the Supreme Court is expected by the end of its term in June 2020.
Seila Law and the CFPB filed their briefs in the U.S. Supreme Court. Both briefs address the question presented in Seila Law’s certiorari petition, which is whether the CFPB’s single-director-removable-only-for-cause structure violates the separation of powers in the U.S Constitution. They both also address the second question that the Court asked the parties to brief in its order granting Seila Law’s petition, which is whether, if the CFPB is found to be unconstitutional, the Dodd-Frank Act’s for-cause removal provision can be severed from the remainder of the Act. While Seila Law and the CFPB respond similarly to the first question, their responses to the second question are very different.
With regard to the CFPB’s constitutionality, Seila Law and the CFPB both argue that the CFPB’s structure violates the separation of powers because it impermissibly restricts the President’s exercise of his executive authority. In its decision upholding the CFPB’s constitutionality, the Ninth Circuit relied substantially on the Supreme Court’s 1935 decision in Humphrey’s Executor v. United States. In that decision, the Court ruled that a for-cause removal restriction on FTC commissioners did not violate separation of powers. Both Seila Law and the CFPB argue that for various reasons, including that it dealt with a “non-partisan” multi-member commission, Humphrey’s Executor has no application to the CFPB’s single-director structure. Alternatively, they both argue that if the Supreme Court nevertheless determines that Humphrey’s Executor is controlling, the Court should overrule it.
With regard to whether severance is the appropriate remedy should the Court find the CFPB’s structure to be unconstitutional, Seila Law and the CFPB take opposite positions, with Seila Law arguing that the for-cause removal provision is not severable and the CFPB arguing that severance would be the appropriate remedy. As an initial matter, Seila Law argues that, even if the Supreme Court determines that the CFPB’s structure is unconstitutional, it does not need to reach the severance question. According to Seila Law, the Court can give it complete relief simply by holding that the CID issued to Seila Law is invalid and it is questionable whether the Court even has Article III power “to take an eraser to statutory provisions when doing so will have no bearing on the judgment in the pending case.”
Seila Law also asserts that “there is a particularly good reason” for the Court not to address severability, namely that Congress would have structured the CFPB as a multi-member commission rather than as an agency headed by a single director removable by the President at will. It asserts that if it reaches the question of severability, the Court will be left with an “unpalatable choice” between “mak[ing] the Director of the CFPB removable at will” and “eliminat[ing] the CFPB altogether.” Seila Law argues that if the Court were to “simply hold that the CFPB’s structure violates the separation of powers and enter judgment for the petitioner,” the CFPB “will be on notice of its unconstitutionality—just as it has been since the Director acknowledged its constitutional defect several months ago.” And “more importantly, Congress will be on notice that it should amend the Dodd-Frank Act to remedy that defect—and that it, not this Court, should make that quintessentially legislative decision in the first instance.”
Finally, Seila Law argues that the for-cause removal provision is not severable and the appropriate remedy “under a severability analysis is to invalidate the entirety of Title X of the Dodd-Frank Act.” Once again, Seila Law asserts that making the CFPB’s Director removable at will would “create an agency that the Congress that enacted the Dodd-Frank Act would surely not have wanted.” It also argues that although the Dodd-Frank Act has a general severability clause, “the clause does not reflect a congressional judgment that every single provision within each title is severable from the title in which it resides.” As evidence of that, Seila Law asserts that “when Congress wanted specific provisions within a title of the Dodd-Frank Act to be severable, it included an additional severability clause within that title. Congress conspicuously did not do so in Title X.” (emphasis provided, citations omitted) It argues that a holding that the removal provision cannot be severed would restore the status quo before the Dodd-Frank Act was enacted “pending, of course, any action by Congress in response to the Court’s decision.” According to Seila Law, “it would not eliminate federal consumer-financial protection; instead, it would return authority under the eighteen preexisting federal consumer-protection laws to other agencies … to administer and enforce those laws.”
In contrast, the CFPB argues that the appropriate remedy for the CFPB’s unconstitutionality is for the Supreme Court to sever the for-cause removal provision from the Dodd-Frank Act. Pointing to the Dodd-Frank Act’s general severability clause, the CFPB asserts “there is no basis to conclude that Congress would have preferred to have no Bureau at all rather than a Bureau headed by a Director who would be removable like almost all other single-headed agencies.” The CFPB does not argue, however, that the CID issued to Seila Law remains valid despite the Bureau’s unconstitutionality nor does it reference the argument that it has previously made that former Acting Director Mulvaney’s ratification of its petition to enforce the CID cured any constitutional defect. Rather, it only asks the Court to vacate the Ninth Circuit’s judgment and remand the case to the Ninth Circuit for further proceedings.
The U.S. Supreme Court has denied the Petition for a Writ of Certiorari Before Judgment filed by All American Check Cashing.
In its petition, All American sought to have the Supreme Court hear its interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality rather than wait for a ruling on its appeal from the Fifth Circuit. Having filed its petition before the Supreme Court granted Seila Law’s certiorari petition, All American argued that its case was a better vehicle than Seila Law for deciding the constitutionality question but that, at a minimum, its case should be heard as a companion case to Seila Law.
All American’s primary argument for why its case would be a better vehicle was that, unlike Seila Law, its case “squarely present[ed]” the question of whether, even if the agency’s structure is unconstitutional, former Acting Director Mulvaney’s ratification of the CFPB’s challenged action cured any constitutional defect. Although the CFPB made the ratification argument in Seila Law, it was not addressed by either the district court or the Ninth Circuit (which both held that the CFPB’s structure is constitutional).
We are not surprised that the Supreme Court denied All American’s petition. It is likely the Supreme Court concluded that its resolution of the remedy question in Seila Law would be sufficient at this time and that it would have another opportunity to address any additional issues raised in All American after the Fifth Circuit renders its decision.
The question presented in Seila Law’s certiorari petition is whether the CFPB’s single-director-removable-only-for-cause structure violates the separation of powers in the U.S. Constitution. In its Order granting Seila Law’s petition, the Supreme Court directed the parties to also brief and argue the question whether the Dodd-Frank Act’s for-cause removal provision can be severed from the Act if the Bureau’s structure is found to be unconstitutional. If the Supreme Court reverses the Ninth Circuit on the CFPB’s constitutionality but rules that the for-cause removal provision can be severed, it is unclear whether the Supreme Court will address the effect of severance on prior CFPB actions. The Supreme Court will hold oral argument in Seila Law on March 3, 2020, and a decision is expected to be issued by the end of the Court’s term in June 2020.
In the meanwhile, it seems unlikely that the Fifth Circuit will issue a decision in All American Check Cashing before the Supreme Court issues its decision in Seila Law. Two other circuit court cases involving a challenge to the CFPB’s constitutionality have been put on hold pending the outcome in Seila Law. In CFPB v. CashCall, CashCall appealed to the Ninth Circuit from the district court’s decision ordering CashCall to pay a $10 million statutory fine based on its finding that it was the “true lender” of loans issued to borrowers in 16 states. CashCall’s grounds for appeal include the district court’s rejection of its constitutional challenge to the CFPB. The Ninth Circuit has issued an order withdrawing submission of the appeal and staying all further proceedings until the Supreme Court’s decision in Seila Law. In CFPB and People of the State of New York v. RD Legal, the CFPB and NYAG appealed to the Second Circuit from the district court’s decision holding the CFPB’s structure is unconstitutional and striking all of Title 10 of Dodd-Frank. The Second Circuit has adjourned oral argument until after Supreme Court issues a decision in Seila Law.
Our podcast looks at the proposed changes to HUD’s rule for establishing liability under the FHA for discriminatory practices based on disparate impact even without discriminatory intent. We discuss the proposal’s history, five-part burden-shifting framework, available defenses (looking closely at those for models used to assess credit risk), and HUD’s likely next steps.
Click here to listen to the podcast.
In an 8-1 decision, the U.S. Supreme Court has ruled in Rotkiske v. Klemm that the FDCPA’s one-year statute of limitations (SOL) runs from the date of the alleged violation and not from a consumer’s discovery of the violation. The decision resolves a circuit split, with the Third Circuit having taken the position adopted by the Supreme Court and the Fourth and Ninth Circuits having ruled that the discovery rule applies to the FDCPA’s one-year SOL.
The FDCPA provides that “[a]n action to enforce any liability created by this subchapter may be brought in any appropriate United States District Court … within one year from the date on which the violation occurs.” In Rotkiske, the plaintiff alleged that the defendant violated the FDCPA by obtaining a default judgment against him based on service of a complaint at an address the defendant knew or should have known was incorrect (a practice sometimes referred to as “sewer service”).
In rejecting the plaintiff’s position that the FDCPA’s SOL includes a discovery rule, the Supreme Court relied on the plain meaning of the FDCPA’s language, stating that the “dictionary definitions [of the word “occur”] confirm what is clear from the face of §1692k(d)’s text: The FDCPA limitations period begins to run on the date the alleged FDCPA violation actually happened.” Calling the “expansive approach” to the discovery rule sought by the plaintiff “a ‘bad wine of recent vintage,’” the Court stated that “a textual judicial supplementation is particularly inappropriate when, as here, Congress has shown that it knows how to adopt the omitted language or provision.” The Court cited to statutes in which Congress has expressly included language that starts the running of an SOL upon the discovery of a violation.
While the Supreme Court’s decision does provide a measure of consistency and will help to constrict the time for plaintiffs’ attorneys to bring FDCPA claims, it leaves the door open for plaintiffs’ attorneys to circumvent the one-year SOL by framing their claims as fraud-based. The Supreme Court stated that the plaintiff could not rely on the equitable doctrine of a “fraud-specific discovery rule” because the plaintiff had failed to preserve the issue in the Third Circuit and did not raise the issue in his petition for certiorari. Accordingly, the Court indicated that “we do not decide whether the text of 15 U.S.C. §1692k(d) permits the application of equitable doctrines or whether the claim raised in this case falls within the scope of the doctrine applied in [cases that have delayed the running of an SOL in fraud actions].”
Moreover, Justice Ginsburg’s dissenting opinion could set the battle lines for future litigation over the application of a fraud-based discovery rule to FDCPA claims. In her opinion, Justice Ginsburg noted that the DOJ (which filed an amicus brief in support of the defendant) argued that a fraud-based discovery rule “applies only when the fraudulent conduct is itself the basis for the plaintiff’s claim for relief.” The DOJ asserted that the plaintiff’s complaint did not raise such a claim because his FDCPA claim was based on the assertion that the defendant’s debt collection suit was time barred.
Justice Ginsburg rejected the DOJ’s view of the fraud-based discovery rule, stating that she would hold “that the rule governs if either the conduct giving rise to the claim is fraudulent, or if fraud infects the manner in which the claim is presented.” In her view, the plaintiff had not failed to preserve a fraud-based discovery rule argument. She concluded that, if proved, the plaintiff’s allegation that that the defendant “employed fraudulent service to obtain and conceal the default judgment that precipitated Rotkiske’s FDCPA claim…should suffice, under the fraud-based discovery rule, to permit adjudication of Rotkiske’s claim on the merits.”
The CFPB has issued a special edition of its Supervisory Highlights that focuses on compliance with the FCRA and Regulation V. The report contains two main sections, with one devoted to supervisory observations at furnishers and the other devoted to supervisory observations at consumer reporting companies (CRCs). (The report was published in the Federal Register.)
Supervisory observations at furnishers included the following:
- Policies and procedures. CFPB examiners found these categories of furnishers had the following deficiencies in their policies and procedures:
- Mortgage servicers did not provide sufficient guidance for responding to disputes in a timely manner or reporting credit reporting changes in furnished accounts when the status of such accounts changed.
- Auto loan furnishers did not provide sufficient guidance for conducting reasonable investigations of indirect disputes that contain allegations of identity theft.
- Debt collection furnishers did not differentiate between FCRA disputes, FDCPA disputes, and validation requests resulting in the handling of these disputes and requests in the same way and without consideration of applicable regulatory requirements. Such furnishers also did not address the regulatory timeframes for conducting investigations of disputes or for reporting the results of disputes to CRCs, and did not provide substantive instructions on how to conduct investigations of disputed accounts.
- Deposit account furnishers to specialty CRCs did not have written policies or procedures for furnishing information to such CRCs or for the validation of such information.
- Prohibition of reporting information with actual knowledge of errors. Furnishers furnished information they knew or had reasonable cause to believe was inaccurate because consumers disputed such information to CRCs and the disputes were forwarded to the furnishers for investigation. (The inaccuracies were attributed to coding errors.) Furnishers also did not clearly and conspicuously specify to consumers an address at which consumers could send notices that furnished information was inaccurate (having provided the address on the last page of a lengthy document, apparently, without otherwise calling attention to it).
- Duty to correct and update information. Auto loan furnishers failed to promptly notify CRCs of their determinations that furnished information was inaccurate because accounts were opened due to identity theft and deposit account furnishers failed to promptly correct and update deposit account information reported to nationwide specialty CRCs that the furnishers determined was not complete or accurate (such as charged-off balances discharged in bankruptcy or payment in full of charged-off balances).
- Duty to provide notice of delinquency of accounts. Furnishers reported the incorrect date of first delinquency.
- Obligations upon notice of dispute. Furnishers failed to investigate disputes submitted by consumers; responded to CRC notices of dispute without verifying the accuracy of the disputed information, instead instructing the CRC to retain the information and have the consumer contact them directly; failed to complete investigations within the required timeframe (with certain of such failures attributed to system design flaws) and; failed to notify consumers when the furnisher determined the consumers’ disputes were frivolous or irrelevant or when the furnisher considered a dispute to be frivolous because the furnisher believed the dispute was from a credit repair organization and/or failed to include required information in frivolousness notices.
Supervisory observations at CRCs included the following:
- Procedures to assume maximum possible accuracy. Nationwide specialty CRCs failed to follow reasonable procedures to ensure maximum possible accuracy by exempting certain furnishers from a data validation testing procedure without a valid basis and not properly processing data files furnished by certain furnishers.
- Duty to limit furnishing of consumer reports to permissible purposes. CRCs did not have procedures to conduct proactive recredentialing reviews of users of reports and failed to monitor users or resellers that requested the CRCs to delete hard inquiry records from consumer reports at higher rates than usual (which might indicate that a user is obtaining reports without a permissible purpose).
- Blocking information resulting from identity theft. CRCs forwarded information to furnishers as to which consumers had made identify theft block requests and relied on the furnishers’ responses without making an independent determination if a permitted basis for declining the block existed.
- Dispute investigations. CRCs failed to 1. initiate investigations after receiving notice of a dispute from a consumer, 2. review and consider all relevant information by relying on the furnisher’s responses and not independently considering information provided by the consumer, 3. complete investigations within the 30-day period by considering disputes filed on weekends, holidays, and after-hours as filed on the next business day, 4. notify furnishers of a consumer’s dispute within five business days of receipt (which was caused by inadequate staffing), and 5. send consumers notice of the results of a reinvestigation when the consumer had sent the CRC a dispute without including a consumer identification and certification form. Nationwide specialty CRCs failed to notify furnishers that information from a consumer’s file had been modified or deleted after a reinvestigation and resellers who had determined that disputed information was not incomplete or inaccurate as a result of the reseller’s act or omission failed to convey to the CRCs that provided the information the notice of dispute together with all relevant information provided by the consumer.
The OCC, Federal Reserve Board, FDIC, NCUA, and CFPB have issued an “Interagency Statement on the Use of Alternative Data in Credit Underwriting.”
The statement sets forth the agencies’ recognition of the benefits of using alternative data (AD) in credit decisions. For purposes of the statement, AD means “information not typically found in the consumer’s credit files of the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit.” The benefits cited by the agencies include improving the speed and accuracy of credit decisions (including in connection with small business underwriting), helping firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system (sometimes called “credit invisibles”) or would otherwise be denied credit (such as in “Second Look” programs), and enabling consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity.
The agencies specifically discuss the automated use of cash flow data to evaluate a borrower’s ability to repay as an example of how the use of AD “may present no greater risks than data traditionally used in the credit evaluation process.” The agencies indicate that such data “may include a range of metrics that examine categories of income and expenses (e.g. fixed expenses such as housing, amount of variable expenses, etc.) and how a consumer or small business has managed an account over time (e.g. residual balances).” Noting the traditional use of a borrower’s income and expenses to determine the borrower’s repayment ability, the agencies state that “improving the measurement of income and expenses through cash flow evaluation may be particularly beneficial for consumers who demonstrate reliable income patterns over time from a variety of sources rather than a single job.” The agencies also comment that the cash flow data used “are specific to the borrower and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy.” Significantly, they observe that the use of cash flow data and other AD that are directly related to a consumers’ finances and how consumers manage their financial commitments may present lower risks than other data. (Presumably, such AD present lower risks because of their greater accuracy and direct relationship to credit underwriting.)
While recognizing the benefits of AD, the agencies also highlight the need for the use of AD to be consistent with applicable consumer protection laws, citing fair lending laws, UDAAP prohibitions, and the FCRA as examples. They comment that a well-designed compliance program would provide “for a thorough analysis of relevant consumer protection laws and regulations to ensue firms understand the opportunities, risks and compliance requirements before using [AD]” and that based on such analysis, AD “that present greater consumer protection risk warrants more robust compliance management” such as appropriate testing, monitoring, and controls to understand and address consumer protection risks.
AD is often used in conjunction with artificial intelligence (AI) models. Our weekly podcasts include an episode released in June 2019 titled, “Using artificial intelligence for consumer finance: a look at the opportunities and challenges.” In the episode, we discussed the opportunities and challenges created by the use of AI models in consumer financial services, including the benefits of explainable AI and its implications for the consumer financial services industry, especially for applications where understanding the model’s reasons for returning a score or decision are necessary. Click here to listen to the podcast.
The CFPB has proposed several amendments to its remittance rule. Comments on the proposal must be filed no later than January 21, 2020.
The proposed amendments are:
- An increase in the rule’s safe harbor threshold that currently removes from the rule’s coverage an entity that provided 100 or fewer remittance transfers in the previous calendar year and provides 100 or fewer remittance transfers in the current calendar year. The proposal would increase the safe harbor threshold from 100 transfers to 500 transfers annually.
- Changes to the rule to mitigate the effects of the July 21, 2020, expiration of the statutory exception that allows insured institutions, under certain conditions, to disclose estimates to consumers of the exchange rate and covered third-party fees instead of exact amounts. The proposed changes are:
- With regard to the exchange rate, a permanent exception that would allow insured institutions to estimate the exchange rate for transfers to a particular country if, among other things, the insured institution made 1,000 or fewer transfers in the prior calendar year to the particular country for which the designated recipients of such transfers received funds in that country’s local currency.
- With regard to covered third-party fees, a permanent exception that would allow insured institutions to estimate such fees for a transfer to a particular designated recipient’s institution if, among other things, the insured institution made 500 or fewer transfers to the designated recipient’s institution in the prior calendar year.
The Bureau is also seeking comment on the rule’s permanent exception that allows providers to use estimates for transfers to certain countries as determined by the Bureau. The Bureau has currently identified five countries that qualify for this exception. The Bureau asks for suggestions regarding possible changes to the substantive criteria used to determine whether a country qualifies for the list (which include the law of a country precluding a determination of exact disclosure amounts) and the process the Bureau uses for adding countries to the list. In addition, the Bureau asks for comment on whether any transfer providers use estimates pursuant to the permanent exception that permits a provider to make its own determination that the laws of a recipient country not on the Bureau’s list, or the method of sending transfers to such country, do not permit a determination of exact amounts.
Although it will not be published in time for holiday gift giving, pre-orders are being taken for a new book written by former CFPB Director Richard Cordray. The book, to be published by Oxford University Press, is titled “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy, and Our Democracy” and includes a foreword by Senator Elizabeth Warren.
Google has updated its financial products and services policy to restrict the advertisement of debt settlement, debt management services, and credit repair services.
Ads for credit repair services will no longer be allowed while ads for debt settlement or debt management services will be allowed only if the advertiser is certified by Google. Certification will be available only in certain countries. To be certified by Google, debt settlement and debt management services advertisers must be registered, licensed, or approved by the relevant regulatory authorities or recognized professional bodies in the country or countries they are targeting.
The new policy applies globally to all accounts that advertise these services directly, to lead generators, and to those who connect consumers with third-party services.
Last week, the CFPB Ombudsman’s Office released its eighth annual report covering the Office’s activities during fiscal year 2019. The Ombudsman’s Office is intended to serve as an independent, impartial, and confidential resource that assists consumers, financial entities, consumer or trade groups, and others in informally resolving process issues with the CFPB.
In the annual report, the Office provides examples of its work in FY 2019 and discusses the types of internal and external engagement in which it has participated during that period.
In addition to reviewing individual inquiries, the Ombudsman’s Office reviews systemic issues that may be affecting consumers or financial entities nationwide, in a particular region, or with a certain process. In FY 2019, the Office reviewed two systemic issues. One review focused on the Bureau’s process for handling consumer complaints referred to the CFPB by other agencies, and resulted in recommendations of steps for the CFPB to take to make that process clearer for consumers. The second review focused on the information provided to consumers on defendant-administered redress and resulted in recommendations of steps for the CFPB to take to provide additional information to consumers on enforcement actions and defendant-administered redress.
The report also includes updates on the following previous systemic reviews:
- How non-consumers contact the CFPB by phone
- Entities mentioned in CFPB materials for a positive purpose
- Third party receipt of consumer complaint responses
- Legal disclaimers used in CFPB webinars
Michigan Adopts Temporary Authority Provisions
Michigan has joined a number of states that have amended its statutes to grant certain individuals temporary authority to act as a mortgage loan originator while a license application is pending, in conformity with the federal SAFE Act. The amendment to the Michigan statutes went into effect on December 5, 2019.
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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.