Mortgage Banking Update
In This Issue:
- CFPB Files First Ever Redlining Complaint Against a Non-Bank Mortgage Lender
- OCC Issues Proposed “True Lender” Rule
- This Week’s Podcast: The OCC and FDIC “Madden Fix” Final Rules and Related Recent Developments
- CFPB Updates 2020 Complaint Bulletin and Again Focuses on COVID-19 Related Complaints
- Fannie Mae and Freddie Mac Update COVID-19 Servicing Guidance
- VA Addresses COVID-19 Precautions for Specially Adapted Housing Project Stakeholders
- FTC Holds Workshop on GLBA Safeguards Rule
- CFPB Files Ratification With Fifth Circuit in All American Check Cashing
- Update on RD Legal Funding and All American Check Cashing
- SCOTUS Agrees to Hear Case on FHFA’s Constitutionality With Implications for CFPB’s Pre-Seila Law Actions
- CFPB Issues Spring 2020 Semi-Annual Report to Congress
- CFPB to Issue ANPR on Consumer-Authorized Access to Financial Records; Releases Report on Feb. 2020 Symposium
- Did You Know?
For the latest updates on the Coronavirus pandemic visit the Ballard Spahr Coronavirus Resource Center
On July 15, 2020, the CPFB filed a complaint in federal court against Townstone Financial, Inc. (Townstone) representing the first ever redlining complaint against a non-bank mortgage lender. The complaint is brought under the Equal Credit Opportunity Act (ECOA) and Consumer Financial Protection Act (CFPA), but not the Fair Housing Act (FHA). (The U.S. Department of Housing and Urban Development (HUD) and U.S. Department of Justice (DOJ), but not the CFPB, have authority to enforce the FHA.)
The complaint in general asserts that during the period of January 1, 2014 through December 31, 2017 (the “relevant period”), Townstone, which principally lent in the Chicago Metropolitan Statistical Area (MSA) during the relevant period, redlined majority and high-majority African-American neighborhoods in the Chicago MSA. The CFPB refers to majority and high-majority African-American neighborhoods as neighborhoods that are more than 50% and more than 80% Black or African-American, respectively.
The DOJ, HUD and CFPB have made redlining claims, and entered into settlements, with banks under the ECOA and the FHA. Despite the substantial differences between banks and non-banks, including without limitation that banks are subject to the Community Reinvestment Act and can make loans for retention in portfolio, the CFPB for years has been exploring the potential of bringing a redlining complaint against a non-bank mortgage lender. And yet the CFPB has never issued guidance regarding how it would assess a non-bank mortgage lender for redlining purposes.
The complaint makes a number of standard allegations for a redlining complaint, but also includes a unique element regarding public statements the CFPB asserts were made by Townstone’s principals that may have prompted the CFPB to select Townstone as the test case for a redlining claim against a non-bank mortgage lender. In terms of the standard allegations, the complaint asserts that during the relevant period Townstone:
- Made no effort to market to African-Americans;
- Did not specifically target any marketing toward African-Americans in the Chicago MSA;
- Did not employ an African-American loan officer among its 17 loan officers;
- Received few applications from African-Americans—1.4% of its total applications– as compared to 9.8% for other lenders;
- Received almost no applications from applicants for properties located in African-American neighborhoods—five or six per year from high African-American neighborhoods, with half of those from White, Non-Hispanic applicants—and only between 1.4% and 2.3% of its applications came from applicants with regard to properties located in majority African-American neighborhoods; and
- In contrast, peer lenders drew 7.6% to 8.2% of their applications from majority African-American neighborhoods, and 4.9% to 5.5% of their applications from high African-American neighborhoods.
In addition to these standard allegations, the CFPB also cites statements that it asserts Townstone’s principals made in radio shows and/or podcasts that would discourage African-American prospective applicants from applying to Townstone for mortgage loans, and would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans. The CFPB asserts that during the relevant period Townstone conducted a weekly radio show and a weekly podcast. (By our calculation, if a radio show and podcast were each conducted nearly every week during the four-year relevant period, there would be approximately 400 total broadcasts.)
In the complaint, the CFPB addresses comments made in five broadcasts, including the following:
“Referring to a neighborhood grocery store with “people from all over the world” as a “jungle”—a word that may be used or understood to be a derogatory reference associated with African Americans, Black people, and foreigners—and saying that the grocery store was “scary” would discourage African-American prospective applicants from applying for mortgage loans from Townstone; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”
The CFPB’s claim that redlining violates the ECOA raises the issue of whether such a claim can be brought under the ECOA. The federal government maintains the position the redlining violates both the FHA and ECOA. However, the ECOA focuses on the treatment of applicants, and a redlining claim addresses individuals who are not applicants. The CFPB notes in the complaint that Regulation B, the ECOA’s implementing regulation, provides that a creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application. But the ECOA itself does not set forth such a prohibition. Whether a redlining claim can be brought under the ECOA may well be an issue that awaits consideration by the Supreme Court. Additionally, as the alleged conduct dates back to January 1, 2014, the CFPB likely also includes an alleged CFPA violation in its complaint because the ECOA has a five-year statute of limitations but the CFPB can file a lawsuit for an alleged CFPA violation within three years after the date of the discovery of a violation. The CFPB asserts that the conduct of Townstone that the CFPB alleges violates the ECOA also violates the CFPA.
Less than two months after issuing its final “Madden fix” rule, the OCC has now issued a proposed rule to address when a national bank or federal savings association should be considered the “true lender” in the context of a third party relationship. Comments on the proposal, which was published in the Federal Register, must be filed by September 3, 2020.
The OCC’s final “Madden fix” rule confirmed that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge under federal law but did not address when a loan is deemed to made by a bank or savings association. In discussing its proposal, the OCC notes that provisions of the National Bank Act (NBA), the Federal Reserve Act, and the Home Owners’ Loan Act (HOLA) (12 U.S.C. 24, 1464(c), and 371, respectively) that allow national banks and federal savings associations to extend credit do not indicate how to determine when a bank has exercised such authority and, rather than its relationship partner, has made a loan.
The OCC’s proposed rule interprets these statutes to provide:
For purposes of [the provisions of the NBA, Federal Reserve Act, and HOLA that authorize national banks and federal savings associations to extend credit and the provisions of the NBA and HOLA that govern the interest permitted on national bank and federal savings association loans (12 U.S.C. 85 and 1463 (g), respectively)], a national bank or Federal savings association makes a loan when the national bank or Federal savings association, as of the date of origination:
(1) Is named as the lender in the loan agreement; or
(2) Funds the loan.
The proposal is intended to remove the uncertainty that has resulted from the courts’ use of divergent standards (which the OCC describes in its background discussion) to determine which entity is the “true lender” by creating “a clear test to determine when a bank makes a loan.” The OCC indicates that the determination of which entity made a loan under its proposed standards “would be complete as of the date the loan is originated and would not change, even if the bank were to subsequently transfer the loan.” Once it is determined that a loan has been made by a bank under the OCC’s standards, “the applicable Federal legal framework (1) determines the interest permitted on the loan, pursuant to 12 U.S.C. 85 and 1463(g), and (2) permits the loan to be subsequently sold, assigned, or otherwise transferred without affecting the interest term, pursuant to the Madden-fix rule.”
With regard to its first basis for treating the bank as the “true lender,” the OCC states that “if a bank is named in the loan agreement as the lender as of the date of origination, the OCC views this imprimatur as conclusive evidence that the bank is exercising its authority to make loans pursuant to [the NBA/Federal Reserve Act or HOLA] and has elected to subject itself to the panoply of applicable Federal laws and regulations (including but not limited to consumer protection laws) governing lending by banks.”
With regard to its second, alternative basis for treating the bank as the “true lender,” the OCC indicates that it is intended to capture “circumstances in which a bank is not named as the lender in the loan agreement but is still, in the OCC’s view, making the loan.” Under this funding standard, “if a bank funds a loan as of the date of origination, the OCC concludes that it has a predominant economic interest in the loan and, therefore, has made the loan—regardless of whether it is the named lender in the loan agreement as of the date of origination.”
A substantial portion of the OCC’s background discussion is devoted to the regulatory and supervisory consequences that flow from a determination that a bank is the “true lender.” The OCC describes the underwriting standards and loan documentation policies and procedures that the OCC expects a bank to have. It also highlights various federal consumer protection laws, such as federal UDAAP and fair lending laws, with which a bank must comply. In addition, the OCC references its requirement for “banks engaged in lending to take into account the borrower’s ability to repay the loan according to its terms” (but does so in the context of secured lending), lists lending practices “that may be considered predatory, unfair, or deceptive,” and identifies the issues it evaluates “as part of its routine supervision of a bank’s lending relationships with third parties.” Thus, the OCC makes it clear that the adoption of its Madden and “true lender” fixes should not be taken as a sign that conduct injuring borrowers will be tolerated.
Previously, Acting Comptroller of the Currency Brian Brooks indicated that the OCC expected to partner with the FDIC in developing the OCC’s “true lender” rule. Presumably, we will soon see a proposed “true lender” rule from the FDIC.
With the finalization of its “Madden-fix” rule and issuance of its proposal to define the circumstances under which a national bank or federal savings association is the “true lender,” the OCC has responsibly taken the bull by the horns to remove the cloud of uncertainty hanging over billions of dollars of loans, including “bank model” marketplace loans, credit card receivables sales and securitizations, and private label credit card programs. (In 2017, Alan Kaplinsky wrote an article for American Banker urging the OCC to use its rulemaking authority to address this issue.) While consumer groups have already threatened to challenge the OCC rules, the U.S Supreme Court’s decision in Smiley v. Citibank, N.A., 517 U.S. 735 (1996), in which the Court deferred to an OCC rule interpreting the term “interest” in Section 85 of the NBA to include late fees, suggests that the OCC’s proposal is on firm grounds.
In addition to a litigation challenge by consumer groups, Congress could attempt to use the Congressional Review Act to override the OCC’s “true lender” rule once it is finalized. Also, if elected President this fall, former Vice-President Biden could appoint a new Comptroller who does not support the OCC’s approach to “true lender” taken under Acting Comptroller Brooks’ leadership.
We have been litigating the “true lender” issue for almost two decades and have structured many loan programs over this period to address the possibility of a “true lender” or Madden challenge. In Hudson v. Ace Cash Express, Inc., 2002 WL 1205060 (N.D. Ind. 2002), we convinced the court that the need for certainty in the application of federal banking laws required it to honor the bank’s formal role as lender instead of participating in the case-by-case development of factually intensive recharacterization rules. We are delighted that the OCC sees it the same way.
After reviewing the legal foundation for federal preemption of state law limits on interest, we discuss the final OCC/FDIC “Madden fix” rules, the “true lender” issue, potential Congressional or litigation challenges to OCC/FDIC “Madden fix” and “true lender” rules, and recent developments in litigation involving Madden or “true lender” challenges to bank/nonbank partnerships and securitizations.
Click here to listen to the podcast.
On July 16, 2020, the Consumer Financial Protection Bureau (CFPB) issued an updated 2020 Complaint Bulletin and again focused on complaints related to COVID-19.
The Complaint Bulletin reflects 2020 consumer complaint data through June 15, 2020, and focuses on complaints filed through May 31, 2020 that mention COVID-19 keywords. Of the 187,547 complaints received in 2020, 8,357 included a COVID-19 keyword. The highest number of complaints (1,575 or about 19%) concerned mortgage loans, with credit cards and credit or consumer reporting running a close second and third. A little over half of the complaints related to mortgage loans identified struggles to make payments as the primary issue. Mortgage-related complaints also cited that borrowers with loans in a COVID-19 forbearance were being advised that a lump sum payment would be required at the end of the forbearance, which is contrary to government guidance. As previously reported, the CFPB and Conference of State Bank Supervisors issued warnings to industry members about not following requirements for a COVID-19 forbearance or offering limited repayment options with regard to a forbearance.
Other issues cited by consumers include:
- Credit card issuers who offered deferment programs did not implement the options as advertised, such as not waiving interest as advertised.
- A significant drop in their credit scores based on the manner in which a student loan servicer reported their loans.
- Being charged overdraft fees despite banks making public statements that the fees would be waived.
- Short term, small dollar loan companies using aggressive collection tactics.
It would appear that counting only complaints that expressly mention a COVID-19 keyword may significantly understate the number of complaints that are in some way related to COVID-19. In the prior version of the Complaint Bulletin, the CFPB noted that the average monthly complaint volume in 2019 was 29,000, and that in March and April of 2020 the complaint volume set records in each month at 36,700 and 42,500, respectively. In the current Bulletin, the CFPB cites April and May 2020 volumes of 42,400 and 44,100 respectively.
On July 15, 2020, Fannie Mae in an update to Lender Letter 2020-02 and Freddie Mac in Bulletin 2020-29 updated their COVID-19 servicing guidance to address insurance loss requirements and other matters. Fannie Mae also issued updates to Lender Letters 2020-07 and 2020-08 addressing the COVID-19 payment deferral and Stop Delinquency Advance Process.
The Fannie Mae guidance on insurance losses focuses on the disbursement of insurance loss proceeds, and the Freddie Mac guidance more broadly addresses the insurance loss settlement process. In each case, the guidance is intended to speed the repair of properties.
Fannie Mae also addresses Home Affordable Mortgage Program (HAMP) pay for performance incentives. Previously in an update to Lender Letter 2020-07, Fannie Mae advised that if a mortgage loan had been modified pursuant to a HAMP modification under which the borrower remains in “good standing,” then the mortgage loan will not lose good standing and the borrower will not lose any “pay for performance” incentives if the borrower was on a COVID-19 related forbearance plan immediately preceding the COVID-19 payment deferral. Fannie Mae is now clarifying that, additionally, the mortgage loan will not lose good standing and the borrower will not lose any “pay for performance” incentives if the borrower:
- Immediately reinstates the mortgage loan upon expiration of the COVID-19 related forbearance plan; or
- Transitions directly from a COVID-19 related forbearance plan to a repayment plan.
Freddie Mac also addresses document custody and certain other matters.
With regard to the COVID-19 payment deferral, in the update to Lender Letter 2020-07 Fannie Mae addresses the performance of an escrow analysis and any escrow shortage that is revealed, the terms of the payment deferral, servicing fees, and when a borrower becomes 60 days delinquent after completing a payment deferral.
As previously reported, based on a directive from the Federal Housing Finance Agency, Fannie Mae is implementing the Stop Delinquency Advance Process to limit the obligations of servicers to make advances commencing with August 2020 remittance activity based on July 2020 reporting activity. In the update to Lender Letter 2020-08, Fannie Mae addresses the one-time transition to the Stop Delinquency Advance Process, reporting and remitting for eligible Scheduled/Scheduled remittance type mortgage loans under the Process, contractual payments received from borrowers under the Process, and monthly reports that Fannie Mae will provide to servicers to aid in the reconciliation of their cash position.
On July 27, 2020, the U.S. Department of Veterans Affairs (VA) issued Circular 26-20-27, dated July 22, 2020, to address COVID-19 precautions for Specially Adapted Housing (SAH) project stakeholders.
VA advises that SAH contractors, compliance inspectors, and other project stakeholders are encouraged to follow the policies outlined in the Circular from the date of issuance. VA also requests that for all in-person or in-house meetings, contractors, compliance inspectors, and other project stakeholders take all reasonable steps to safeguard themselves, the veteran they are assisting, and the veteran’s household. VA specifically requests that:
- Compliance inspectors assigned to inspect properties on behalf of the SAH program follow all current local health and safety guidance and Center for Disease Control and Prevention (CDC) guidelines regarding handwashing and the use of masks or cloth face coverings.
- Building contractors, subcontractors, designers, and other construction specialists follow all current local health and safety guidance, CDC guidelines, and the Department of Labor’s OSHA control and prevention standards.
VA also advises that SAH eligible veterans and their representatives have the right to request that all individuals accessing their homes wear a mask or cloth face covering.
On July 13, 2020, the Federal Trade Commission (FTC) held a workshop titled “Information Security and Financial Institutions: FTC Workshop to Examine Safeguards Rule.” This workshop discussed the proposed amendments to the Gramm-Leach-Bliley Act’s (GLBA) Safeguards Rule, which requires financial institutions to develop, implement, and maintain a comprehensive information security program. The GLBA Safeguards Rule has not been updated since it went into effect in 2003. The workshop explored the cost of information security for financial institutions, the availability of information security services for smaller financial institutions, and other issues raised in comments received in response to the FTC’s notice of proposed rulemaking.
During the workshop, FTC staff provided the following insights into the proposed amendments to the GLBA Safeguards Rule:
- Designate one qualified individual to be responsible for overseeing the information security program. Although the term Chief Information Security Officer (CISO) is used in the proposed amendments, the FTC staff clarified that the qualified person does not necessarily need to carry the title of a CISO. The FTC staff noted that the necessary qualifications for the responsible individual will likely be dependent on the information security needs of each financial institution.
- Base the information security program on a written risk assessment that must include certain criteria for determining risk and address how the information security program will address those risks. The FTC staff expressly stated that there is an expectation that risk assessments are to be done on a routine basis; financial institutions cannot complete a risk assessment one time and then never again.
- Provide security awareness training to personnel. The FTC staff recommended that all employees receive basic security training, but information security personnel should receive more in-depth security training. The FTC staff noted that financial institutions may use a third party service provider to conduct these trainings.
- Implement an information security program that includes access controls, developing information inventories, implementing secure development practices, conducting audits, implementing secure disposal requirements, developing change management procedures, and monitoring the activity of authorized users. The FTC staff emphasized that it is up to the financial institution to determine how to implement the various requirements and that each financial institution should be free to choose a solution that works best for each financial institution’s respective information security program.
- Implement encryption and multifactor authentication. The FTC staff indicated their belief that financial institutions should have the flexibility to determine how to implement encryption and multifactor authentication. However, the FTC staff noted that in the event it is not feasible for a financial institution to implement encryption or multifactor authentication, the financial institution should come up with alternative controls that have been reviewed and approved by the qualified individual in charge of the financial institution’s information security program.
- Financial institutions that maintain information about fewer than 5,000 consumers would be exempted from most of the written requirements. The FTC staff explained that the exception was written so that small financial institutions with small budgets that have access to tens of thousands of consumers’ data are still expected to implement security controls that are appropriate to the amount of data they are collecting, not necessarily to the size of their business.
The deadline to submit comments about the proposed amendments to the GLBA Safeguards Rule is August 12, 2020. Financial institutions that are subject to the GLBA Safeguards Rule should review their current information security program in light of the proposed amendments to determine how any changes may affect their information security programs.
This past Friday, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she has ratified the Bureau’s enforcement action against All American Check Cashing.
On July 10, the CFPB filed a similar declaration with the Second Circuit in RD Legal Funding, another circuit court case involving a challenge to the Bureau’s constitutionality that was put “on hold” pending the Supreme Court’s decision in Seila Law. In that declaration, Director Kraninger stated that she has ratified the Bureau’s decisions to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action.
It bears noting that in both All American Check Cashing and RD Legal, the CFPB had argued that any constitutional defect was cured by former Acting Director Mulvaney’s ratification of the two enforcement actions. The CFPB’s ratification argument was not ruled on by the district court in All American Check Cashing and was rejected by the district court in RD Legal Funding. The Second Circuit has proposed to calendar oral argument in RD Legal Funding during the week of October 5, 2020. The Fifth Circuit has tentatively calendared en banc oral argument in All American Check Cashing during the week of September 21, 2020 and has ordered the parties to file supplemental briefs.
In Seila Law, the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney had ratified the civil investigative demand issued to Seila Law by the CFPB. Assuming the CFPB intends to continue its effort to enforce the CID, we would expect the CFPB to now file a declaration with the Ninth Circuit that Director Kraninger has ratified the issuance of the CID to Seila Law.
With the U.S. Supreme Court having ruled in Seila Law that the CFPB’s leadership structure is unconstitutional, two circuit court cases involving the same constitutional challenge that were “on hold” pending the Supreme Court’s decision will now be moving forward. The two cases are RD Legal Funding pending in the Second Circuit and All American Check Cashing pending in the Fifth Circuit.
RD Legal Funding. The underlying case is an enforcement action filed jointly by the CFPB and the New York Attorney General in 2017 in a New York federal district court alleging federal UDAAP and state law claims. The CFPB appealed to the Second Circuit from the district court’s June 2018 decision, as amended by a September 2018 order, in which it ruled that the CFPB’s structure is unconstitutional, struck the entire CFPA (Title X of Dodd-Frank), and dismissed the CFPB from the case. The NYAG appealed from the district court’s dismissal of all of the NYAG’s federal and state law claims, and a subsequent order that dismissed the NYAG’s claims under Dodd-Frank Section 1042 “with prejudice.” (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)
The CFPB had filed a notice of ratification by former Acting Director Mulvaney with the district court. In its June 2018 decision, the district court stated that the CFPB’s ratification “does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to make decisions on the CFPB’s behalf.”
On July 10, 2020, the CFPB filed a declaration with the Second Circuit in which Director Kraninger stated that she has ratified the Bureau’s decisions to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action. In response, RD Legal filed a letter with the Second Circuit in which it stated that the CFPB has waived the ratification issue because it did not appeal the district court’s ruling on ratification. Alternatively, it argued that the ratification is not effective because Director Kraninger cannot ratify an act that the CFPB could not do at the time such act was done and, in any event, she cannot ratify the enforcement action or appeal because the action would be time-barred and the time to appeal has lapsed.
The Second Circuit can be expected to follow Seila Law and affirm the district court’s ruling that the CFPB’s structure is unconstitutional. However, also following Seila Law, the Second Circuit can be expected to reverse the district court’s ruling striking all of Title X and rule instead that the Dodd-Frank Act’s “for cause” removal provision should be severed. Although the district court considered former Acting Director Mulvaney’s ratification and not Director Kraninger’s ratification, its rationale for rejecting former Acting Director Mulvaney’s ratification would apply equally to Director Kraninger’s ratification. It therefore seems unlikely that the Second Circuit would remand that issue to the district court rather than issue a ruling on ratification.
All American Check Cashing. The underlying case is an enforcement action filed by the CFPB against All American Check Cashing in 2016 in a Mississippi federal district for alleged violations of the CFPA’s UDAAP prohibition. In March 2018, the district court denied All American’s motion for judgment on the pleadings based on the Bureau’s unconstitutionality and ruled that the CFPB’s structure is constitutional. In opposing All American’s motion to certify the case for interlocutory appeal, the CFPB argued that a notice of ratification of the action by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue. The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.
On March 3, 2020 (the same day that the Supreme Court heard oral argument in Seila Law), a Fifth Circuit panel ruled that the CFPB’s structure is constitutional. On March 20, the Fifth Circuit, on its own motion, entered an order vacating the panel decision and granting rehearing en banc. On June 30, the Fifth Circuit tentatively calendared the case for en banc oral argument during the week of September 21, 2020 and ordered the parties to file supplemental briefs.
Following Seila Law, the en banc Fifth Circuit can be expected to reverse the panel’s ruling that the CFPB’s structure is constitutional and sever the Dodd-Frank Act’s “for cause” removal provision. Because it ruled that the CFPB’s structure is constitutional, the panel did not reach the CFPB’s ratification argument. Assuming the CFPB files a declaration of ratification by Director Kraninger as it did in RD Legal, the en banc Fifth Circuit will have an opportunity to issue a ruling on ratification or could decide to remand that issue to the district court.
In Seila Law, the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney had ratified the civil investigative demand issued to Seila Law by the CFPB. As a result, three circuit courts (the Second, Fifth and Ninth Circuits) could now issue rulings on the ratification issue.
On July 9, the U.S. Supreme Court granted the two petitions for certiorari in Collins v. Mnuchin, the en banc Fifth Circuit decision which held that the FHFA’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 (HERA) only allows the President to remove the FHFA’s Director “for cause.” In addition to the question of the FHFA’s constitutionality, the case could result in a decision by the Supreme Court on whether the proper remedy for a constitutional violation is to set aside action taken by an agency when it was operating unconstitutionally. Such a decision could have profound implications for the CFPB whose structure was held to be unconstitutional by the Supreme Court in Seila Law.
The FHFA was created by HERA to oversee Fannie Mae and Freddie Mac. Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.” Also like the CFPB, the FHFA is not funded through the regular appropriations process. Instead, the FHFA is funded through assessments collected from Fannie Mae and Freddie Mac. HERA contains an anti-injunction clause that precludes courts from taking any action that would “restrain or affect the exercise of powers or functions of the [FHFA] as a conservator or a receiver.” It also contains a succession provision under which the FHFA, as conservator, inherits the shareholders’ rights to bring derivative actions on behalf of Fannie Mae and Freddie Mac.
The parties challenging the FHFA’s constitutionality are shareholders of Fannie Mae and Freddie Mac who are seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for Fannie Mae and Freddie Mac that requires the entities to pay quarterly dividends to the Treasury equal to their excess net worth after accounting for prescribed capital reserves. While ruling that the FHFA’s structure is unconstitutional, the en banc Fifth Circuit concluded that the appropriate remedy for the constitutional violation was to sever HERA’s for-cause removal provision but not to invalidate the Third Amendment. It also ruled that the shareholders could bring a direct claim against the FHFA challenging the Third Amendment.
The two questions presented by the certiorari petition filed by the shareholders are (1) whether the FHFA’s structure violates the U.S. Constitution’s separation of powers, and (2) whether the court must set aside a final action that the FHFA took when it was unconstitutionally structured and strike down the statutory provisions that make the FHFA independent.
The two questions presented by the certiorari petition filed by the Treasury Department and the FHFA are (1) whether HERA’s anti-injunction provision precludes a federal court from setting aside the Third Amendment, and (2) whether HERA’s succession provision precludes the shareholders from challenging the Third Amendment.
Although the FHFA defended its constitutionality in the Fifth Circuit, the Treasury Department agreed with the shareholders that the FHFA’s structure is unconstitutional. In opposing the shareholders’ certiorari petition, the Treasury Department and the FHFA did not address the merits of the shareholders’ constitutional challenge and instead argued that the Supreme Court’s grant of certiorari in Seila Law made it unnecessary to grant review of essentially the same question in Collins.
In ruling that the FHFA’s structure is unconstitutional, the en banc Fifth Circuit reinstated the portion of the Fifth Circuit panel’s decision that reached that conclusion. Among other features, the Fifth Circuit panel relied on the FHFA’s exercise of executive functions as a basis for its conclusion. As an example of such functions, the panel indicated that “the FHFA can enforce rules that it creates through cease-and-desist orders and monetary civil penalties.” In Seila Law, the Supreme Court also relied on the executive power exercised by the CFPB Director as a basis for its holding that the CFPB’s single director structure was unconstitutional. However, some observers have questioned whether the executive functions exercised by the FHFA Director are comparable to those of the CFPB Director highlighted by the Supreme Court in Seila Law. Accordingly, despite not having defended the FHFA’s constitutionality in the Fifth Circuit, it is unclear whether the Treasury Department will change its position in the Supreme Court and attempt to use Seila Law to distinguish the FHFA from the CFPB.
Assuming the Supreme Court reaches the constitutional question in Collins and rules that the FHFA’s structure is unconstitutional, it could have an opportunity to decide whether the Third Amendment should be set aside as a remedy for the FHFA’s structural defect. In their opposition to the shareholders’ certiorari petition, the Treasury Department and FHFA invoked the de facto officer doctrine as a basis for upholding the Third Amendment even if a constitutional violation exists. Together with ratification, that doctrine might be used by the CFPB to defend the validity of its pre-Seila Law actions. Thus, the grants of certiorari in Collins create the possibility of a Supreme Court decision on the ability of an unconstitutionally structured agency to preserve actions it took while operating unconstitutionally.
The CFPB has issued its Spring 2020 Semi-Annual Report to Congress covering the period September 30, 2019 through March 31, 2020.
The report represents the CFPB’s fourth semi-annual report under Director Kraninger’s leadership and continues the practice of the prior three reports of not providing aggregate numbers for how much consumers obtained in consumer relief and how much was assessed in civil money penalties in supervisory and enforcement actions during the period covered by the report.
The new report indicates that the Bureau had 1,421 employees as of March 31, 2020, representing a decrease of 9 employees from the number of employees as of September 30, 2019 (1,430) and a decrease of 31 employees from the number of employees as of March 31, 2019 (1,452).
In addition to discussing ongoing or past developments that we have covered in previous blog posts, the report includes the following noteworthy information:
- In October 2019, the Bureau created a Taskforce on Federal Consumer Financial Law. The Taskforce is charged with examining the existing legal and regulatory environment for consumers and financial services providers and making recommendations to the Bureau’s leadership for improving consumer financial laws and regulations, with a focus on harmonizing, modernizing, and updating the enumerated consumer credit laws, and their implementing regulations. In April 2020, the Bureau published a request for information seeking comments and information to assist the Taskforce. In the report, Bureau states that in Fall 2020, the Taskforce intends to participate in a publicly available listening session with the Bureau’s four advisory committees and to engage with federal and state regulatory partners before delivering its final report in early 2021.
- The Bureau’s Fair Lending Supervision program initiated 14 supervisory events during the period covered by the report, which is 2 fewer than the number of such events initiated during the period covered by the prior semi-annual report. As compared with that period, however, it issued more matters requiring attention or memoranda of understanding. In addition, the Bureau provided supervisory recommendations “pertaining to supervisory concerns related to weak or nonexistent fair lending policies and procedures, risk assessments, fair lending training, service provider oversight and/or consumer complaint response.”
- During the period covered by the report, the Bureau filed one fair lending public enforcement action and referred four ECOA matters to the DOJ. The referrals involved “redlining in mortgage origination based on race and/or national origin, discrimination in mortgage origination based on receipt of public assistance income, and discrimination in auto origination based on race and national origin.” The report states that the Bureau “has a number of ongoing and newly opened fair lending investigations of institutions.”
With regard to the timing of a final debt collection rule, the report repeats the same information that was set forth in the Bureau’s Spring 2020 rulemaking agenda. The report states that the Bureau expects to issue a final debt collection rule in October 2020. In February 2020, the Bureau issued a supplemental proposal that would require debt collectors to make specified disclosures when collecting time-barred debts. The proposal’s comment deadline was extended until August 4, 2020. The report provides no information as to when the Bureau expects to finalize the supplemental proposal.
The CFPB has announced that it plans to issue an advance notice of proposed rulemaking (ANPR) later this year on consumer-authorized access to financial records. The announcement was made concurrently with the Bureau’s release of a report summarizing its February 2020 symposium on this topic.
Section 1033 of the Dodd-Frank Act requires that “[s]ubject to rules prescribed by the Bureau, a covered person shall make available to a consumer, upon request, information in the control or possession of such person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related to any transaction, or series of transactions, to the account including costs, charges, and usage data.” In November 2016, the CFPB issued a request for information about market practices related to consumer access to financial information, and in October 2017, it released a set of “Consumer Protection Principles“ for participants “in the developing market for services based on the consumer-authorized use of financial data.”
According to the Bureau, the symposium’s purpose was to allow the Bureau to hear from stakeholders and to review the Bureau’s approach to consumer-authorized third-party access to financial records, “which has been largely identifying and promoting consumer interests—in access, control, security, privacy, and other areas—and allowing the market to develop without direct regulatory intervention.” The Bureau intends to use the ANPR to obtain information to help it understand and address competing perspectives.
ANPR. Through the ANPR, the Bureau will:
- Solicit stakeholder input on ways that the Bureau might effectively and efficiently implement the financial access rights described in Section 1033. While market participants have helped authorized data access become more secure, effective, and subject to consumer control, the Bureau sees indications that some emerging market practices may not reflect the access rights described in Section 1033.
- Seek information regarding the possible scope of data that might be made subject to protected access as well as information that might bear on other terms of access, such as those relating to security, privacy, effective consumer control over access and accessed data, and accountability for data errors and unauthorized access.
- Inquire into whether (and if so, how) regulatory uncertainty with respect to Section 1033’s interaction with other statutes within the Bureau’s jurisdiction, such as the FCRA, may be impacting this market to consumers’ potential detriment, and seek information that may help resolve such uncertainty.
Report on Symposium. In the report, the Bureau summarizes its understanding of the key facts, issues, and points of contention raised at the symposium. The Bureau describes the composition of the symposium’s three panels as follows:
- Six panelists represented non-bank fintech companies and consisted of: three “aggregator” companies, one trade association that represents aggregators and other companies that rely on consumer-permissioned access to financial data, one consumer-facing lender that relies on consumer-permissioned financial data, and one industry attorney who represents companies that use consumer-permissioned financial data
- Five panelists represented banks, consisting of four “large banks” and one “smaller bank”
- Two panelists were consumer advocates
- Three panelists were researchers
The Bureau highlights the views presented by stakeholders in the following areas:
- Data access and scope. Panelists focused on permissioned third-party access to consumer data, the scope of data consumers should be allowed to share via authorized third parties, and sharing of proprietary data.
- Credential-based access and “screen scraping.” Panelists discussed different methods for accessing consumer data, the benefits of replacing current methods with application program interfaced (API)-based access, and challenges related to transitioning to API-based access.
- Disclosure and informed consent. Panelists discussed the adequacy of consumer disclosure and consent management practices of companies seeking consumer authorization for permissioned data sharing.
- Privacy. Panelists discussed privacy risks arising from credential-based access and screen scraping and whether increased regulatory oversight of aggregators and other fintechs is needed.
- Transparency and control. Panelists discussed consumer control over the data they permission, including consumers’ ability to monitor and regulate data flows, revoke access, and request retroactive deletion of data.
- Security and minimization. Panelists discussed security risks in permissioned data sharing and mitigation of such risks.
- Accuracy, disputes, and accountability. Panelists discussed accuracy of shared data and the FCRA’s applicability to credit-related uses of permissioned data, dispute resolution mechanisms for uses of permissioned data, and liability for unauthorized transactions associated with permissioned use of data.
- Legal issues. Issues raised by panelists included:
- The meaning of Section 1033, including whether it is “self-executing” (i.e. effective without the issuance of Bureau rules), whether consumer agents (such as aggregators) are considered consumers for purposes of Sec. 1033, and whether Sec. 1033 provides authority for the Bureau to allow for data field exclusions from a consumer’s right to access or to deny data access to third parties relating to security concerns
- Whether development of API standards should be market-led or Bureau-prescribed
- Whether the Bureau should limit certain secondary uses of consumer-permissioned data
- Whether a market-driven equilibrium of ultimate liability allocation for unauthorized transactions relating to permissioned data use would emerge absent regulatory intervention
- Whether the Bureau, relying on Section 1033, should prescribe a right for consumers and permissioned third parties to access their data (as sought by fintechs)
- Whether the Bureau should issue a larger participant rule for the data aggregation market (as sought by banks)
Annual Fees for the Missouri Mortgage Company License to be Collected on NMLS
Starting November 1, 2020, annual license fees for the Missouri Mortgage Company License will be assessed during the year-end renewal period through NMLS in order to streamline the process for collecting such fees. Currently, annual license fees are collected outside of the NMLS throughout the year based on the anniversary date of initial licensure. This change will eliminate the collection of fees outside of the NMLS at varying dates throughout the year.
Upon completion of the NMLS renewal request, the company renewal will be automatically approved for licensees in good standing. All licenses renewed will be valid for the period of January 1 through December 31, of each year and license certificate expiration dates will match the NMLS status dates.
Colorado Conducts Mandatory Review of and Adopts Revised Rules for MLO and Mortgage Company Licensing
The Colorado Department of Regulatory Agencies, Division of Real Estate recently adopted modifications to its regulations relating to the Mortgage Loan Originator Licensing and Mortgage Company Registration Act during a mandatory review of the rules to assess the continuing need for, the appropriateness, and cost-effectiveness of the rules.
While modifications were made to most agency rules including those addressing definitions, licensure requirements, application processes, education requirements, and professional standards, generally, no major substantive changes were made.
The revised provisions are effective on January 1, 2021.
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