Legal Alert

Mortgage Banking Update - March 30, 2023

March 30, 2023
In This Issue:


Second Circuit Rules CFPB’s Funding Does Not Violate Appropriations Clause

A three-judge panel of the U.S. Court of Appeals for the Second Circuit has unanimously ruled that the CFPB’s funding structure does not violate the Appropriations Clause of the U.S. Constitution. In its decision, the panel expressly declined to follow the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB that reached the opposite conclusion. Last month, the U.S. Supreme Court granted the CFPB’s certiorari petition seeking review of the Fifth Circuit decision and agreed to hear the case next Term.

In CFPB v. Law Offices of Crystal Moroney, the federal district court granted the CFPB’s petition to enforce a civil investigative demand (CID) that it issued to Moroney prior to the U.S. Supreme Court’s decision in Seila Law holding that the limitation on the President’s ability to remove the CFPB Director only “for cause” was unconstitutional. After that decision, then CFPB Director Kraninger ratified the issuance of the CID. 

On appeal to the Second Circuit, Moroney argued that the CID could not be enforced because (1) the CID was void when it was issued because the CFPB Director was unconstitutionally shielded from removal by the President, (2) the CFPB’s funding structure violates the Appropriations Clause, (3) Congress violated the nondelegation doctrine when it created the CFPB’s funding structure, and (4) the CID is unduly burdensome. In an opinion written by Judge Richard Sullivan, appointed by President Trump, all of Moroney’s arguments were rejected by the Second Circuit panel. The other two panel members were Senior Judge Amalya Kearse, appointed by President Carter, and Senior Judge John Walker, appointed by President George H. W. Bush.

CID not void when issued. In Collins v. Yellen, the Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed. Relying on Collins, the Second Circuit ruled that the CID was valid despite the unconstitutionality of the Consumer Financial Protection Act's (CFPA) removal provision because Richard Cordray, the CFPB Director when the CID issued, was properly appointed. In addition, relying on Justice Kagan’s separate opinion in Collins (in which Justice Breyer and Justice Sotomayor joined), the Second Circuit held that “to void an agency action due to unconstitutional removal protection, a party must show that the agency action would not have been taken but for the President’s inability to remove the agency head.” (emphasis included). The Second Circuit found there was “nothing to suggest that the Director’s removal protection affected the issuance of the CID or the investigation into Moroney.”

No Appropriations Clause violation. The Second Circuit found no violation of the Appropriations Clause “[b]ecause the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions in the CFPA. In CFSA, the Fifth Circuit had concluded that Congress had ceded direct control over the CFPB’s budget by insulating it from annual or other limited appropriations and ceded indirect control by providing that the CFPB’s funding was to come from a source outside of the appropriations process, i.e. the Federal Reserve System. The Fifth Circuit labeled this structure “a double insulation from Congress’s purse strings” that violated the separation of powers. 

The Second Circuit commented as an initial matter that it could not find any support for the Fifth Circuit’s conclusion in Supreme Court precedent. It stated that “[t]o the contrary, the Court has consistently interpreted the Appropriations Clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute.’” (emphasis included, citation omitted). The Second Circuit indicated that it was not aware of “any Supreme Court decision holding (or even suggesting) that the Appropriations Clause requires more than this ‘straightforward and explicit command.’” (citation omitted).

In addition, the Second Circuit stated that it “likewise find[s] no support for the Fifth Circuit’s reasoning in the Constitution’s text.” That text provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The Second Circuit observed that “[n]othing in the Constitution, however, requires that agency appropriations be ‘time limited’ or that appropriated funds be drawn from a particular ‘source.’”

The Second Circuit stated further that it found no support for the Fifth Circuit’s reasoning in the Appropriation Clause’s history. According to the Second Circuit, the CFPB’s funding was “[c]onsistent with the historical practices of English, colonial, and state governments that formed the basis of the Founders’ understanding of the appropriation’s process at the time of the Constitution’s enactment.” Those practices required that the “purpose” of an appropriation, a “limit” on its amount, and the “fund” for its payment be specified by a previous law. According to the Second Circuit, these practices were satisfied by the CFPA’s list of five “objectives” for the CFPB, its limit on funding to 12% of the Federal Reserve System’s total operating expenses as reported in 2009 (subject to adjustment for inflation) and its designation of the combined earnings of the Federal Reserve System as the funding source.

No violation of nondelegation doctrine. Moroney argued that, even if the CFPB’s funding did not violate the Appropriations Clause, Congress violated the nondelegation doctrine in enacting the CFPA because it did not articulate an “intelligible principle” in circumscribing the President’s discretion in appropriating funds. The Second Circuit concluded that the CFPB’s funding structure is proper under the nondelegation doctrine because in the CFPA “Congress has plainly provided an intelligible principle to guide the CFPB in setting and spending its budget.” The Second Circuit pointed to (1) the statement in the CFPA that the CFPB’s budget is to be used to “pay the expenses of the [CFPB] in carrying out its duties and responsibilities, (2) the CFPB’s purpose as stated in the CFPA to “seek to implement, and where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive,” and (3) the CFPA’s list of five “objectives” and six “primary functions” for the CFPB. 

CID not unduly burdensome. The Second Circuit concluded that Moroney had not met her burden of showing that the CID was unreasonable. Among her arguments rejected by the Second Circuit were that that the CID was not issued for a proper purpose because it sought information implicating the practice of law and attorneys engaged in practice of law are excluded from the CFPB’s enforcement jurisdiction. The Second Circuit found that the CID was issued for a legitimate purpose because the CID was only addressed to Moroney’s debt collection activities and possible violations of the FDCPA and FCRA.

Moroney might seek rehearing en banc in the Second Circuit or, instead, file a certiorari petition in the Supreme Court. With the Supreme Court already having granted CFSA’s certiorari petition and issued a briefing schedule, Moroney may be more likely to opt to file a certiorari petition. If filed, the CFPB is unlikely to oppose Moroney’s petition and the Supreme Court is likely to grant the petition and either consolidate it for argument with CFSA or hold it pending the outcome in CFSA.

The Supreme Court did not grant CFSA’s cross-petition for certiorari which asked the Court to consider the alternative, non-constitutional grounds for vacating the CFPB’s payday lending rule that the Fifth Circuit rejected. The Court also declined to consider the alternative grounds as antecedent questions added to the CFPB’s petition. Nevertheless, some observers have suggested that the constitutional avoidance doctrine could still require the Supreme Court to first consider the alternative grounds before reaching the Appropriations Clause issue. That doctrine provides that a court should avoid deciding a constitutional issue if there is another non-constitutional basis for resolving the case. In that circumstance, the Second Circuit decision could provide a better vehicle for reaching the Appropriations Clause issue because Moroney’s non-constitutional arguments appear to be weaker than those of CFSA.

Other than the Fifth and Second Circuits, the D.C. Circuit is the only other circuit to have considered the constitutionality of the CFPB’s funding. In its 2018 decision in PHH Funding v. CFPB, the en banc D.C. Circuit upheld the CFPB’s funding mechanism because it “fits within the tradition of independent financial regulators.” However, unlike the Second Circuit decision which involved a direct challenge to the CFPB’s constitutionality based on its funding structure, PHH involved a challenge to the CFPB’s constitutionality based on the CFPB Director’s “for cause” removal protection in which the D.C. Circuit was asked to consider whether the CFPB’s funding structure, when considered in combination with the Director’s “for cause” removal protection, created a separation of powers constitutional violation. 

Of course, the Supreme Court will have the final say on this matter.

Richard J. Andreano, Jr.John L. Culhane, Jr.Michael Gordon & Alan S. Kaplinsky

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SCOTUS Extends Briefing Schedule in Case Challenging Constitutionality of CFPB’s Funding

Having granted the certiorari petition filed by the CFPB seeking review of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB, the U.S. Supreme Court has granted the parties’ joint request to extend the time to file the briefs on the merits. The Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule.

The Supreme Court extended the time to file the joint appendix and the CFPB’s brief on the merits to and including May 8, 2023. It extended the time to file CFSA’s brief on the merits to and including July 3, 2023. The CFPB’s reply brief must be filed by August 2, 2023.

Not unexpectedly, this is a very protracted briefing schedule which will facilitate the filing of numerous amicus briefs supporting both sides. Since the briefing will be completed in August, we would expect oral argument to occur early in the Supreme Court’s new Term that begins in October 2023.

Michael Gordon & Alan S. Kaplinsky

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HUD Reinstates 2013 Fair Housing Act Disparate Impact Rule

The U.S. Department of Housing and Urban Development (HUD) recently issued a final rule reinstating the 2013 version of its disparate impact rule under the Fair Housing Act (Act) to replace a version of the rule adopted by HUD during the Trump Administration in 2020 that never became effective. The final rule is effective 30 days after publication in the Federal Register. As the final rule mainly reinstates the 2013 rule, we refer to the final rule as the 2013 rule. 

The 2013 rule sets forth a three-step burden shifting approach for disparate impact claims under the Act. The party challenging a practice has the burden of proving that that the practice caused or predictably will cause a discriminatory effect. If the party is successful in doing so, the party defending the practice has the burden of proving that the practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative. If the party defending the practice is successful in doing so, the party challenging the practice may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect.

Shortly after HUD issued the 2013 rule, two insurance industry trade associations sued HUD in the District of Columbia federal district court challenging the rule on various grounds particular to the insurance industry, but also making a central assertion that a disparate impact claim may not be brought under the Act. However, in the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., the U.S. Supreme Court held in 2015 that disparate impact claims may be brought under the Act. The trade associations then amended their complaint to remove the assertion that a disparate impact claim may not be brought under the Act, and added assertions that the 2013 rule was inconsistent with the Court’s decision in Inclusive Communities. Only one of the trade associations remains as a plaintiff. The case has been stayed based on the HUD disparate impact rulemaking. Presumably, the case will now proceed.

As noted above, in 2020 the HUD adopted a revised version of the disparate impact rule, claiming that the revisions were consistent with the decision in the Inclusive Communities case. The 2020 version of the rule soon faced legal challenges, and before the rule could become effective a Massachusetts federal district court in the case Massachusetts Fair Hous. Ctr., et al. v. HUD issued a preliminary injunction staying and postponing the effective date of the rule. The court determined that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that that the 2020 rule is arbitrary and capricious in violation of the Administrative Procedure Act.

In the preamble to the reinstated 2013 rule, HUD extensively addresses comments raising issues specific to the insurance industry, including a comment “to exempt homeowners’ insurance—in whole or in part, as well as risk-based pricing and underwriting in particular—from liability for any unjustified discriminatory effects…” In responding to this comment, statements from HUD include the following: “HUD declines to provide an exemption for the insurance industry in whole or in part. . . . [A]s a threshold matter, HUD lacks the authority to create exemptions that are not in the text of the Act. When Congress enacted the Act in 1968 and amended it in 1988, it established exemptions for certain practices but not for insurance. Furthermore, courts have routinely applied the Act to insurers and have found that discriminatory effects liability applies to insurers under the Act.”

HUD also responds to comments that the 2013 rule is not consistent with Inclusive Communities. Despite the Inclusive Communities decision being rendered more than two years after HUD issued the 2013 rule, HUD asserts that the rule is consistent with the decision. In addition to the existing insurance industry trade association lawsuit challenging the 2013 rule, in part, as being inconsistent with such decision, we would not be surprised if one or more other lawsuits are filed challenging the 2013 rule on such basis.

Robust Causality. The Supreme Court in the Inclusive Communities decision addressed the standard that a plaintiff must satisfy to sufficiently make a prima facie claim of disparate impact. Citing to its decision in Wards Cove Packing v. Antonio addressing a disparate impact claim under Title VII of the Civil Rights Act of 1964, the Court stated that “a disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity. A robust causality requirement ensures that ‘[r]acial imbalance . . . does not, without more, establish a prima facie case of disparate impact’ and thus protects defendants from being held liable for racial disparities they did not create.” The Court also stated that “[w]ithout adequate safeguards at the prima facie stage, disparate-impact liability might cause race to be used and considered in a pervasive way and ‘would almost inexorably lead’ governmental or private entities to use ‘numerical quotas,’ and serious constitutional questions then could arise.”

As noted above, the 2013 rule places the initial burden on the plaintiff “of proving that a challenged practice caused or predictably will cause a discriminatory effect.” HUD made several points in response to comments that this aspect of the 2013 rule does not satisfy the robust causality standard set forth in the Inclusive Communities decision, including the following:

  • The rule “contain[s] a robust causality requirement by requiring the plaintiff to prove at the first step of the framework that a challenged practice caused or predictably will cause a discriminatory effect.”
  • “The Inclusive Communities Court did not announce a heightened causality requirement for disparate impact liability, a requirement which would find no support in the statutory text or case law.” “[T]he Court merely reiterated that plaintiffs must identify a causal link between the challenged practice and the alleged disparate impact that is sufficiently robust to permit that connection to be scrutinized at each stage of the case.”
  • The rule does “not use the precise words ‘robust causality’ and (as explained elsewhere in this preamble) nothing in Inclusive Communities requires these words. What Inclusive Communities requires is that a court’s examination of causality be robust.”
  • “As explained above, the Court in Inclusive Communities did not announce a new ‘robust causality’ requirement. Nor did it indicate any intention to exclude from liability cases that allege predictable discriminatory effects. Rather, the Court simply described the longstanding requirement that a plaintiff must establish a causal connection between the policy or practice and the discriminatory effect.”

Basically, HUD is taking the position that (1) the robust causality language in the Inclusive Communities decision did not impose a heightened causality requirement, (2) although the 2013 rule does not use the words “robust causality,” there is no requirement that the rule use such words and, (3) in any event, the rule includes a robust causality requirement. 

Arbitrary, Artificial, and Unnecessary. Citing to its decision in Griggs v. Duke Power Co. addressing a disparate impact claim under Title VII of the Civil Rights Act of 1964, in its Inclusive Communities decision the Supreme Court stated that “[d]isparate-impact liability mandates the ‘removal of artificial, arbitrary, and unnecessary barriers,’ not the displacement of valid governmental policies” and that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The 2020 rule included a requirement that at the pleading stage the party challenging a policy or practice must sufficiently plead facts supporting that the policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective.

Responding to comments that HUD include in the final rule a requirement that plaintiffs plead that a challenged policy is “artificial, arbitrary, and unnecessary,” HUD stated that it “declines to add an ‘artificial, arbitrary, and unnecessary’ pleading standard or substantive element to this final rule. As previously explained, HUD does not construe Inclusive Communities to require the agency to add specific elements or pleading standards for disparate impact cases that go beyond what ‘has always’ been required. Rather, when the Inclusive Communities Court quoted Griggs’ decades-old formulation that disparate impact claims require the removal of artificial, arbitrary, and unnecessary barriers, it did so as part of restating the safeguards and requirements that it found (and HUD agrees) have always been a part of disparate impact jurisprudence. In this context, the Court quoted Griggs’ short-hand formulation for the type of policy that traditionally has been held to create an unjustified discriminatory effect at the end of the burden shifting analysis.” (Footnote omitted.)

The federal district court in Massachusetts that issued the preliminary injunction staying the 2020 rule addressed the “arbitrary, artificial, and unnecessary standard.” The court stated that “[p]laintiffs argue there is no judicial support for the 2020 Rule’s requirement, to be codified in 24 C.F.R. § 100.500(b)(1), that a plaintiff must plead, at the outset, facts showing ‘[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.’” But, as [HUD] point[s] out, the “arbitrary, artificial, and unnecessary” language comes directly from Inclusive Communities, 576 U.S. at 540, 543, 544. Moreover, Plaintiffs completely ignore, in their briefing, the Eighth Circuit’s decision in Ellis v. City of Minneapolis, 860 F.3d 1106, 1112 (8th Cir. 2017), which interpreted Inclusive Communities to require that plaintiffs allege in the complaint that the challenged policy is “arbitrary and unnecessary.””

Valid Interest. As noted above, under the 2013 rule, if the party challenging a practice satisfies its burden of proving that that the practice caused or predictably will cause a discriminatory effect, the party defending the practice has the burden of proving that the practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. Commenters noted that the Supreme Court in the Inclusive Communities decision referred to a “valid interest” and not a “substantial, legitimate, nondiscriminatory interest.” In the decision, the Court stated that “[a]n important and appropriate means of ensuring that disparate-impact liability is properly limited is to give housing authorities and private developers leeway to state and explain the valid interest served by their policies.”

In responding to this point, HUD stated that “[n]othing in Inclusive Communities suggests that the Court endorsed lowering the burden for defendants in step two of the discriminatory effects framework. When Inclusive Communities discussed the ability of defendants to state a “valid interest”, it referred specifically to HUD’s 2013 Rule and the second step of the burden-shifting analysis which requires that defendant show that its policy is necessary to achieve a substantial, legitimate, and nondiscriminatory interest. HUD believes the Court in Inclusive Communities, like other courts and HUD itself, used “valid” as shorthand for the same concept that the 2013 Rule describes as “substantial, legitimate, and non-discriminatory.” (Footnotes omitted.) While the Supreme Court did cite to the 2013 rule in connection with the valid interest language quoted in the prior paragraph, the court added a clarification “that HUD did not use the phrase ‘business necessity’ because that ‘phrase may not be easily understood to cover the full scope of practices covered by the Fair Housing Act, which applies to individuals, businesses, nonprofit organizations, and public entities.’” The Court did not mention that it used the term “valid interest” as shorthand for a “substantial, legitimate, and nondiscriminatory interest.”

While the issuance by HUD of a final rule to reinstate the 2013 rule is the latest step in the disparate impact rulemaking, it is likely not the last step in view of the existing lawsuit challenging that rule, and the potential for additional lawsuits.

Richard J. Andreano, Jr.

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SCOTUS Asks for Solicitor General’s Views on Federal Preemption of State Laws Requiring Payment of Interest on Mortgage Escrow Accounts

The U.S. Supreme Court has invited the Solicitor General to file briefs expressing the views of the United States in two cases involving the question whether state laws requiring the payment of interest on mortgage escrow accounts are preempted for national banks and federal savings associations. The Supreme Court is considering whether to grant the petitions for certiorari filed in the two cases. There is currently a split in the circuits on the question.

One case is Flagstar Bank, FSB v. Kivett in which a Ninth Circuit panel, affirming the district court, ruled that the National Bank Act (NBA) does not preempt a California law that requires financial institutions to pay interest at a specified rate on escrow accounts associated with certain mortgage loans. (Cal. Civil Code Section 2954.8(a).) The panel concluded that the California law was not preempted because it did not “prevent or significantly interfere with the exercise of a national bank’s powers.” (Pursuant to Dodd-Frank, the NBA preemption standard also applies to federal savings associations.)

In concluding that the California law was not preempted, the Ninth Circuit panel indicated that it was bound by the prior decision of another Ninth Circuit panel in Lusak v. Bank of America, N.A. The preemption standard applied by the panel in Lusak was whether the California law “prevents [the bank] from exercising its national bank powers or significantly interferes with [the bank’s] ability to do so.” A petition for certiorari filed by Bank of America in Lusak was denied.

The second case is Cantero v. Bank of America, N.A. in which a Second Circuit panel, reversing the district court, ruled that the NBA preempts a New York law that requires “mortgage investing institutions” that maintain escrow accounts to pay interest at a specified rate. (N.Y. Gen. Oblig. Law Section 5-601.) Applying what it called “ordinary legal principles of preemption,” the Second Circuit panel indicated that “[i]t is only when state laws control the exercise of powers granted to national banks that those laws conflict with the NBA.” It concluded that the New York law was preempted because “[b]y requiring a bank to pay its customers in order to exercise a banking power granted by the federal government [i.e. the power to create and fund escrow accounts], the law would exert control over banks’ exercise of that power.” 

In its brief filed in the Supreme Court in Cantero, Bank of America observes that the Supreme Court “often considers a 1-1 split like this one too shallow to warrant certiorari.” It also suggests that should the Supreme Court nevertheless decide that the preemption question warrants immediate review, the Court should grant the petition in Flagstar and hold the petition in Cantero. The bank argues that Flagstar is a better vehicle because it presents the preemption issue more broadly than the issue decided by the Second Circuit. In Flagstar, the Ninth Circuit panel, following Lusak, held that state law was not preempted as to all mortgage escrow accounts, regardless of whether they qualified as accounts mandated by Dodd-Frank. In contrast, the Second Circuit panel held only that federal law preempted New York law for mortgage escrow accounts that are not mandatory under Dodd-Frank and expressly reserved the question of whether state law would be preempted for mandatory accounts.

Richard J. Andreano, Jr. & Alan S. Kaplinsky

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CFPB and DOJ File Statement of Interest in Lawsuit Alleging Lender Violated ECOA and FHA by Denying Loan Based on Appraisal Alleged to Be Discriminatory

The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) have filed a Statement of Interest regarding the application of the Fair Housing Act (FHA) and the Equal Credit Opportunity Act (ECOA) to a lender that allegedly denied a loan to the plaintiffs based on a home appraisal alleged to be discriminatory.

In Connolly, et al. v. Lanham, et al., a lawsuit currently pending in the U.S. District Court for the District of Maryland, the plaintiffs sought to refinance their home loan with the defendant lender. They allege that the appraiser hired by the lender significantly undervalued their home at $472,000 based on their race. They also allege that despite having told the lender that the appraisal was discriminatory, the lender denied the loan and, in retaliation, stopped answering or returning their calls once they challenged the appraisal on that basis. The plaintiffs further allege that (1) after they replaced their family photos with photos borrowed from white friends and enlisted a white colleague to be present instead of the plaintiffs when another appraiser came, the second appraiser valued their home at $750,000, and (2) they received a loan from another lender based on the second appraisal but that the interest rate on the loan was higher than the rate they would have received from the defendant lender. The defendants have moved to dismiss the case, and the plaintiffs have opposed the defendants’ motions.

In their Statement of Interest, the CFPB and DOJ address the following three legal issues raised by the lender’s motion to dismiss:

Pleading standard for disparate treatment claims under the FHA and ECOA. The lender has argued that to state a claim of disparate treatment under the FHA or ECOA, the complaint must either (1) allege direct evidence of discriminatory intent, or (2) plead a prima facie case under the McDonnell Douglas burden–shifting test. (McDonnell Douglas is a 1973 U.S. Supreme Court decision that created a three-part burden-shifting test through which a plaintiff alleging employment discrimination under Title VII can prove discriminatory intent.) According to the DOJ and CFPB, a plaintiff alleging intentional discrimination in violation of the FHA or ECOA is only required to plead sufficient facts establishing a plausible allegation of discriminatory intent. The agencies assert that a plaintiff need not offer direct evidence of discriminatory intent at any stage of a lawsuit but can demonstrate discriminatory intent either directly, through direct or circumstantial evidence, or indirectly through the McDonnell Douglas inferential burden-shifting test. They also assert that the McDonnell Douglas test is an evidentiary standard and not a pleading requirement and that the lender is attempting to transpose a summary judgment standard to the motion to dismiss stage.

Lender ECOA/FHA liability. In response to the lender’s “implied” argument that it can only be liable if it took discriminatory actions that were entirely separate from the appraiser’s actions, the DOJ and CFPB assert that a lender violates both the FHA and ECOA if it relies on an appraisal that it knows or should know to be discriminatory. According to the agencies, if a lender relies on a discriminatory appraisal to deny a loan (based on the inference that the insufficiency of the collateral makes the applicant non-creditworthy), the lender has taken a prohibited basis into account in its evaluation of the applicant’s creditworthiness. In response to the lender’s argument that pursuant to the Mortgage Reform and Anti-Predatory Lending Act (Mortgage Reform Act) it could only request that the appraiser reconsider his evaluation and provide an explanation, the agencies assert that the Mortgage Reform Act would have permitted the lender to consider additional property information or correct errors in the appraisal report. The agencies also assert that the lender would also have been permitted to obtain additional appraisals or take action “‘permitted or required by applicable Federal or state statute, regulation, or agency guidance,’ such as not relying on an appraisal that is inaccurate or violates the law.” (citation omitted).

Retaliation claims. Section 3617 of the FHA prohibits retaliation against “any person in the exercise or enjoyment, or on account of his having exercised or enjoyed,…any right granted or protected by section 3603, 3604, 3605, or 3606.” In response to the lender’s argument that for the plaintiffs to state a claim under Section 3617 they must also state a claim for an underlying FHA violation, the CFPB and DOJ assert that claims under Section 3617 are not dependent on the existence of another FHA violation. According to the agencies, the language of Section 3617 explicitly contemplates that a defendant might act unlawfully in response to the exercise or enjoyment of a right that has not been violated.

As noted in the Statement of Interest, the issue of appraisal bias has been identified by the Biden Administration as a priority issue. The Administration has created an Interagency Task Force on Property Appraisal and Valuation Equity, with the CFPB among the participants. In January 2022, the Federal Financial Institutions Examination Council’s (FFIEC) Appraisal Subcommittee issued a report entitled “Identifying Bias and Barriers, Promoting Equity: An Analysis of the USPAP Standards and Appraiser Qualifications Criteria.” In an October 2022 blog post, the CFPB warned mortgage lenders that they risk violating federal law if they “fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value.” In December 2022, the Federal Reserve hosted its annual Fair Lending Interagency Webinar at which appraisal bias was among the topics discussed. In January 2023, the CFPB hosted the first hearing of the FFIEC Appraisal Subcommittee on appraisal bias. In February 2023, the CFPB and other federal agencies with responsibility to enforce the ECOA and/or FHA sent a joint letter to The Appraisal Foundation expressing concerns that the proposed changes to the Uniform Standards of Professional Appraisal Practice do not give sufficient attention to appraisal bias. 

Richard J. Andreano, Jr. & John L. Culhane, Jr.

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CFPB Consent Order Shuts Down Mortgage Lender Focused on Servicemembers

On February 27, 2023, the Consumer Financial Protection Bureau (CFPB) entered into a consent order against RMK Financial Corporation d/b/a Majestic Home Loan (RMK), a California-based mortgage lender, based on allegations that it falsely implied government endorsement of its home loans in its marketing. The consent order, which addressed numerous alleged statutory and regulatory violations and a failure to comply with an earlier consent order, prohibits RMK from engaging in any mortgage lending activities (or from receiving remuneration from mortgage lending) going forward, effectively shutting it down. RMK also agreed to pay a $1-million civil money penalty.

The severity of the order is a result of the CFPB finding that RMK’s alleged actions occurred despite a 2015 Consent Order specifically prohibiting specific practices. In that earlier consent order, the CFPB alleged that RMK sent direct mail advertisements to military servicemembers and veterans containing the names and logos of the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA) in a way that falsely implied that the advertisements were sent by the VA or FHA, or that the advertised mortgage products were endorsed or sponsored by the VA or FHA.

The Bureau also alleged that RMK’s advertisements failed to satisfy requirements under the Truth In Lending Act (TILA) and Regulation Z for advertising variable rate loans and misrepresented interest rates and estimated monthly payments, such as by misleading consumers to believe advertisements were for fixed-rate rather than variable-rate loans. In addition to the alleged TILA/Regulation Z violations, the CFPB asserted that these acts were in violation of the Consumer Financial Protection Act of 2010 (CFPA) and Regulation N (the Mortgage Acts and Practices Advertising Rule). Regulation N bars material misrepresentations about the terms of a mortgage product in a commercial communication, including misrepresentations regarding the relationship between a credit provider and a government. RMK settled the 2015 action by paying a $250,000 civil money penalty, agreeing to cease the alleged unlawful practices, and consenting to reporting and recordkeeping requirements.

The CFPB alleged that, despite the earlier consent order, the prohibited acts continued. For example, RMK allegedly disseminated over seven million advertisements between 2015 and 2019 that made false or misleading representations or contained inadequate or impermissible disclosures, in violation of the 2015 consent order, the CFPA, Regulation N, and Regulation Z. The Bureau stated that “[m]any of the advertisements reflected the same types of deceptive and other unlawful advertising practices” that were expressly prohibited by the earlier consent order. It further found that “many, if not all, of these unlawful practices occurred at the direction of [RMK’s] late Chief Executive Officer and sole owner or, at a minimum, with his knowledge, despite concerns and objections expressed by [RMK’s] compliance vendor and compliance officer that the advertisements were deceptive or otherwise violated Federal consumer financial laws.”

The CFPB alleged that many of the actions took place shortly after the 2015 consent order. For example, the Bureau alleged that RMK sent advertisements to about 10,000 consumers in May 2016 that featured a fake VA seal with design elements similar to the official VA seal. The fake seal included the name of the VA’s Interest Rate Reduction Refinance Loan product.

It is unclear why the new consent order was issued close to eight years after the first consent order, when the CFPB alleged that conduct prohibited by the 2015 consent order began occurring within months after that consent order, including during the period in which RMK was obligated to report its consent order compliance to the CFPB.

The CFPB issued a series of consent orders in 2020 against other lenders as part of “an ongoing sweep” of investigations into companies allegedly using false and misleading advertising to servicemembers and veterans. Similarly, the FDIC has more recently focused on the use and misuse of the FDIC name and logo and the misrepresentation of insured status by non-bank entities. (A podcast on the use of the FDIC name and logo can be found here.)

Brian Turetsky

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CFPB Issues Request for Information About Data Brokers and Other Businesses That Collect and Sell Consumer Data

The CFPB has issued a request for information about business models that collect and sell consumer data, such as data brokers, data aggregators, and platforms. The RFI is intended to provide the CFPB with insight into the full scope of the data broker industry about which, according to the CFPB, “there is still relatively limited public understanding of their operations and other impacts.” More specifically, the CFPB plans to use the information obtained through the RFI to assess whether the companies using these business models are covered by the Fair Credit Reporting Act or other statutory authorities and to learn about consumer harm and any market abuses (which according to the CFPB has been identified by financial institutions, consumer advocates, and others to include “significant privacy and security risks, the facilitation of harassment and fraud, the lack of consumer knowledge and consent, and the spread of inaccurate information.”) Comments on the RFI must be received by the CFPB by June 13, 2023.

In the RFI, the CFPB uses the umbrella term “data brokers” to describe businesses that “collect, aggregate, sell, resell, license, or otherwise share consumers’ personal information with other parties.” The term encompasses companies that act as first-party data brokers and interact directly with consumers as well as third-party data brokers with whom consumers do not have a direct relationship. It also includes firms that specialize in preparing employment background screening reports and credit reports. In describing the activities of data brokers, the CFPB states that they “collect information from public and private sources for purposes including marketing and advertising, building and refining proprietary algorithms, credit and insurance underwriting, consumer-authorized data porting, fraud detection, criminal background checks, identity verification, and people search databases.”

The RFI is divided into two sections. One section is titled “Market-level inquiries” that asks questions about the overall data broker market. The other second is titled “Individual inquiries” that asks questions about consumers’ direct experiences with data brokers. 

Curiously, the RFI does not mention the Advance Notice of Proposed Rulemaking issued by the Bureau in October 2020 in connection with its rulemaking to implement Section 1033 of the Dodd-Frank Act. Section 1033 requires consumer financial services providers to give consumers access to certain financial information and data aggregation services are a major focus of the ANPR. The Bureau issued a SBREFA outline in October 2022 and in its Fall 2022 rulemaking agenda, estimated that it would issue a SBREFA report in February 2023.

In August 2022, eight national trade groups filed a petition with the CFPB urging it to engage in rulemaking to define larger participants in the market for data aggregation services. In their petition, the trade groups asserted that the CFPB “should ensure that data aggregators and data users that are larger participants in the aggregation services market—not just banks and credit unions—are examined for compliance with applicable federal consumer financial law, especially the requirements of the forthcoming 1033 rulemaking, including the substantive prohibitions on the release of confidential commercial information.” 

John L. Culhane, Jr.Michael R. Guerrero & Michael Gordon

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2022 HMDA Modified Loan Application Data Published

The CFPB recently announced the publication of the Home Mortgage Disclosure Act (HMDA) Modified Loan Application Data for 2022. The data is available on the Federal Financial Institutions Examination Council (FFIEC) website. The CFPB advises that this year, in addition to institution-specific modified Loan Application Register (LAR) files, users can download one combined file that contains all institutions’ modified LAR data.

For privacy reasons, certain data in actual LARs of reporting institutions is removed or modified. To assist the public with the review of HMDA data, the CFPB publishes A Beginner’s Guide to Accessing and Using Home Mortgage Disclosure Act Data.

The CFPB advises as follows regarding the future release of additional HMDA data:

“Later this year, the 2022 HMDA data will be available in other forms to provide users insights into the data. These forms will include a nationwide loan-level dataset with all publicly available data for all HMDA reporters; aggregate and disclosure reports with summary information by geography and lender; and access to the 2022 data through the HMDA Data Browser to allow users to create custom datasets, reports, and data maps. The CFPB will later also publish a Data Point article highlighting key trends in the annual data.” 

Richard J. Andreano, Jr.

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CFPB Makes Updates and Corrections to CFPB and Other Federal Agency Contact Information in ECOA and FCRA Notices

On March 20, 2023, the CFPB published a final rule in the Federal Register that makes non-substantive corrections and updates to CFPB and other federal agency contact information found in various regulations, including the contact information that must be provided in ECOA adverse action notices and the FCRA Summary of Consumer Rights. The final rule also makes non-substantive changes to various regulations. The final rule is effective April 19, 2023, but the mandatory compliance date for amendments that impact forms given to consumers, as indicated below, is March 20, 2024.

The most significant updates and corrections consist of the following:

  • In Regulation B (ECOA), the CFPB is amending the federal agency contact information in appendix A for the CFPB, OCC, FDIC, NCUA, FTC, and other listed agencies. The contact information must be included in ECOA adverse action notices. The CFPB is also correcting its contact information in appendix D, which sets forth the process for requesting official CFPB interpretations of Regulation B. The appendix A amendments have a March 20, 2024, mandatory compliance date.
  • In Regulation E (EFTA), the CFPB is correcting and updating its contact information in appendix C, which sets forth the process for requesting official CFPB interpretations of Regulation E.
  • In Regulation F (FDCPA), the CFPB is updating its contact information in appendix A and in the introductory section of Supplement I which set forth, respectively, the process for a state to apply for an exemption from the FDCPA and Regulation F and the process for requesting official CFPB interpretations of Regulation F.
  • In Regulation V (FCRA), the CFPB is amending the model form in appendix K for the Summary of Consumer Rights to correct the contact information for various agencies, including the OCC, FDIC, and NCUA. Consumer reporting agencies must provide a Summary when making written disclosure of information from a consumer’s file or providing a credit score to a consumer. A Summary must also be provided by certain other persons in specified circumstances. The appendix K amendments have a March 20, 2024 mandatory compliance date.
  • In Regulation X (RESPA), the CFPB is correcting its contact information in the definition of “Public Guidance Documents” in section 1024.2(b) and in the introductory section of Supplement I, which set forth, respectively, the procedure for requesting copies of public guidance documents from the CFPB and the procedure for requesting official CFPB interpretations of Regulation X.
  • In Regulation DD (Truth in Savings), the CFPB is correcting its contact information in appendix C, which sets forth the process for a state to request a determination from the CFPB regarding whether a state law is inconsistent with TISA and Regulation DD.
  • In Regulation Z (TILA), the CFPB is correcting its contact information in appendices A, B, and C which set forth, respectively, the process for a state to request a determination from the CFPB regarding whether a state law is inconsistent with or substantially the same as TILA and Regulation Z, the process for a state to apply to the CFPB to exempt a class of transactions from TILA and Regulation Z, and the process for requesting official CFPB interpretations of Regulation Z. In appendix J, the CFPB is correcting its postal address for requests to the CFPB for APR calculation tables and to add a URL on its website at which the tables can be accessed.
  • In Regulation J (Interstate Land Sales), the CFPB is correcting its contact information in Appendix A, which contains model forms and clauses that land developers must provide to prospective land buyers under certain circumstances. The appendix A amendments have a March 20, 2024 mandatory compliance date.

John L. Culhane, Jr.

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NLRB General Counsel Issues Guidance Regarding Restrictions on Severance Agreements

Last month, the National Labor Relations Board (NLRB) ruled that an employer violates Section 8(a)(1) of the National Labor Relations Act (NLRA or Act) when the employer offers employee severance agreements with provisions restricting employees’ Section 7 rights under the Act, such as with overly broad confidentiality and non-disparagement provisions. McLaren Macomb, 372 NLRB No. 58 (Feb. 21, 2023) (read about the decision here). In response to inquiries from workers, employers, and labor organizations, NLRB General Counsel Jennifer A. Abruzzo released Memorandum GC 23-05 on March 22, 2023, to express her views on the implications stemming from that case. 

  • Severance Agreements Generally. Lawful severance agreements are not banned by the NLRA, provided “they do not have overly broad provisions that affect the rights of employees to engage with one another to improve their lot as employees.” The General Counsel specifically noted that employees cannot be prohibited from utilizing channels outside of the immediate employee-employer relationship, such as the Board, a union, judicial, administrative or legislative forums, and the media or other third parties.
  • Proffer Unlawful. Whether or not the employee actually signs the severance agreement is irrelevant for finding a violation of the Act. Rather, the offer itself “inherently coerces employees by conditioning severance benefits on the waiver of statutory rights such as the right to engage in future protected concerted activities and the right to file or assist in the investigation and prosecution of charges with the Board.” 
  • Supervisors. Although supervisors generally fall outside the definition of “employees” under the Act, the General Counsel stated that she believes an employer nevertheless violates the Act if: (1) a supervisor is retaliated against for refusing to offer an unlawfully overbroad severance agreement to employees; or (2) an employer proffers a severance agreement to a supervisor in connection with preventing the supervisor from participating in a Board proceeding. 
  • Retroactivity. The General Counsel expressed her view that the McLaren Macomb decision applies retroactively to severance agreements entered into before February 21, 2023, since Board decisions are presumed to apply retroactively unless manifest injustice requires prospective application. While the proffer itself is subject to the Act’s six-month limitations period, enforcing unlawful provisions would continue to be a violation, in the General Counsel’s opinion. The Memo offers no views on whether retroactive application implicates constitutional issues of contract impairment. 
  • Severability. The Memo states that, while each case is fact-specific, the Regions generally will not seek to invalidate the entire severance agreement, but only to void unlawful provisions. This is the case regardless whether the agreement contains a severability provision. The General Counsel advised employers to consider remedying past violations by advising former employees that overbroad provisions of their separation agreements are null and void.
  • Savings Clauses. According to the General Counsel, a savings clause or disclaimer, protecting Section 7 rights, would not necessarily cure overly broad provisions, and the employer still could be liable for “mixed or inconsistent messages.” If an employer wants to use a savings clause, the Memo suggests that the employer must affirmatively and specifically set forth employee statutory rights — enumerating at least nine rights individually — and explain that nothing in the agreement should be interpreted to restrict such rights. The General Counsel referred to the lengthy (and unwieldy) model prophylactic statement of rights set forth in her brief to the Board in the Stericycle case involving overbroad handbook provisions. 

The Memo also provides guidance on what the General Counsel regards as lawful confidentiality and non-disparagement provisions. Confidentiality clauses that are narrowly tailored to restrict dissemination of “proprietary or trade secret information” and are time-limited based on legitimate business justifications may be considered lawful. The General Counsel also suggested that non-Board settlements with confidentiality limited to the financial terms of the settlement may be acceptable. Non-disparagement statements may be lawful if they are limited to “employee statements about the employer that meet the definition of defamation as being maliciously untrue,” when made with knowledge of their falsity or with reckless disregard for their truth. Again, the General Counsel suggested that placing a time limit on such clauses could make them more enforceable. 

The General Counsel concluded by saying that other severance agreement provisions may violate Section 7 of the NLRA, including non-compete clauses, no solicitation clauses, no poaching clauses, broad liability releases reaching beyond the employer, and cooperation requirements impacting Section 7 rights. The General Counsel offered no view as to how the Board has jurisdiction over some of these issues. 

Given the McLaren Macomb decision and Memorandum GC 23-05, now is an opportune time for employers to review their standard severance agreements. Ballard Spahr’s Labor & Employment attorneys regularly work with both unionized and non-unionized employers in preparing severance agreements so that they are compliant not only with the latest NLRB guidance, but also with the array of other employment laws at the local, state and federal levels. 

Brian D. Pedrow & Kyle I. Platt

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Did You Know?

On March 17th, the NMLS released an updated Policy Guidebook, which includes new guidance regarding disclosure questions and reorganizations. 

- John Georgievski

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