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PHH v CFPB Update: D.C. Circuit Grants CFPB’s Request to Go Last at May 24 En Banc Oral Arguments
In an per curium order handed down on May 1, the U.S. Court of Appeals for the D.C. Circuit granted an uncontested motion brought by the CFPB seeking to revise the order of the oral arguments in the upcoming PHH Corp. v. CFPB hearing before the en banc court. With all briefing on the merits having been submitted, the case awaits oral arguments, which have been set for May 24. The Bureau sought to change the order of arguments such that the CFPB presented its argument last—after both PHH and the DOJ. In seeking a change in scheduling order, the CFPB argued that the original schedule—pursuant to which the DOJ would go last—did not afford the Bureau an opportunity to respond to the DOJ’s arguments. The Court’s May 1 Order, having granted the Bureau’s Motion, provides for the following argument order:
- Petitioners (PHH Corp.) – 30 minutes
- Amicus Curiae United States – 10 minutes
- Respondent (CFPB) – 30 minutes
Also, note that the CFPB’s motion agrees-in-advance to PHH to likewise respond to both the DOJ and CFPB, should it wish to do so.
As previously discussed in InfoBytes, the once-cooperative relationship between the CFPB and the DOJ recently turned adverse after the Sessions-led DOJ presented arguments in its latest briefing that differed markedly from both the CFPB’s positions and from the arguments asserted in briefing submitted by the Obama Administration in December 2016. For additional background, please see our recent PHH Corp. v CFPB Case Update.
NCUA Collects $445 Million from International Bank Due to Faulty Mortgage-Backed Securities, Recovers Nearly $4.7 Billion to Date
On May 1, the National Credit Union Administration (NCUA) announced it has collected $445 million from a Switzerland-based bank over claims stemming from losses borne by two liquidated credit unions related to faulty mortgage-backed securities they bought from the bank. As part of the settlement, NCUA will dismiss its 2012 lawsuit filed in the U.S. District Court in Kansas on behalf of the credit unions and brought against the bank for violations of federal and state laws through its alleged misrepresentations in the sale of mortgage-backed securities. Notably, the bank is not admitting fault as part of the deal. The $445 million in recoveries will be used to pay claims against the liquidated corporate credit unions, “including those of the Temporary Corporate Credit Union Stabilization Fund.” “This latest recovery . . . provide[s] a measure of accountability for the firms that sold faulty securities to the corporate credit unions,” acting NCUA Chairman Mark McWatters said. “It remains incumbent on NCUA to provide transparency in terms of the settlements, the legal fees and other costs that go with them, and how these affect the Stabilization Fund.” To date, NCUA’s recoveries from financial institutions alleged to have sold faulty securities to five corporate credit unions, leading to their collapse, have reached nearly $4.8 billion.
CFPB Releases Report on Diversity and Inclusion in the Mortgage Industry, Banking Agencies Attend Roundtable Meeting
On April 27, the Consumer Financial Protection Bureau published its report summarizing strategies intended to promote diversity and inclusion by mortgage industry participants. The report, Diversity and Inclusion in the Mortgage Industry: Readout from an Opening Roundtable, is the result of the Bureau’s collaboration with the financial services industry. The roundtable meeting—led by the Bureau’s Office of Minority and Women Inclusion (OMWI)—convened representatives from the mortgage industry, nonbank financial companies, and OMWI staff from the OCC, FDIC, Federal Reserve, and FHFA. OMWI was a created by Section 342 of the Dodd-Frank Act and charges directors with “increasing diversity in agency programs and contracts, and assessing diversity policies and practices of entities regulated by the agency.” The report highlights issues raised by roundtable participants and stresses the need to develop a “strong business case for diversity and inclusion.” The Bureau’s position on the strategies and practices discussed include the following:
- promoting diversity and inclusion strengthens organizations and improves overall performance;
- building in diversity and inclusion as “fundamental principles” and taking a “tone from the top” approach highlights the importance of leadership buy-in and accountability;
- boosting diversity and inclusion through the recruitment, hiring, retention, and advancement of personnel creates opportunities for more diverse viewpoints;
- promoting a more diverse workforce and tailoring products to the needs of different consumers fosters a greater understanding of the needs of a more diverse customer base; and
- understanding the importance of data collection and analysis supports the business case for diversity.
Fannie Mae to Allow Home Owners to Swap Student Loan Debt for Mortgage Debt
On April 25, Fannie Mae issued updates to its Selling Guide allowing home owners to refinance their mortgages to pay off their student loan debt. The new policies will present opportunities for homeowners to (i) pay down student debt by refinancing their mortgage; (ii) no longer be required to include non-mortgage debt (credit cards, auto loans, and student loans) paid by others on loan applications; and (iii) increase the likelihood of qualifying for a mortgage loan while carrying student debt “by allowing lenders to accept student debt payments included on credit reports.” The updates also allow for debt to be excluded from the debt-to-income ratio if a lender can obtain documents showing that a non-mortgage debt has been paid by another party for at least 12 months. “These new policies provide . . . flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers,” stated Jonathan Lawless, Fannie Mae’s Vice President of Customer Solutions. The policy changes are effective immediately.
CFPB Releases Supervisory Highlights Focused on Student Lending and Mortgage Servicing
On April 26, the CFPB released its Supervisory Highlights for spring 2017, which outlines its supervisory and oversight actions in areas such as mortgage servicing and student loan servicing. According to the Supervisory Highlights, recent supervisory resolutions have “resulted in approximately $6.1 million in restitution to more than 16,000 consumers.”
Student loan servicing. Bureau examiners reported that student loan servicers (i) routinely acted on incorrect information about whether the borrower was enrolled in school, and (ii) failed to reverse certain charges, including improper late fees and capitalization of unpaid interest, even after they knew they had wrongly ended a deferment.
Mortgage servicing. According to the report, the Bureau continued to see “serious issues for consumers seeking alternatives to foreclosure, or loss mitigation, at certain servicers.” CFPB examiners found problems with premature foreclosure filings, mishandling of escrow accounts, and incomplete periodic statements. Furthermore, examiners found that one or more mortgage servicers:
- failed to identify the additional documents and information borrowers needed to submit to complete a loss mitigation application and then denied the applications for not including those documents;
- launched the foreclosure process prematurely after receiving loss mitigation applications from borrowers, thereby failing to give required foreclosure protections to qualified consumers;
- mishandled escrow accounts by using funds to pay insurance premiums on unrelated loans, creating shortages in the escrow accounts and higher monthly payments for consumers; and
- issued incomplete periodic statements that used vague language such as “Misc. Expenses” and “Charge for Service” when describing transaction activity.
The report also outlined the Bureau’s position on employee production incentives and presented guidance and examples of where “incentives contributed to substantial harm.”
Special Alert: CFPB Proposes Amendments to 2015 HMDA Rule
On April 13, the Consumer Financial Protection Bureau (CFPB) issued a proposal to amend the 2015 Home Mortgage Disclosure Act (HMDA) rule. The changes are primarily for the purpose of clarifying data collection and reporting requirements, and most of the clarifications and revisions would take effect in January 2018. Comments on the CFPB’s proposal are due 30 days after publication in the Federal Register.
The CFPB describes the changes as being non-substantive in nature, noting that the proposal is meant to provide “clarifications, technical corrections, or minor changes.” While we describe the more significant proposed amendments below in greater detail, highlights of the proposal include:
- Clarification of the definitions of “automated underwriting system,” “closed-end mortgage loan” (specifically, extension of credit), “dwelling” (specifically, multifamily residential structures and communities), “home improvement loan,” and “home purchase loan” (specifically, construction and permanent financing)
- Permission for institutions to report “not applicable” for loan purpose and the loan originator’s Nationwide Mortgage Licensing System and Registry ID when reporting certain purchased loans originated before Regulation Z’s loan originator rules took effect
- Clarification of the exclusions for temporary financing and construction loans, commercial or business purpose loans, financial institutions that do not meet the loan-volume threshold, and new funds in advance of consolidation with New York State consolidation, extension, and modification agreements (CEMA)
- Provision of a safe harbor for bona-fide errors related to incorrect census tract reporting if the institution properly uses the geocoding tool published on the CFPB website
Click here to read full special alert
If you have questions about the amendments or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.
PHH Submits Reply Brief in Case Against CFPB; DOJ Allocated 10 Minutes at May 24 Oral Argument
As recently covered by InfoBytes, on March 31 the CFPB and seven amicus curiae respondents each filed briefing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. On April 10, PHH filed a reply brief responding to the arguments raised by the CFPB and other respondents, and reiterating its position that, among other things, the en banc court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and that the only satisfactory remedy is the complete invalidation of the Bureau.
Citing Myers v. United States, 272 U.S. 52 (1926), PHH contends that, “the Constitution does not permit Congress to assign any portion of the executive power to an ’independent’ officer who is not accountable to, and removable by, the President.” Id. at 113. Moreover, in addressing comparisons between the CFPB and the FTC, the mortgage lender’s reply argues that “[t]he CFPB’s broad executive, legislative, and adjudicative authority further refutes its claim that it is functionally ‘indistinguishable’ from the FTC in 1935” because, among other reasons, “[i]n 1935, the FTC had no substantive rulemaking powers—the FTC disclaimed that authority until 1962.” In support of this claim, PHH highlights the fact that “the CFPB has all the authority—and more—of a cabinet department such as Treasury or Justice” but “unlike most cabinet positions, the Director may unilaterally appoint every subordinate official in the agency, as well as hire and compensate all CFPB employees outside the normal competitive-service requirements” (emphasis added). In addition to addressing the constitutional issue, PHH’s reply brief also notes that the CFPB has offered no support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.
Oral argument is scheduled for May 24. As provided in a Per Curiam Order issued on April 11, the Court has allocated 30 minutes per side for the argument and an additional ten minutes of argument for the United States as amicus curiae. For additional background, please see our recent PHH Corp. v CFPB Case Update.
District Court Says Bank/RMBS Trustee Must Face Suit Filed by Institutional Investors Claiming Breach of Trust Agreement
On March 30, a federal court in the Southern District of New York denied in part a bank’s motion to dismiss claims brought in five consolidated actions by institutional investors alleging breach of contract and conflict of interest in connection with billions of dollars of alleged losses stemming from the bank’s role as a trustee of 53 residential mortgage-backed securities (RMBS). The RMBS investors alleged, among other things, that the trustee took “virtually no action” to require lenders to repurchase or cure defaulted or improperly underwritten loans that backed the securities, despite having knowledge of “systemic violations.” The investors further alleged that the trustee’s failure to take corrective action was due to concerns that it might expose its own “misconduct” in other RMBS trusts and/or jeopardize its business dealings with lenders and servicers.
Ultimately, the Court granted in part and denied in part the bank-trustee’s motion to dismiss, finding that the plaintiffs may pursue breach of contract and conflict of interest claims related to the trusts, as well as certain claims alleging breaches of fiduciary duty and due care. In reaching its conclusion, the Court explained that, having identified internal bank documents that raise legitimate questions about whether bank officials knew about lenders’ “alleged breaches of the trusts’ governing agreements” and failed to address the problems, the plaintiffs’ allegations “go far beyond many other RMBS trustee complaints, which themselves have been found sufficient to state a claim.” The Court did, however, dismiss the investors’ claims that alleged negligence and those alleging a breach of the covenant of good faith and fair dealing and negligence because, among other reasons, “[a] tort claim cannot be sustained if it ‘do[es] no more than assert violations of a duty which is identical to and indivisible from the contract obligations which have allegedly been breached.’” The Court also nixed several claims asserting violations of certain provisions of the New York law governing mortgage trusts for which no private right of action exists.
Case Update: PHH Corp. v CFPB
March 31 marked the deadline for the CFPB to file its brief in response to PHH Corporation in the U.S. Court of Appeals for the District of Columbia Circuit’s en banc review of the CFPB’s enforcement action against PHH for alleged violations of the Real Estate Settlement Procedures Act (RESPA). As previously covered by InfoBytes, the PHH case began as a challenge to a 2015 penalty the CFPB levied against PHH, which was collected as part of what the CFPB deemed – a “captive reinsurance arrangement.” In fighting the penalty, PHH called into question the Bureau’s constitutionality and in October 2016, a panel of the D.C. Circuit concluded both that the CFPB misinterpreted RESPA, and also that its single-Director structure violated the constitutional separation of powers. On February 16 of this year, however, the D.C. Circuit granted the CFPB’s petition for rehearing en banc of the October 2015 panel decision. In granting en banc review, the court sought guidance from the parties on three specific questions:
- Is the Bureau’s structure unconstitutional because its Director may be removed only for cause, and if so, is the appropriate remedy to sever the for-cause removal provision from the Consumer Financial Protection Act?;
- May the Court avoid addressing the constitutionality of the Bureau’s structure if it adopts the panel’s holdings as to PHH’s liability under RESPA (and should it adopt those holdings)?; and
- What is the appropriate disposition of this case if this Court concludes that the SEC’s administrative law judges are “inferior officers” under Lucia v. SEC?
Oral argument is scheduled for May 24. This Court has allocated 30 minutes per side for the argument and, as discussed further below, the Department of Justice (DOJ) has filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.
CFPB’s Brief. On March 31, the CFPB filed its brief for the en banc rehearing in PHH Corp. v CFPB urging the D.C. Circuit to uphold the constitutionality of the Bureau’s single-director, independent-agency structure. According to the CFPB, neither the Bureau’s current single-director arrangement, nor the “for-cause” restriction on the President’s removal powers prevents the Executive branch from ensuring that the nation’s laws are implemented. Specifically, the brief explains that “[t]he President has no less control over a single-director agency than he does over a multi-member commission.” The brief also sets forth the Bureau’s position that, even “[i]f this Court determines that the Bureau’s structure is unconstitutional,” the appropriate remedy is not to invalidate the agency in its entirety, but rather to “sever the for-cause removal provision” of the Dodd-Frank Act (the Act), thereby allowing the President to remove the Bureau’s director for any reason. In addition to addressing the constitutional question, the CFPB also reiterated its argument that its RESPA interpretation is correct, that PHH and its affiliates violated RESPA, and that the Act’s statute of limitations does not apply to the Bureau’s administrative enforcement authority. And, at the direction of the court, the brief also addressed the potential effect of a decision in Lucia v. SEC that a SEC administrative law judge (ALJ) was an inferior officer under the Constitution. The ALJ used by the CFPB in the PHH enforcement proceeding was, in fact, borrowed from the SEC. Notably, Lucia v. SEC is scheduled to be argued immediately before PHH Corp. v. CFPB, on May 24, 2017.
Amicus Curiae in Support of the CFPB. Also filed on March 31 were seven amicus curiae briefs, each of which offered arguments, both legal and non-legal, in favor of the CFPB’s continued existence as an independent regulator:
- Brief on Rehearing en banc of Amici Curiae State Attorneys General of the States of Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont and Washington, and the District Of Columbia in Support of Respondent
- Brief on Rehearing en banc of Current and Former Members of Congress as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Amici Curiae Public Citizen, Inc., Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, and Tzedek DC in Support of Respondent
- Brief of Americans For Financial Reform, California Reinvestment Coalition, Center for Responsible Lending, Consumer Action, Demos, Housing and Equal Rights Advocates, Leadership Conference on Civil and Human Rights, National Community Reinvestment Coalition, National Council of La Raza, National Fair Housing Alliance, Self-Help Credit Union, United States Public Interest Research Group Education Fund, Inc., and Woodstock Institute, as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Separation of Powers Scholar as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of Amici Curiae Financial Regulation Scholars as Amici Curiae in Support of Respondent
- Brief on Rehearing en banc of AARP and AARP Foundation as Amici Curiae in Support of Respondent
PHH’s Brief. Briefing for PHH and amicus curiae briefs in support of the mortgage lender were due on March 17. In its opening brief and addendum, PHH focused on the separation-of-powers and remedy issues, raising the RESPA interpretation issue principally in support of the claim that the CFPB’s unconstitutional structure rendered the Bureau dangerously unaccountable. The New Jersey mortgage lender noted, among other things, that Congress has no ability to cut the agency’s budget and the President cannot remove its director without cause. As a general matter, the mortgage lender has argued that the Bureau’s creation “placed massive, unchecked federal power in the hands of a single, unaccountable director” and that “[t]he director alone rules over large swaths of the field of consumer finance, subject to virtually no restraints from the representative branches.”
DOJ Brief. As previously covered by InfoBytes, the DOJ filed its own brief in the case on March 17, arguing in support of the D.C. Circuit panel’s initial ruling and proposed remedy. The DOJ brief stated, among other things, that, “[w]hile we do not agree with all of the reasoning in the panel’s opinion,” the DOJ agrees with the panel’s conclusion that “a removal restriction for the Director of the CFPB is an unwarranted limitation on the President’s executive power” and that “the panel correctly concluded … that the proposed remedy for the constitutional violation is to sever the provision limiting the President’s authority to remove the CFPB’s Director, not to declare the entire agency and its operations unconstitutional.” As covered recently on InfoBytes, the DOJ presented arguments that differed both from the CFPB and from the positions previously presented by the Obama Administration in briefing submitted on behalf of the United States back in December.
Also, as mentioned above, on April 3, the DOJ filed an unopposed motion seeking ten minutes of argument time for the United States at the May 24 en banc hearing.
Amicus Curiae in Support of PHH. The March 10 deadline in the en banc proceeding also brought about the filing of seven amicus curiae briefs in support of PHH’s claims and/or defenses. Six of these filings took the position that the Bureau’s current structure violates separation-of-powers principles:
- Brief on Rehearing en banc of the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Petitioners
- Brief on Rehearing en banc of ACA International as Amicus Curiae in Support of Petitioners
- Brief on Rehearing en banc of the Cato Institute as Amicus Curiae in Support of Petitioners
- En Bank Brief of Amici Curiae RD Legal Partners, LP, RD Legal Funding, LLC, RD Legal Finance, LLC and Roni Dersovitz in Support of Petitioners
- State National Bank of Big Spring, 60 Plus Association, Inc.; and Competitive Enterprise Institute as Amici Curiae in Support of Petitioners
- Brief for the States of Missouri, Alabama, Arizona, Arkansas, Georgia, Idaho, Indiana, Kansas, Louisiana, Nevada, Oklahoma, South Dakota, Texas, West Virginia, and Wisconsin as Amici Curiae in Support of Petitioners
A seventh—filed by a combined group of 13 banking and residential real estate-related organizations—argued in support of the company’s interpretation of the RESPA. According to this brief, the CFPB incorrectly changed a long-standing RESPA interpretation that permitted the use of captive reinsurance companies under appropriate circumstances. The changed interpretation was contrary to the Act and to the CFPB’s own regulation. The brief also argued that the Bureau improperly changed the interpretation and applied the new interpretation in an enforcement action without proper notice.
FDIC Releases Third Volume in its Affordable Mortgage Lending Guide
On April 6, the FDIC released the third volume of its Affordable Mortgage Lending Guide (Guide). The Guide is designed to help community bankers understand and compare various affordable mortgage-related programs, as well as their Community Reinvestment implications. This third installment of the Guide provides an overview of Federal Home Loan Bank programs designed to support single-family home purchases, such as down payment and closing cost assistance—many of which can be used in conjunction with other federal and state housing finance agency and government-sponsored enterprise programs. The Guide also provides alternatives for selling mortgages on the secondary market. As previously reported in InfoBytes, the first and second volumes in the series were published last year.