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Fed Assesses $1.8 Million Civil Money Penalty Against Florida-Based Holding Company, Terminates Enforcement Action
On June 8, the Board of Governors of the Federal Reserve (Board) announced the termination of an enforcement action brought against a Florida-based holding company in April 2011 relating to deficiencies in its residential mortgage loan servicing, loss mitigation, and foreclosure processing activities found in an Office of Thrift Supervision (OTS) review of the company. Additionally, the OTS review found inadequate procedures to assess potential risks associated with such activities. Under the terms of the 2011 enforcement action, the holding company was required to enhance its oversight of its thrift subsidiary and improve its internal risk management, audit, and compliance programs to address deficiencies in these areas. The decision to terminate the action was based on a review conducted by the Board’s supervisory team, which determined the holding company made “sustainable improvement” in its mortgage servicing oversight practices. Furthermore, the mortgage servicer has agreed to pay a $1.8 million civil money penalty.
CFPB Fines Mortgage Servicer for RESPA Violations
On June 7, the CFPB ordered a mortgage servicer to pay up to $1.15 million in restitution for failing to provide borrowers with required foreclosure protections when handling loss-mitigation applications. The consent order alleges the servicer violated RESPA by failing to send critical information to consumers who were applying for foreclosure relief, and, in some circumstances, beginning foreclosure proceedings on borrowers who had submitted completed applications. Pursuant to the consent order, in addition to restitution, the servicer is required to provide borrowers the opportunity to pursue foreclosure relief, must cease its illegal practices, and develop policies and procedures to ensure compliance with mortgage servicing rules.
Appeal Denied in Los Angeles Fair Housing Suit
On May 26, the Ninth Circuit issued decisions affirming the District Court’s decisions to grant summary judgments in two separate lawsuits brought against two different national banks by the city of Los Angeles (city). (View the district court’s summary judgments here and here). In separate appeals, the city alleged that each of the banks violated the Fair Housing Act by engaging in discriminatory mortgage lending to minority borrowers. The city also asserted that this practice resulted in risky loans and increased foreclosures, which lowered the city’s property tax revenues.
The appellate court disagreed with the city. In both decisions, the court observed that the city’s theory of liability was based on alleged “disparate impact,” which requires the city to demonstrate both the existence of a disparity and a facially neutral policy that caused the disparity.” The court noted that under established precedent a disparate impact claim, to succeed, must be supported by evidence of a robust causal connection between the disparity and the facially neutral policy. In the first case, the court held that the city failed to show such a robust causal connection, and in the second, it found “[t]he record does not reflect that the city raised a genuine issue of material fact as to a policy or policies with a robust casual connection to the racial disparity.” (View appellate memoranda for these cases here and here).
Do Not Call Violations Net $280 Million Fine for FTC, States
On June 5, the U.S. District Court for the Central District of Illinois ruled in favor of the Federal Trade Commission (FTC) and the states of California, Illinois, North Carolina, and Ohio resolving Do Not Call litigation against a direct-broadcast satellite service provider. The court found the service provider liable for making millions of calls resulting in violations of the Telemarketing Sales Rule (TSR) and the Telephone Consumer Protection Act, among other things. The $280 million in civil penalties, with a record $168 million going to the FTC, is the largest civil penalty ever awarded for violation of the FTC Act.
Additionally, the court issued a permanent injunction order against the service provider. Among the requirements in the order, the service provider will show within 90 days of the order effective date that they are “fully complying with the safe harbor provisions” and “have made no prerecorded telemarketing calls at any time during the five (5) years immediately preceding the effective date.” The service provider must also hire an expert to ensure compliance with the injunction and telemarketing laws, provide semi-annual compliance materials, and ensure their compliance with the TSR.
Cordray Discusses Youth Financial Education, CFPB Responsibilities
Recently, CFPB Director Richard Cordray delivered prepared remarks at the Financial Literacy and Education Commission Meeting in Washington, DC on May 24 and at the People and Places Conference in Arlington, VA on May 31.
Financial Literacy and Education Commission (Commission). Coordinated by the Treasury Department’s Office of Financial Security, the Commission presented results from the 2015 Programme for International Student Assessment study on financial education in the U.S. and how it compares to other countries. Cordray’s opening remarks stressed the-importance of providing financial resources and educational tools empowering young people and outlined efforts the CFPB has underway, such as the Youth Financial Education resource page, the online Money as You Grow tool, and other community outreach education programs.
People and Places Conference. A keynote speaker at the conference, Cordray outlined the three main components of the CFPB’s work: (i) supervision and enforcement; (ii) implementing common-sense rules; and (iii) hearing and addressing consumer complaints to help keep companies accountable. Regarding supervisory and enforcement actions, Cordray stated that the Bureau’s activities serve to help change institutions’ practices for the better by (i) providing consistent supervision; (ii) initiating public enforcement actions to serve as a deterrent to “bad behavior”; and (iii) upholding “laws that ban unfair, deceptive, or abusive acts or practices.” Cordray asserted that by setting expectations financial institutions must meet in their own compliance work, similar violations can be avoided. Cordray spoke next about the need to establish “common-sense rules of the road” in order to protect consumers. He used the mortgage industry as an example of how the Bureau responded to Congress’s directive for developing “much-needed reforms” by “implementing rules to govern underwriting, servicing, and loan originator compensation” and “temper[ed] these regulations for small creditors so as to ease regulatory burdens on community banks and credit unions.” Furthermore, Cordray stated the Bureau’s ability to receive and process consumer complaints is crucial to identifying, understanding, and prioritizing problems.
FTC Submits Annual Report on 2016 Enforcement Actions to CFPB
On June 1, the FTC announced that it submitted its 2016 Annual Financial Acts Enforcement Report to the CFPB. The report—requested by the Bureau for its use in preparing its 2016 Annual Report to Congress—covers the FTC’s enforcement activities related to compliance with Regulation Z (Truth in Lending Act or TILA), Regulation M (Consumer Leasing Act), and Regulation E (Electronic Funds Transfer Act or EFTA), as well as its initiatives to engage in research and consumer education.
According to the report, the FTC’s enforcement actions in 2016 concerning TILA involved automobile purchasing and financing, payday loans, and financing of consumer electronics. Regarding mortgage-related credit activity, the report highlights continued litigation in two cases involving mortgage assistance relief services involving “forensic audit scams.” Furthermore, the FTC continued its consumer and business education efforts on issues related to consumer credit transactions in the following areas: military lending, auto sales and financing, payday lending, marketplace lending, and consumer disclosures and testing.
Regarding the Consumer Leasing Act, the report noted the FTC had issued a final administrative consent order for deceptive advertising practices and failure to disclose key lease offer terms. The FTC also filed two federal court actions against automobile dealers. The FTC also engaged in research and policy development and educational activities in this area.
Concerning the EFTA, the FTC reported six new or ongoing cases, including four cases alleging violations in the context of “negative option” plans, in which a consumer agrees to “receive various goods or services from a company for a trial period at no charge or at a reduced price” but later incurs unauthorized recurring charges after the end of the trial period, in violation of the EFTA. The remaining two cases involved payday lending and consumer electronics financing. The FTC also engaged in rulemaking, research, policy development, and educational activities involving the EFTA.
CFPB Seeks Public Comment on its Plans for Assessing the Ability-to-Repay/Qualified Mortgage Rule
On May 25, the CFPB issued a request for comment on its plans for assessing the 2014 Ability-to-Repay/Qualified Mortgage Rule’s effectiveness in meeting the purposes and objectives outlined in the Dodd-Frank Act, which requires the Bureau to assess each significant rule or order it adopts under Federal consumer financial laws. According to the request for comment, and a May 25 blog post on the CFPB’s website, the self-assessment will focus on objectives to ensure that: (i) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (ii) consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination; (iii) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (iv) federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (v) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.
The Dodd-Frank Act established new standards for mortgage lending and created a class of “qualified mortgage” (QM) loans. The standards required lenders to assess consumers’ ability to repay (ATR). Dodd-Frank also provided for a class of QM loans that must not have “certain risky product features and are presumed to comply with the ATR requirement.”
The CFPB issued rules to make ATR and QM standards “clear and effective” in January 2013. As previously covered in a Special Alert, the rule and its amendments that took effect on January 10, 2014 provide a mechanism for curing point-and-fees overages on QM loans as well as more minor amendments to its mortgage origination and servicing rules.
Financial Agencies Issue Advisory Addressing Appraiser Availability
On May 31, the FDIC, the Board of Governors of the Federal Reserve, the OCC, and the NCUA issued FIL-19-2017 to discuss two possible methods for addressing appraiser shortages: (i) temporary practice permits and (ii) temporary waivers. The resulting Interagency Advisory addresses concerns raised pursuant to the Economic Growth and Regulatory Paperwork Reduction Act process regarding the shortage of certified and licensed appraisers, particularly in rural areas. The advisory states that “[t]emporary practice permits could allow state certified or licensed appraisers to provide their services in states where they are not certified or licensed, including those experiencing a shortage of appraisers.” The advisory further states that temporary waivers may also be granted thus improving the timeliness of appraisals in those areas. The advisory applies to all FDIC-supervised institutions.
PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court
On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.
Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”
In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.
At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)
A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.
Eleventh Circuit Rules that Return of a Certified Mail Receipt Satisfies Regulation X of RESPA
In a per curiam opinion issued on March 1, 2017, the Eleventh Circuit Court of Appeals affirmed the dismissal of a complaint alleging that a mortgage servicer had violated Regulation X of the Real Estate Settlement Procedures Act (“RESPA”) by failing to “correctly or timely acknowledge receipt of his [written request for information (“RFI”)].” See Meeks v. Ocwen Loan Servicing LLC, [Order] No. 16-15536 (11th Cir. Mar. 1, 2017). Regulation X requires that, within five days of receiving an RFI, mortgage servicers must “provide to the borrower a written response acknowledging receipt of the information request.” 12 C.F.R. § 1024.36(c). Plaintiff alleged that the mortgage servicer violated 12 C.F.R. § 1024.36(c) when it signed and sent a Certified Receipt on the same day as receiving the RFI and when it sent a substantive response nine days later. Plaintiff sought actual damages of less than $100 and attorneys’ fees and costs.
The Eleventh Circuit ruled, as a matter of first impression, that the mortgage servicer’s return of the Certified Receipt , which the plaintiff’s attorney “unquestionably received,” satisfied Regulation X. Alternatively, the Court affirmed the district court’s decision because the plaintiff “did not suffer any compensable damages from [the] alleged violation” and plaintiff’s counsel’s notice of error “falsely question[ed] the servicer’s receipt in order to create a claim for damages.” As to the claim for statutory damages, the Eleventh Circuit held that the plaintiff lacked Article III standing because he did not suffer a concrete injury-in-fact. Rather, because the plaintiff (and his attorney) “had undisputed actual knowledge of receipt of the RFI,” plaintiff “suffered at most ‘a bare procedural violation.’”