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Special Alert: CFPB Consent Orders Address Wide Range of Real Estate Referral Practices Under Section 8(a) of RESPA
On January 31, the CFPB announced consent orders against mortgage lender Prospect Mortgage, LCC (“Prospect”), real estate brokers Willamette Legacy, LLC d/b/a Keller Williams Mid-Willamette, and RGC Services, Inc. d/b/a Re/Max Gold Coast Realtors (together, “the Brokers”), and mortgage servicer Planet Home Lending, LCC (“Planet”), based on allegations that a wide range of business arrangements between the parties violated the prohibition on “kickbacks” in Section 8(a) of RESPA.
In a press release accompanying the settlements, CFPB Director Richard Cordray stated that the Bureau “will hold both sides of these improper arrangements accountable for breaking the law, which skews the real estate market to the disadvantage of consumers and honest businesses.” The consent orders address a number of practices that have long been the source of uncertainty within the industry. Unfortunately, despite acknowledging in the orders that referrals are an inherent part of real estate transactions, the Bureau provided little constructive guidance as to how lenders, real estate brokers, title agents, servicers, and other industry participants should structure referral arrangements to comply with RESPA.
RESPA Section 8(a)
Section 8(a) of RESPA provides that “[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”
Notably, the CFPB’s consent orders make no reference to Section 8(c)(2), which provides that “[n]othing in this section shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” In a much discussed decision, a panel of the U.S. Court of Appeals for the D.C. Circuit reversed the CFPB’s $109 million penalty against PHH Corporation in October 2015 based on, among other things, the CFPB’s failure to establish that payments for the service at issue (reinsurance) exceeded the fair market value of the service. The CFPB is currently seeking rehearing of this decision from the full D.C. Circuit, as discussed in our summaries of the Bureau’s petition for en banc reconsideration, responses from PHH and the Solicitor General, a motion to intervene filed by several State Attorneys General, and, most recently, PHH’s reply to both the Solicitor General and the motions to intervene.
Click here to read full special alert
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If you have questions about the order or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.
CFPB Sues Law Firms for Unlawful Debt Relief Scheme
On January 30, the CFPB announced that it was seeking a permanent injunction against a group of affiliated law firms and their managing attorneys who charged illegal fees to consumers seeking debt relief. In a complaint filed with the Central District of California, the Bureau alleges, among other things, that the firms violated the Telemarketing Sales Rule by (i) collecting improper fees in advance of providing debt relief services; (ii) misrepresenting that advance fees would not be charged; and (iii) providing substantial assistance to another company it knew or should have known was engaged in acts or practices that violated the rule, because the company had itself been the subject of a $40 million final judgment for similarly deceptive upfront fee arrangements in March 2016. The CFPB contends that the same attorneys from the earlier 2016 action—presently under appeal—took over operations of the firms now targeted.
Bank Fined $18.3 Million for Billing Rate Discrepancies
On January 26, a cease-and-desist order was announced between the SEC and the bank regarding alleged violations involving unauthorized advisor fee overcharges affecting at least 60,000 advisory client accounts. The order claims that during a 15-year period, the bank failed to confirm the accuracy of billing rates entered into its computer systems in comparison to fee rates outlined in client contracts, billing histories, and other documents. Furthermore, the order alleges that the bank cannot locate approximately 83,000 advisory contracts for accounts opened from 1990 to 2012, preventing the bank from accurately validating the fee rates billed to clients over the years against the fee rates that were negotiated when the accounts were opened. As part of the settlement, the bank agreed to enhance its fee-billing and books-and-records practices, and will pay an $18.3 million fine.
**UPDATE** PHH v. CFPB
On January 27, PHH filed a scheduled response brief to views briefed last month by the U.S. Department of Justice (DOJ) under President Obama, likely bringing to a close the parties’ briefing of the CFPB’s petition for en banc review by the full D.C. Circuit of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. Also on January 27, PHH separately filed a (less significant) brief, opposing the recent-filed motion to intervene on the CFPB’s behalf submitted by 17 Attorneys General.
As previously covered on InfoBytes, late last year the Court invited briefing by President Obama’s DOJ on behalf of the United States. (Note that the DOJ does not represent the CFPB; the Bureau is legally permitted to litigate on its own behalf.) The DOJ’s brief focused on the constitutional issue (without wading into the RESPA rulings), and argued that the en banc court should either (i) review the panel’s majority holding that the CFPB’s structure was unconstitutional because the majority’s reasoning was erroneous in view of Supreme Court precedent, or (ii) review and simply adopt the dissenting panelist’s view that because the panel was in all events reversing the CFPB’s RESPA rulings and remanding to the CFPB on that basis, the panel majority should not have reached the constitutional issue.
In response to the DOJ, PHH argues that en banc review is unnecessary because the DOJ had only pointed to an error in the panel’s constitutional reasoning, without stating whether DOJ’s preferred mode of analysis would have led to a different result than the one reached by the panel, namely the severing of the “for cause” removal provision applicable to the CFPB Director under Dodd-Frank. PHH also contended that there is no precedent for an en banc court panel to review a panel decision just to determine whether the panel had properly reached a constitutional issue, and that in any event the panel’s decision to reach the issue was entirely proper (and therefore not worthy of review) because, as PHH’s framed the matter, the panel could not have remanded the case to an agency with a potentially unconstitutional structure.
In addition, on January 26, two other non-parties filed two motions to intervene on the CFPB’s side: (i) one by the Democratic Ranking Members of the Senate and House Committees with jurisdiction over the CFPB, Sen. Sherrod Brown of Ohio and Rep. Maxine Waters of California, respectively; and (ii) one by a coalition of interest groups, which included the Center for Responsible Lending, US PIRG, Americans for Financial Reform, the Leadership Conference on Civil and Human Rights, and other movants.
CFPB Releases Independent Audit of its Operations and Budget
In accordance with its obligations under the Dodd-Frank Act, the CFPB released an Independent Audit of Selected Operations and Budget for the Bureau’s fiscal year 2016. The audit report—which is dated December 16, 2016—was prepared by KPMG LLP for the purpose of evaluating the CFPB’s: (i) budget process relative to Bureau policies and procedures regarding budget formulation, execution, and monitoring; (ii) inventory and asset management practices, policies, and procedures; (iii) frequent traveler stipend program; and (iv) corrective actions taken to resolve the findings included in the Bureau’s 2015 Independent Audit (also completed by KPMG). KPMG concluded generally that adherence to asset management policies and procedures needs to be improved and that certain additional controls should be adopted. The report offers several recommendations addressing the deficiencies, which the Bureau’s Acting Chief Financial Officer agreed with and is “already preparing to implement.” The report also noted that the CFPB had “partially” but not completely remediated the deficiencies KPMG had identified in its 2015 audit.
CFPB Fines Mortgage Servicers $28 Million, Claims Failure to Provide Foreclosure Relief
On January 23, the CFPB announced that it had entered consent orders (2017-CFPB-0004 , 2017-CFPB-0005), against two affiliated mortgage servicers, claiming the companies had misled homeowners seeking foreclosure relief. One of the respondent companies is alleged to have, among other things, burdened consumers with excessive and unnecessary paperwork demands in response to foreclosure relief applications thereby violating both RESPA and the Dodd-Frank Act’s prohibition on deceptive acts or practices. The Bureau is therefore requiring the company to pay an estimated $17 million to compensate affected consumers and to pay a civil penalty of $3 million.
As for the second respondent, the CFPB alleged that it failed to consider payment deferment applicants for foreclosure relief options, misled consumers about the impact of deferring payments, charged certain borrowers for credit insurance that should have been cancelled, prematurely cancelled credit insurance for other borrowers, provided inaccurate information to credit reporting agencies, and failed to investigate consumer disputes. Finding violations under RESPA, FCRA, and various “deceptive acts or practices,” the Bureau is requiring the second company to refund approximately $4.4 million to consumers and to pay a civil penalty of $4.4 million.
CFPB Files Suit Against Bank Regarding its OverDraft Services
On January 19, the CFPB initiated an enforcement action against a U.S. bank alleging it mislead consumers regarding its overdraft services. In a complaint filed with the United States District Court for the District of Minnesota, the Bureau claims the bank created an application process that obscured fees and made an optional opt-in overdraft service appear to be mandatory for both new and existing consumers. Furthermore, the complaint alleges that the bank relied on overdraft fee revenue to a greater degree than most other banks its size and recognized that the opt-in rule could negatively impact its business by virtue of reducing overdraft revenue. The CFPB seeks “redress for consumers, injunctive relief, and penalties.”
Ninth Circuit Orders Tribal Lenders to Comply with CFPB Investigative Demands
On January 20, the Ninth Circuit issued an opinion affirming the U.S. District Court for the Central District of California’s 2014 order enforcing the investigative demands against three tribal lending entities. The investigative demands are centered on determining whether small-dollar online lenders or other persons have engaged or are engaging in unlawful acts or practices relating to the advertising, marketing, provision, or collection of small-dollar loan products, in violation the Dodd-Frank Act and other Federal consumer financial laws. According to the opinion, the court claims that in “the Consumer Financial Protection Act, a generally applicable law, Congress did not expressly exclude tribes from the Bureau’s enforcement authority” and thereby, the tribes cannot claim tribal sovereign immunity.
FTC Halts Scheme to Enroll Consumers in Credit Monitoring Service
On January 10, the FTC filed a complaint against an online company that owns three “free credit report” websites as well as three individuals connected to the company with claims that they illegally lured consumers to their websites. The scheme, as alleged in the complaint, made use of Craigslist ads promoting non-existent or unauthorized apartments and houses for rent as the means of encouraging consumers to request additional information, which would then prompt them to click on a link to one of the three websites owned by the company to get a “free” credit check. The consumers allegedly were then enrolled in a credit monitoring service, supposedly without their knowledge or consent. The company has purportedly accrued millions of dollars using this method. On January 11, the U.S. District Court for the Northern District of Illinois entered a temporary restraining order against the defendants.
Special Alert: Trump Administration Initiates "Regulatory Freeze"
On January 20, Reince Priebus, Chief of Staff to President Trump, issued a memorandum to the heads of executive departments and agencies initiating a regulatory review to be headed by the Director of the Office of Management and Budget (“OMB”). Congressman Mick Mulvaney (R-SC) has been nominated to fill that position.
On behalf of the President, the memorandum asks the following of the agency and department heads:
- No new regulations: “[S]end no regulation to the Office of the Federal Register (the ‘OFR’) until a department or agency head appointed or designated by the President after noon on January 20, 2017, reviews and approves the regulation.”
- Withdraw final but unpublished regulations: “With respect to regulations that have been sent to the OFR but not published in the Federal Register, immediately withdraw them from the OFR for review and approval.”
- Delay the effective date of published but not yet effective regulations: “With respect to regulations that have been published in the OFR but have not taken effect, as permitted by applicable law, temporarily postpone their effective date for 60 days from the date of this memorandum” and consider notice and comment to further delay the effective date or to address “questions of fact, law, or policy.” Following the delay, regulations that “raise no substantial questions of law or policy” would be allowed to take effect. For those regulations that do raise such questions, the agency or department “should notify the OMB Director and take further appropriate action in consultation with the OMB Director.”
Rulemakings subject to statutory or judicial deadlines are exempt, and the OMB Director has the authority to grant further exemptions for “emergency situations or other urgent circumstances relating to health, safety, financial, or national security matters, or otherwise.”
Click here to read full special alert
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If you have questions about the “freeze” or other related issues, visit our Consumer Financial Protection Bureau practice for more information, or contact a BuckleySandler attorney with whom you have worked in the past.