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CFPB Debuts Mortgage Rule Videos, Spanish Language Website
On May 15, the CFPB announced a YouTube playlist, which includes seven videos that provide information about the mortgage rules the CFPB published earlier this year. The CFPB stated that the purpose of the videos is to provide an overview of the rules in a plain language format for use by a broad array of industry constituents, but cautioned that the videos are not a substitute for the rules themselves. Also on May 15, the CFPB announced a Spanish language website, with mobile capability, that provides access to CFPB resources, including information about how to submit a consumer complaint and answers to consumers’ frequently asked questions.
Third Circuit Joins DC Circuit in Invalidating NLRB Recess Appointment
On May 16, the U.S. Court of Appeals for the Third Circuit held that an appointment to the National Labor Relations Board (NLRB) made by President Obama in March 2010 during a purported Senate recess was unconstitutional and vacated orders of the NLRB as constituted with the improperly appointed member. NLRB v. New Vista Nursing & Rehab., No. 11-3440, 2013 WL 2099742 (3rd Cir. May 16, 2013). The NLRB member appointment at issue in this case precedes the appointments at issue in Noel Canning, which appointments were made during the same pro forma Senate session in which President Obama appointed CFPB Director Richard Cordray. The D.C. Circuit’s opinion invalidating those appointments currently is on appeal to the Supreme Court. Here, as explained in the majority opinion and as in Noel Canning, the central question is the meaning of “the Recess of the Senate.” The court concluded that "the Recess of the Senate" in the Recess Appointments Clause refers to only intersession breaks, held that the NLRB panel lacked the requisite number of members to exercise its authority because one panel member was invalidly appointed during an intrasession break, and vacated the Board‘s orders. In a dissenting opinion, one judge argued that the majority holding undoes an appointments process that has successfully operated for over 220 years, and the court instead should have held that “the Recess” refers to both intrasession and intersession recesses because the Senate can be unavailable to provide advice and consent during both. The Third Circuit did not address whether the President may only fill vacancies that arise or begin during such intersession recesses, as opposed to vacancies that happen to exist during such recesses.
FTC Submits Financial Acts Enforcement Letter to CFPB
On May 14, the FTC released a letter it sent to the CFPB’s assistant directors for fair lending and supervision examinations describing activities related to the FTC’s administration and enforcement of the regulations implementing ECOA, EFTA, TILA, and the Consumer Leasing Act. The annual letter reviews the FTC’s post-Dodd-Frank Act responsibilities with regard to these regulations and reports on enforcement actions taken with regard to each. For example, with regard to TILA, the letter reviews FTC enforcement actions involving non-mortgage credit advertisements, mortgage lending advertisements, and forensic audit scams, and describes the FTC’s rulemaking and policy work related to the CFPB’s mortgage rules and in the area of mobile payments.
Second Circuit Sides with CFPB in ILSFDA Case While Applying Auer Deference
On May 6, the U.S. Court of Appeals for the Second Circuit agreed with the CFPB in holding that a single-story unit in a multi-story condominium is a “lot,” as that term is used in the Interstate Land Sales Full Disclosure Act. Berlin v. Renaissance Rental Partners, No. 12-2213, slip op. (2d Cir. May 6, 2013). The CFPB and HUD, the predecessor regulator under the ILSFDA, had previously issued regulations stating that a property could only qualify as a “lot” if it involved the “exclusive use of … land.” The Second Circuit determined that the definition of the term “land” was ambiguous and deferred to the agencies’ interpretation, which equated “land” with “realty.” The case is notable primarily because the dissenting opinion reflects an increasingly unfriendly attitude in the courts towards so-called Auer deference. That deference generally requires courts to defer to any plausible interpretation from an agency of its own regulations. In a 15-page dissent in Berlin, Chief Judge Dennis Jacobs questioned the utility of that deference doctrine in this case, arguing that the agency’s reading was “unnatural” and should not be given effect. Chief Judge Jacobs also disagreed with the majority’s emphasis on the fact that the HUD/CFPB position was consistent. Indeed, Chief Judge Jacobs felt that the CFPB’s “gravity-defying” “misunderstanding” was “not improved by consistency,” particularly given that the agencies’ interpretations rested on guidelines that were “semi-literate.” Interestingly, Chief Judge Jacobs twice cited to Justice Scalia’s recent dissent in Decker v. Northwest Environmental Defense Center, which questions the continuing basis for Auer. (A previous InfoByte discussed the opinions in Decker.) Because Auer may prove relevant in many administrative law cases—including those involving banking and financial regulators—this unfriendly attitude may prove significant for participants throughout the financial industry.
DOJ Files First Criminal Action on CFPB Referral, CFPB Files Parallel Civil Suit
On May 7, the U.S. Attorney for the Southern District of New York announced mail and wire fraud charges against a debt settlement firm, its owner, and three of its employees. The government alleges the defendants lied to prospective customers about (i) fees associated with the company’s debt relief products, (ii) the company’s purported affiliation with the federal government and leading credit bureaus, and (iii) the results achieved for its customers. On the same day, the CFPB filed a civil complaint against the same debt relief provider and one other company in which the CFPB alleges the firms violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by charging consumers illegal advance fees for debt-settlement services. The CFPB is seeking to halt the operations, collect civil penalties, and obtain customer redress.
CFPB Proposes to Delay Part of Mortgage Loan Originator Rule
On May 7, the CFPB proposed to temporarily delay the effective date of one aspect of its loan originator compensation rule. Under the final rule, effective June 1, 2013, creditors would be prohibited from financing premiums or fees for certain credit insurance products offered in connection with certain mortgage loan transactions. The CFPB proposes to temporarily delay the relevant provision so that the Bureau can clarify its application to transactions other than those in which a lump-sum premium is added to the loan amount at closing. The CFPB plans to publish a new proposal to seek further notice and comment about whether, and under what circumstances, premiums for certain credit insurance products can be charged on a periodic basis in connection with a covered consumer credit transaction
CFPB Issues Report, Holds Field Hearing on Student Loan Relief Policy Options
On May 8, the CFPB issued a report regarding student loan affordability and related policy issues. The report summarizes and analyzes public responses to the CFPB’s request for information and discusses policy options for addressing these issues. In particular, the paper explores policy options for restructuring student loans, including, for example, allowing distressed private loan borrowers to convert their obligations into federal student loans, which would allow them to accesses certain income-based repayment and other benefits available to federal loan borrowers, and options for a public-private loan restructuring program. The paper also identifies multiple policy options for jumpstarting the refinance market, including creating a “centralized source on private student loans[, which] could create the conditions and data standards for the emergence of an auction-like marketplace for refinance activity.” The paper states that compliance with existing laws on origination, servicing, and collection of student loans is also critical. On the same day the report was issued, the CFPB held a field hearing at which CFPB Director Richard Cordray, other CFPB officials, and industry and consumer groups discussed many of the issues presented by the CFPB information request and report, including the effects of student debt burdens on individuals and the broader economy, and potential debt relief policy options.
Special Alert: CFPB Issues Final Civil Penalty Fund Rule with Request for Comment
On April 26, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a final rule, effective immediately, that sets forth procedures for the administration of the Consumer Financial Civil Penalty Fund (Civil Penalty Fund or Fund). Under Dodd-Frank, all civil penalties obtained by the CFPB are deposited into the Civil Penalty Fund, which may be used to compensate victims and, to the extent any funds remain, to fund consumer education and financial literacy programs. The final rule identifies categories of victims who may receive payments from the Civil Penalty Fund and articulates the Bureau’s interpretation of the types of payments that may be appropriate for these victims. It also establishes procedures for allocating funds for such payments to victims and for consumer education and financial literacy programs. The CFPB simultaneously issued a proposed rule, seeking comment on possible revisions to the final rule. The CFPB is accepting comments on the proposed rule through July 8, 2013.
Pursuant to the final rule, victims are eligible for compensation from the Fund if a final order in a Bureau enforcement action imposed a civil penalty for the particular violation that harmed the victim. A final order is defined as a consent order or settlement issued by a court or by the Bureau, or an appealable order issued by a court or by the Bureau as to which the time for filing an appeal has expired and no appeals are pending. The Bureau’s proposed rule, however, states that it is considering whether it should revise the final rule to allow payments to victims of any “type” of activity for which civil penalties have been imposed, even if no enforcement action has imposed penalties for the “particular” activity that harmed the victims.
Under the final rule, victims will be compensated from the Fund to the extent of their uncompensated harm. Uncompensated harm is defined as the victim’s compensable harm minus any compensation for that harm that the victim has received or is reasonably expected to receive. The final rule describes three categories of compensation that a victim has received or may be reasonably expected to receive: (i) a previous allocation from the Civil Penalty Fund to the victim’s class; (ii) any redress that a final order in a Bureau enforcement action orders paid to the victim that has not been suspended, waived, or determined by the Chief Financial Officer to be uncollectible; and (iii) other redress that the Bureau knows has been paid to the victim. In determining whether a victim’s harm is compensable, the final rules states that the CFPB will look to the objective terms of the order imposing the civil penalty, or if the order does not set forth such objective terms, the victim’s out-of-pocket loss that resulted from the violation. The Bureau’s proposed rule, however, seeks comment on (i) what should qualify as compensable harm. (ii) whether, when the amount of harm cannot be determined based on the terms of a final order, the Fund Administrator should determine what amount of harm is “practicable,” as opposed to using the victim’s out-of-pocket loss, and (iii) whether, instead of paying victims for their uncompensated harm, the Bureau instead should pay victims a share of the civil penalties collected for the particular violations that harmed them.
The CFPB has stated that it will only make payments to victims to the extent practicable. In the final rule’s interpretative commentary, the CFPB explained that it believes that for payments to be “practicable,” it must be feasible to carry out all of the steps involved in making the payments, and to do so efficiently and without excessive administrative cost. The final rule identifies scenarios where distribution may be impracticable, including when the amount of the payment is so small the victim is unlikely to redeem it, the cost of distribution is not justified, the victim cannot be located with reasonable effort, the victim does not timely submit information required by the distribution plan, or the victim does not redeem the payment within a reasonable time.
With respect to fund allocation procedures, the final rule establishes a Civil Penalty Fund Administrator who will manage the Fund and report to the CFPB’s Chief Financial Officer. The Fund Administrator also must follow written direction provided by the Civil Penalty Fund Governance Board, which will be established by the Director of the CFPB. The Administrator will designate a payment administrator—who may be a CFPB employee or a contractor—who will propose a plan for distributing the allocated funds to individual victims. The plan must be approved by the Administrator.
Under the final rule, funds will be allocated based on six-month periods, which will be published on the CFPB’s website by July 8, 2013. The start date for the first period has been established as July 21, 2011. The first two periods, however, need not be exactly six months in order to allow the Bureau to establish a schedule that will be administratively efficient. When there are sufficient funds available to fully compensate all the victims in the six-month period class, the Fund Administrator will allocate to each victim the amount necessary to fully compensate those victims for their uncompensated harm. If there are insufficient funds to fully compensate victims in any six-month period, victims from the most recently concluded six-month period will receive an equal percentage of their uncompensated harm. In the event of a surplusage within a given six-month period, the Fund Administrator next will allocate any remaining funds to classes of victims from preceding six-month periods until no funds remain or the victims are fully compensated. The proposed rule seeks comments regarding (i) how funds should be allocated to classes of victims, particularly when there are insufficient funds in a particular period to fully compensate all victims and (ii) whether funds should be allocated more or less frequently, or whether a different method of timing allocations should be used.
Under the final rule, any funds that remain after distribution can be allocated to consumer education or financial literacy programs, based on criteria separately adopted by the CFPB. The Fund Administrator, however, does not have the authority to select or allocate funds to particular programs. The proposed rule also seeks comment regarding whether there should be a limit to the amount of funds that may be allocated to such programs.
The CFPB will issue annual reports that describe how the funds will be allocated, the basis for those allocations, and how the funds have been distributed. The reports will be available on the CFPB’s web site.
CFPB Issues Revised Remittance Transfer Rule
On April 30, the CFPB issued a revised final rule to amend regulations applicable to consumer remittance transfers of over fifteen dollars originating in the United States and sent internationally. Generally, the rule requires remittance transfer providers to (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds, as well as the amount of funds the recipient will receive, and (ii) investigate consumer disputes and remedy errors. The revised rule makes optional the original requirement to disclose (i) recipient institution fees for transfers to an account, except where the recipient institution is acting as an agent of the provider and (ii) taxes imposed by a person other than the remittance transfer provider. Instead, the revised rule requires providers to include a disclaimer on disclosures that the recipient may receive less than the disclosed total value due to these two categories of fees and taxes. The revised rule exempts from certain error resolution requirements two additional errors: (i) providing an incorrect account number or (ii) providing an incorrect recipient institution identifier. For the exception to apply, a remittance transfer provider must (i) notify the sender prior to the transfer that the transfer amount could be lost, (ii) implement reasonable measures to verify the accuracy of a recipient institution identifier, and (iii) make reasonable efforts to retrieve misdirected funds. In addition, the revised rule provides institutions more time to comply with the new remittance transfer standards. The final regulations, as revised by this rule, take effect on October 28, 2013.
CFPB Publishes Additional Mortgage Rule Compliance Guides
On May 2, the CFPB published three additional guides to assist companies seeking to comply with its HOEPA rule, ECOA valuations rule, and TILA high-priced mortgage appraisal rule. As with other prior guides it has released, the CFPB cautions that the guides are not a substitute for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination of mortgage loans. BuckleySandler also has prepared detailed analyses of these and other CFPB mortgage rules.