Today is the sixth anniversary of the CFPB. I would be remiss if I didn’t recognize the sixth anniversary of our blog which was launched on the same day that the CFPB became operational. I also want to acknowledge the members in our Consumer Financial Services Group who have contributed to our blog, particularly Barbara Mishkin who manages our blog.
A federal district court recently ruled against the CFPB in a long-standing case under the Real Estate Settlement Procedures Act (RESPA) involving a Louisville, Kentucky law firm Borders & Borders, PLC (Borders). In the case, CFPB v. Borders & Borders, PLC (Civil Action No. 3:13-CV-01047-CRS-DW), the court granted the summary judgment motion of Borders, finding that joint ventures related to Borders satisfied the statutory conditions of the RESPA section 8(c)(4) affiliated business arrangement exemption. The court referred to the exemption as a “safe harbor”. The CFPB had alleged that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services.
Borders is a law firm that performs residential real estate closings, and also is an agent authorized to issue title insurance policies for a number of title insurers. In 2006, the principals of Borders established nine joint venture title agencies with the principals of real estate and mortgage brokerage companies. In February 2011, the Department of Housing and Urban Development (HUD) notified Borders that it was investigating the firm for potential violations of the RESPA referral fee prohibitions based on the joint ventures. (HUD was the federal agency responsible for interpreting and enforcing RESPA before such authority was transferred to the CFPB.) Upon receipt of the notice, Borders ceased operating all of the joint ventures.
In October 2013 the CFPB filed a complaint against Borders asserting that the firm violated the RESPA referral fee prohibition through the establishment and operation of the joint ventures. The CFPB asserted that Borders paid kickbacks to the principals of the real estate and mortgage brokerage companies that were disguised as profit distributions from the joint ventures, and that the kickbacks were for the referral of customers to Borders by the principals.
The CFPB claimed that the joint ventures were not subject to the affiliated business arrangement safe harbor under RESPA section 8(c)(4), which permits referrals and payments of ownership distributions among affiliated parties if the conditions of the safe harbor are met. The conditions are that (1) when a person is referred to a settlement servicer provider that is a party to an affiliated business arrangement, a disclosure is made to the person being referred of the existence of the affiliated business arrangement, along with a written estimate of the charge or range of charges generally made by the provider to which the person is being referred, (2) the person is not required to use any particular provider of settlement services (subject to certain exceptions), and (3) the only thing of value that is received from the arrangement, other than payments otherwise permitted under RESPA section 8(c), is a return on the ownership interest or franchise relationship.
As noted above, the CFPB argued that the joint ventures did not qualify for the safe harbor because they were not bona fide providers of settlement services within the meaning of RESPA. The statutory safe harbor for affiliated business arrangements contains no such condition. The position that a joint venture must be a bona fide provider of settlement services to qualify for the safe harbor previously was asserted by HUD in statement of policy 1996-2 (the “Statement of Policy”). HUD set forth factors that it would examine in assessing whether or not a particular joint venture is a bona fide provider of settlement services.
Although the CFPB did not expressly reference the Statement of Policy in its complaint against Borders, it addressed many of the same factors that HUD identified in the Statement of Policy. The CFPB asserted that:
- In most instances Borders provided the initial capitalization for the joint ventures, and the capital was comprised of only enough funds to cover a joint venture’s errors and omissions insurance.
- Each joint venture had a single staff member, who was an independent contractor shared by all of the joint ventures and concurrently employed by Borders.
- Borders’ principals, employees and agents managed the affairs of the joint ventures.
- The joint ventures did not have their own office spaces, email addresses or phone numbers, and could not operate independent of Borders.
- The joint ventures did not advertise themselves to the public
- All of the business of the joint ventures was referred by Borders.
- The joint ventures did not perform substantive title work—such work was performed by Borders.
With regard to the disclosure condition of the affiliated business arrangement safe harbor, the CFPB asserted that when Borders referred a customer to a joint venture, Borders “sometimes used a disclosure form intended to notify customers of a business affiliation between the owners of the law firm and [the joint venture].” The CFPB also asserted that the notice did not contain the ownership interest percentages in the joint venture or include a customer acknowledgment section, which are elements of the form of notice in Appendix D to Regulation X, the regulation under RESPA.
About a month after the CFPB filed its complaint, the US Court of Appeals for the Sixth Circuit issued a decision in Carter v. Wells Bowen Realty, Inc., 736 F.3d 722 (6th 2013). It appears the opinion of the court presented a hurdle that the CFPB could not clear in its case against Borders. In the Carter case, private plaintiffs asserted that certain joint ventures did not qualify for the affiliated business arrangement safe harbor based on the bona fide settlement service provider requirement that HUD set forth in the Statement of Policy. The court determined that the defendants satisfied the three statutory conditions of the affiliated business arrangement safe harbor, and based on this determination the court ruled in favor of the defendants. The court refused to apply what it considered a fourth condition to the safe harbor asserted by HUD—that the entity receiving referrals must be a bona fide provider of settlement services. The court stated that “a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement.”
The court in the Borders case stated that the joint ventures each had an operating agreement, were authorized to conduct business in Kentucky, were approved by a title insurer to issue title insurance policies, were subject to audit, had a separate operating bank account, had a separate escrow bank account, maintained an errors and omission insurance policy, issued lender’s and owner’s title insurance policies, had operating expenses, generated revenue, made profit distributions, filed tax returns, issued IRS K-1 forms and were solvent. The court also stated that each of the joint ventures were staffed by the same individual, who worked from her home office and was categorized as an independent contractor.
Citing the Carter case, the court set forth the three statutory conditions of the affiliated business arrangement safe harbor. The court determined that the joint ventures satisfied the three conditions. With regard to the disclosure condition, the court determined that the provision of the disclosure by Borders to its customers at the closing of a real estate transaction was sufficient, because it was the first contact that Borders had with the customers, and that the customer then decided at the closing whether to accept the referral of title insurance to one of the joint ventures. (The court had earlier noted in its opinion that customers had 30 days from the date of closing to decide whether to purchase owner’s title insurance from the joint venture.) With regard to the deviation of the notice from the form notice in Regulation X, the court found the content of the Borders’ notice to be sufficient to meet the statutory notice condition.
The decision of the court that the delivery of the notice at closing was sufficient is raising more than a few eyebrows in the industry. In any event, based on the determination that the three statutory conditions of the affiliated business arrangement were satisfied, the court granted Borders’ motion for summary judgment. The court did not impose the fourth condition asserted by the CFPB that the joint ventures had to be bona fide settlement service providers. It interesting that the court nonetheless decided to note various aspects of the joint ventures in an apparent attempt to demonstrate their legitimacy.
The CFPB can appeal the decision to the Sixth Circuit, but if it does so the CFPB will have to face the hurdle of the Carter decision. So the CFPB would need to assert one or more theories supporting why the Carter decision does not preclude a finding of a RESPA violation in the Borders case.
The CFPB’s Spring 2017 rulemaking agenda has been published as part of the Spring 2017 Unified Agenda of Federal Regulatory and Deregulatory Actions. The preamble indicates that the information in the agenda is current as of April 1, 2017. Accordingly, the agenda does not reflect the issuance of the CFPB’s final arbitration rule on July 10 or other rulemaking actions taken since April 1 such as the proposed changes to the CFPB’s prepaid account rule and various recent mortgage-related developments. In addition, the agenda and timetables are likely to be significantly impacted should Director Cordray leave the CFPB this fall to run for Ohio governor as has been widely speculated.
The agenda sets the following timetables for key rulemaking initiatives:
Payday, title, and deposit advance loans. The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016. The Spring 2017 agenda gives a June 2017 date for completing the initial review of comments (which the CFPB states in the preamble numbered more than one million) but does not give an estimated date for a final rule. There has been considerable speculation that a final rule will be issued by the end of next month.
Debt collection. In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection. In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel. The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA. When it issued the proposals, the CFPB indicated that it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals. However, Director Cordray announced last month that the CFPB has decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.
In the Spring 2017 agenda, the CFPB gives a September 2017 date for a proposed rule. Presumably, that date is for a proposal that will deal with disclosures and treatment of consumers by debt collectors. The new agenda gives no estimated dates for the convening of a second SBREFA panel or a proposed second rule. In the preamble to the new agenda, the CFPB states only that it “has now decided to issue a proposed rule later in 2017 concerning FDCPA collectors’ communications practices and consumer disclosures. The Bureau intends to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
Larger participants. The CFPB states in the Spring 2017 agenda that it “expects to conduct a rulemaking to define larger participants in the markets for consumer installment loans and vehicle title loans for purposes of supervision.” It also repeats the statement made in previous agendas that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.” (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”) The new agenda estimates a June 2017 date for prerule activities and a September 2017 date for a proposed rule.
Overdrafts. The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services. In the Spring 2017 agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.” Although the Fall 2016 agenda estimated a January 2017 date for further prerule activities, the new agenda moves that date to June 2017. As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.
Small business lending data. Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business. The new agenda estimates a June 2017 date for prerule activities. The CFPB repeats the statement made in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071. The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”
Mortgage rules. Earlier this month, the CFPB issued a proposed rule dealing with a lender’s use of a Closing Disclosure to determine if an estimated charge was disclosed in good faith. The Spring 2017 agenda gives a March 2018 estimated date for issuance of a final rule. This past March, the CFPB issued a proposal to amend Regulation B requirements relating to the collection of consumer ethnicity and race information to resolve the differences between Regulation B and revised Regulation C. The Spring 2017 agenda gives an October 2017 estimated date for a final rule.
According to news reports yesterday, Ohio Supreme Court Justice Bill O’Neill has told media sources that he was informed by an unnamed mutual friend that Director Corday plans to enter the 2018 Democratic primary for Ohio governor.
Judge O’Neill indicated that the mutual friend had called him to ask whether the Judge planned to abide by prior statements that he would not enter the race if Director Cordray decided to run. Judge O’Neill stated that he did plan to abide by his prior statements.
There is also speculation that Director Cordray will announce his candidacy on September 4 at the Cincinnati AFL-CIO annual Labor Day picnic where he is a scheduled speaker. Should Director Cordray resign in September, plenty of time will remain for a new Director to take a fresh look at the CFPB’s arbitration rule and move forward on the steps necessary to prevent the rule from becoming operational on March 19, 2018 as currently scheduled.
House and Senate Republicans announced today that they are sponsoring Congressional Review Act resolutions to override the CFPB’s final arbitration rule, which was published in yesterday’s Federal Register.
In the House, a press release published on the House Financial Services Committee’s website announced that a joint resolution (H.J. Res. 111), sponsored by Committee member Keith Rothfus and co-sponsored by all other Republican Committee members, has been introduced to disapprove the arbitration rule.
In the Senate, a press release on the Senate Banking Committee’s website announced that Committee Mike Crapo and Republican colleagues “will file” a CRA resolution to disapprove the arbitration rule. The resolution has 23 co-sponsors in addition to Mr. Crapo, several of whom are not Banking Committee members. Only one Republican Banking Committee member, Louisiana Senator John Kennedy, is not listed as a co-sponsor.
Neither press release includes or links to the resolution text.
In an opinion article published by The Hill entitled “The ‘consumer’ financial bureau chooses lawyers over consumers,” Rob Nichols, President and CEO of the American Bankers Association, explains why the CFPB’s final arbitration rule gives “a regulatory windfall to trial lawyers at consumers’ expense.” Mr. Nichols urges Congress to use the Congressional Review Act to override the rule.
Click here to read the full article.
The CFPB issued HMDA Loan Scenarios on July 19, 2017 to provide additional guidance to the industry on reporting transactions under the revised HMDA rule, which has a January 1, 2018 effective date for most provisions.
The guidance includes loan scenarios for a single-family mortgage loan, multifamily mortgage loan, and home equity line of credit. For each scenario, the guidance reflects how the information about the transaction would be mapped to the required data fields, and then how the transaction would appear on the Loan Application Register in the pipe delimited format.
In a letter dated July 18, 2017 to Acting Comptroller Noreika purporting to respond to Acting Comptroller Noreika’s July 17 letter, Director Cordray continued to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.” We shared how we would respond to Director Cordray’s question, pointing out the many flaws in his rationale for questioning the existence of “any plausible basis” for safety and soundness concerns arising from the CFPB arbitration rule.
In his July 17 letter to Director Cordray, so the OCC could complete its analysis of the arbitration rule’s impact on the federal banking system, Acting Comptroller Noreika repeated his prior request for the data used by the CFPB to develop and support its proposed rule. Despite questioning Acting Comptroller Noreika’s basis for raising safety and soundness concerns, Director Cordray wrote in his July 18 response that “we are happy to share the data underlying our rulemaking. I understand that our teams are in communication and we are in the process of assembling the data your staff has requested.”
Perhaps choosing to wait to respond to Director Cordray’s question until the OCC has reviewed the CFPB data and completed its analysis, Acting Comptroller is reported to have said only the following in a prepared statement released yesterday:
“Consenting to share the data is important progress. I look forward to working with the OCC staff to conduct an independent review of the data and analysis in a timely manner to answer my prudential concerns regarding what impact the final rule may have on the federal banking system.”
The CFPB final arbitration rule was published in today’s Federal Register and has an effective date of September 18, 2017 and a mandatory compliance date of March 19, 2018. The rule’s publication is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.
The letter-writing war between Director Cordray and Acting Comptroller Keith Noreika continues. Director Cordray sent a letter dated July 18, 2017 to Acting Comptroller Noreika in which he purports to respond to Acting Comptroller Noreika’s July 17 letter to Director Cordray and continues to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.” To support his conclusion, he relies on the CFPB’s economic analysis of the rule which “shows that its impact on the entire financial system (not just the banking system) is on the order of less than $1 billion per year.” He then compares this to banking industry profits last year of over $171 billion. He also points to the mortgage market (in which the use of pre-dispute arbitration provision is prohibited) which he states “is larger than all other consumer financial markets combined” and states that nobody suggests that the lack of arbitration poses a safety and soundness issue. He states, “So on what conceivable basis can there be any legitimate argument that this poses a safety and soundness issue?”
Although I am sure that Acting Comptroller Noreika will respond to Director Cordray’s question, let me try to respond myself.
First, why is it a “given” that the CFPB’s cost estimates are reasonable? The CFPB said it could not quantify expected costs of additional state court class actions and just assumed that they would be less than the costs of additional federal court class actions. Shouldn’t the OCC be entitled to review the CFPB’s methodology and to conduct its own study of costs? Let’s not forget that it is the OCC and the other prudential banking regulators, not the CFPB, that is responsible for ensuring the safety and soundness of the banking system.
Second, while banking industry profits last year were $171 billion, there is no assurance, as Director Cordray implies, that industry banking profits will continue to increase. Indeed, during the last economic recession, particularly during 2008 and 2009, banking industry profits were minuscule with many banks sustaining large losses. Furthermore, in assessing the impact of the arbitration rule on safety and soundness, it is not enough to focus on the industry as a whole. Those numbers include the overwhelming majority of banks that are community banks who are rarely the target of class action litigation. Instead, the CFPB and the OCC should focus on the larger banks that are often targeted by the class action lawyers. As we learned from the economic crisis of 2008-2009, the failure of one large bank could have a domino effect and result in multiple failures which certainly would create safety and soundness concerns. The point is that while the CFPB has estimated costs to the industry for the arbitration order, it has not conducted, and it lacks the expertise and experience to conduct, a study to assess the impact of the rule on bank safety and soundness.
Director Cordray has also overlooked why arbitration came into vogue about 15 or 20 years ago. It was because banks and other consumer financial services providers were being crushed by an avalanche of class action litigation. At the time, it was becoming a safety and soundness issue. There is every reason to expect a similar avalanche of litigation to occur sometime after the compliance date of the rule. Indeed, things may actually be worse now than they were 15 years ago because of the enactment of new federal and state consumer protection laws, like the TCPA, where there is no cap on class action liability.
Finally, Director Cordray’s reference to the mortgage industry is misplaced. While arbitration provisions are prohibited in mortgages, the Uniform Mortgage Instruments contain language requiring a borrower to provide notice to the lender of a dispute and an opportunity to resolve the dispute before the borrower may participate in any litigation. That language would potentially preclude a class from being certified.
The CFPB final arbitration rule is scheduled to be published in the Federal Register tomorrow, July 19.
The rule’s effective date will be the 60th day after publication and the mandatory compliance date will be March 19, 2018. Based on our calculation, the effective date will be Monday, September 18, 2017 (since the 60th calendar day is Sunday, September 17).
The final rule’s publication in the Federal Register is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule. The Dodd-Frank Act (DFA) provides that such a petition must be filed “not later than 10 days” after a regulation has been published in the Federal Register. The 10th calendar day after publication would be Saturday, July 29. Since the DFA does not specify whether the term “day” means a “calendar” or a “business” day, it is uncertain whether the deadline for filing a petition with the FSOC will be July 29 or Monday, July 31.
A resolution of disapproval under the Congressional Review Act (CRA) is another potential route for overturning the arbitration rule. According to a report prepared by the Congressional Research Service (CRS), the receipt of a final rule by Congress begins a period of 60 “days-of-continuous-session” during which a member of either chamber can submit a joint resolution disapproving a rule under the CRA.
For purposes of the CRA, a rule is considered to have been “received by Congress” on the later of the date it is received in the Office of the Speaker of the House and the date of its referral to the appropriate Senate committee. The arbitration rule was received by the Speaker of the House on July 10 and referred to the Senate Banking Committee on July 13.
In calculating “days of continuous session,” every calendar day is counted, including weekends and holidays. However, because the count is suspended for periods when either chamber (or both) is gone for more than three days (i.e. pursuant to an adjournment resolution), the deadline for when a CRA resolution to disapprove the arbitration rule would have to be submitted cannot be calculated with certainty. Assuming no adjournment of the House or Senate, the 60th calendar day after the arbitration rule’s receipt by Congress would be September 11, 2017.
In order to be eligible for the special Senate procedure that allows a CRA disapproval resolution to be passed with only a simple majority, the Senate must act on the resolution during a period of 60 days of Senate session which begins when the rule is received by Congress and published in the Federal Register. That deadline would appear to be either September 17 or 18, 2017. (The CRS report indicates that if the House passes a joint resolution of disapproval, the Senate might only be able to use its special procedure if there is a companion Senate resolution.)