TILA / RESPA

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As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

A federal district court in Kentucky 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, 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 finalized the long-awaited initial round of amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, also known as the Know Before Your Owe rule.  However, instead of addressing the so-called “black hole” issue, which refers to situations in which a lender may not be able to use a Closing Disclosure to reset fee tolerances, the CFPB punted by releasing a proposed rule on the issue.

The proposed amendments were posted on the CFPB’s website at the end of July 2016.  Although the CFPB planned to finalize amendments in March, the final amendments, along with the related proposal, were not issued until the beginning of July.  While the amendments will become effective 60 days after publication in the Federal Register, mandatory compliance with the amendments will not be required until October 1, 2018.  The CFPB has been urged to take this approach to implementing regulations by industry members, as it allows for the testing of changes on a pilot basis before going live across a company’s entire platform.

In its press release announcing the amendments, the CFPB notes that it adopted (1) tolerances for the Total of Payments disclosure that are based on the existing finance charge tolerances, (2) a change to the partial exemption for certain down-payment and related assistance loans by excluding recording fees and transfer taxes from the fee limitation that applies to the exemption, (3) a change in the scope of the rule to cover loans on cooperative units, whether or not the cooperative is considered real property under applicable state law, and (4) clarifications on how to provide separate Closing Disclosures to the consumer and the seller.

The final rule is 560 pages in length and the proposal is 41 pages in length.  We will be analyzing the final rule and proposal and will provide a more detailed analysis in a future edition of our Mortgage Banking Update.  (To subscribe to the Mortgage Banking Update, please click here.)

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

Several individuals and organizations filed amicus briefs in support of the CFPB in the en banc rehearing in the PHH case. Among the amici is a brief filed by current and former members of Congress, including Chris Dodd and Barney Frank, the principal architects and namesakes of the Dodd-Frank Act, which created the CFPB. Senator Sherrod Brown and Representative Maxine Waters, both of whom previously sought to intervene, joined the brief as well.

The current and former members of Congress assert that the structure of the CFPB is constitutional and critical to the congressional design of Dodd-Frank. They stress the importance of the CFPB’s “independence” and the ability of a single director “to avoid the delay and gridlock to which multi-member agencies are susceptible.” These themes are repeated throughout the brief.

Of course, the flipside of independence is unaccountability. The CFPB’s structure heavily shields it from the consequences of an election. The ability of voters to voice their approval or disapproval with the CFPB’s enforcement and rulemaking is far lower than that of other important agencies such as the EPA. And although a single director may be able to move more swiftly than a multi-member commission, faster is not always better. Before a multi-member commission reaches a decision, it must debate the matter internally among a group of commissioners with diverse perspectives and experiences. That internal debate arguably has the ability to produce a better, more efficient outcome than any individual commissioner would be able to reach on their own. Indeed, input from multiple commissioners is particularly valuable to an agency like the CFPB that relies more heavily on enforcement actions than notice-and-comment rulemaking to effect industry-wide change.

A group of financial regulation scholars likewise submitted a brief in support of the CFPB’s position, focused entirely on the constitutionality of the CFPB’s structure. The scholars’ brief is, not surprisingly, more esoteric than many of the other briefs submitted in the case. Unlike the CFPB, the scholars concede that its structure is “novel,” but argue that the novel structure is evidence of a creative legislative approach to an issue, not evidence that it is unconstitutional. The brief then attempts to argue two seemingly inconsistent positions: 1) that the CFPB’s independence is necessary to prevent regulatory capture, but 2) the CFPB is subject to significant oversight.

The scholars’ regulatory capture argument is particularly weak. They claim that three features of the CFPB’s structure are key to preventing business interests from capturing the CFPB: “non-appropriated funding; a for-cause removal standard; and a single director.” The scholars correctly note that industry funding can create regulatory capture in the classical sense in that the regulated industry has direct control over the agency’s funding. That argument has no relevance to the actual issue in this case, however, since the real controversy is whether the CFPB should be subject to Congressional appropriations, not whether it should be industry funded.

The scholars then switch from capture theory to public-choice theory to argue that Congressional appropriation is unwise because concentrated industry groups have greater influence over Congress and the Executive Branch than individual consumers. In making this argument, the scholars focus not on industry capture of the CFPB but of the entire Legislative and Executive Branches. And the activities with which the scholars take issue – lobbying and campaign contributions – are key First Amendment activities. The scholars therefore argue that the CFPB’s structure is necessary because members of the public might exercise their First Amendment rights successfully to oppose the actions of the CFPB.

The scholars then undercut their legislative-and-executive-capture argument completely in the next session of their brief, in which they argue that the CFPB is, in fact, subject to extensive legislative oversight and control. This argument is wholly inconsistent with the prior argument that the CFPB is completely independent and thus immune from capture. Namely, if the CFPB is subject to extensive oversight and control, then it is also subject to Legislative-and-Executive capture.

A group of separation of powers scholars likewise filed an amicus brief heavy on theory. As their name suggests, the separation of powers scholars focus on whether the single director, removable-for-cause feature of the CFPB violates constitutional separation of powers principals. The brief firsts undertakes an originalist-style historical analysis of early federal-and-state executive agencies. Next, the scholars argue that the number of commissioners is irrelevant to the constitutional analysis. Then, they argue that the for-cause removability feature leaves enough Presidential discretion over the CFPB Director to preserve its constitutionality.

Finally, in a preview of arguments likely designed to drive a wedge between Justice Kennedy and other members of the Supreme Court, Chief Justice Roberts in particular, the scholars argue that abstract concerns over the protection of “individual liberty” and separation of powers do not supply independent constitutional bases to invalidate the CFPB structure. Instead, they argue that the structure must violate a specific constitutional provision, not an abstract ideal. This particular line of argument will likely receive greater attention if the constitutional issues reach the Supreme Court, as there are different views regarding it among the conservative majority.

A host of “consumer and civil rights organizations who advocated for the CFPB’s creation,” many of which unsuccessfully sought to intervene, filed a brief that mainly covers public policy arguments in favor of the CFPB’s structure. They essentially argue that the CFPB has succeeded where other agencies failed in terms of protecting consumers.

The AARP also filed an amicus brief in support of the CFPB’s position. Unlike other amici, however, the AARP brief focused more on the RESPA issues in the case than the more esoteric constitutional issues. The AARP claimed that kickbacks and “junk fees” have a disproportionate impact on older individuals.  It argued that older individuals are often the target of “unscrupulous mortgage lending practices,” which increases the cost of homeownership to older individuals by several thousand dollars. After the policy-heavy introduction, the brief tackles the history and purpose of the RESPA provisions at issue, which we blogged about in detail.

Although the constitutional issues received the most attention in the press, the RESPA issues discussed in the AARP brief could very well be more important to the outcome of the appeal. The court could reverse the district court on the RESPA issues and invoke the doctrine of constitutional avoidance to decline to reach the overall constitutionality of the CFPB’s structure.

On March 31, the CFPB and supporting amici submitted their briefs in the en banc rehearing of the PHH case. We have blogged extensively about the PHH case in which the D.C. Circuit is grappling with four critical issues: (i) whether the CFPB’s structure is constitutional (the CFPB says, yes), (ii) whether administrative actions brought by the CFPB are subject to a statute of limitations (the CFPB says, no), (iii) whether the CFPB’s interpretation of RESPA is correct (the CFPB says, yes), and (iv) whether the CFPB’s interpretation of RESPA, which differs from HUD’s historical interpretation, can be applied retroactively (the CFPB says, yes). We’ll focus here on the CFPB’s constitutional arguments.

The CFPB’s main argument is that under Humphry’s Executory and its progeny, there is only one relevant question to determining whether its structure is constitutional: Is its structure “of such a nature that [it] impede[s] the President’s ability to perform his constitutional duty” to take care that the laws are faithfully executed? It insists that the  D.C. Circuit panel erred in undertaking “’an additional inquiry’ into whether an agency’s structure somehow threatens individual liberty.”

This is, of course, a strained argument. On the one hand the CFPB grants that its structure is a “departure from tradition” in that “most independent agencies[, like the FTC,] have been headed by multi-member commissions.” Yet, at the same time, the CFPB argues that the D.C. Circuit must slavishly apply precedents such as Humphry’s Executor which address (and, indeed, create) the “traditional” structure of independent agencies. It seems obvious that a different structure demands a different analysis.

In making this argument, the CFPB ignores the underlying separation of powers issue by insisting that the protections for individual liberty in the structure of other independent agencies are irrelevant to the constitutional analysis.  Counsel for PHH put it succinctly in recent testimony before a Senate sub-committee. Quoting James Madison, he pointed out that the consolidation of executive, judicial, and legislative power in one person is the “very definition of tyranny.”  By constituting other independent agencies as commissions, Congress prevented that consolidation and avoided the very problem the U.S. structure of government was designed to prevent. Yet, the CFPB argues that the commission and single-director structures are “indistinguishable” from a constitutional perspective.

The CFPB also ignores other features of agencies with a  commission structure that  make them more likely to operate as “independent” agencies, a precondition to the courts’ acceptance of their constitutionality. For example, no more than three of the FTC’s five commissioners can be of the same political party. As a result, the decision-making body at the FTC is required to receive input from those with differing views.  Not so with the CFPB director. He can set an agenda driven by the politics of his party without any check on his authority, even if that agenda is completely contrary to that of the President. This too is irrelevant from the CFPB’s perspective.

The CFPB has posted on its TILA-RESPA implementation webpage updated versions of its Small Entity Compliance Guide and Guide to Loan Estimate and Closing Disclosure Forms.  The updates focus on various guidance provided in recent TILA/RESPA Integrated Disclosure (TRID) rule webinars provided by the Bureau.  We have previously addressed the content of the March 1, 2016 and April 12, 2016 webinars.

Among the changes, the CFPB added the following language to the second Guide, apparently to address the issue in the industry regarding whether same payment range must be disclosed in multiple columns for an adjustable rate loan when a rate change can move the payment within the disclosed range, even though the payment range remains the same:

“Adjustable Rate loans – the Projected Payments table will have a new column, up to a maximum of four columns, for each scheduled rate adjustment. Because the Principal & Interest amount may change each time the rate is scheduled to adjust, a new column is required, up to a maximum of four columns. There is a new column, up to a maximum of four columns, even if the range of payments will stay the same. For example, there is a new column, up to a maximum of four columns, even when the range will stay the same because the range is the minimum and maximum interest rate caps listed in the contract. (Comment 37(c)(1)(i)(A)-1).”

The D.C. Circuit issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly-owned) mortgage reinsurer, the court made several landmark rulings.

First, it held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the “critical check” of presidential control or the “substitute check” of a multi-member governance structure necessary to protect individual liberty against “arbitrary decisionmaking and abuse of power.” The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.

It also rejected the CFPB’s argument that statutes of limitations do not apply to its administrative enforcement actions. The court’s holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. “[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”

In addition, the court held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited. We have blogged about the CFPB’s erroneous interpretation of the RESPA provisions at issue in this case.

Finally, the court further admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.”

Notably, the court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB’s view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court’s decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.

The opinion of the court also did not address one aspect of the CFPB Director’s prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director’s approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.

Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.

The CFPB has posted on its website an updated index to include the various questions regarding the TILA/RESPA Integrated Disclosure (TRID) rule that were addressed during the March 1, 2016 and April 12, 2016 webinars on the rule conducted by CFPB staff. The updated index identifies the questions addressed in all seven of the TRID rule webinars conducted by CFPB staff.

The index includes a link to the CFPB webpage that has links to the recordings of all the previous webinars.  Also, the reference date of the applicable webinar that addresses each question is linked to the Table of Contents for that webinar.