Beyond the Constitutionality of the CFPB: D.C. Circuit Decision Limits Scope of Fines and Enforcement Actions

By Joe Patry

Most media reports and commentary discussing the recent D.C. Circuit opinion on the CFPB focused on the Constitutional issues involving how the Director of the CFPB is appointed and may be removed, but overlooked the decision’s potentially significant benefit to the financial services industry. The key impact on the financial services industry is the D.C. Circuit’s restriction on the extent of the CFPB’s ability to levy penalties and bring enforcement actions.

D.C. Circuit Decision

On October 11, 2016, a three-judge panel of the United States Court of Appeals for the District of Columbia Circuit overturned an administrative decision by the CFPB, which previously imposed a $109 million fine against PHH Mortgage Corporation (“PHH”). The D.C. Circuit rejected the CFPB’s attempt to apply its changed interpretation of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. § 2601(b)(2), retroactively, and ruled that the CFPB erroneously ignored the expiration of the applicable statute of limitations to inappropriately inflate the amount of the imposed fine.

HUD’s Prior Interpretation of RESPA

Before the CFPB was created, the Department of Housing and Urban Development (“HUD”) was responsible for regulations interpreting Section 8(a) of RESPA. See PHH v. CFPB et al., No. 15-1177 at 14.[1] This section of RESPA prohibits mortgage companies from giving kickbacks or other incentives to vendors. Id.

HUD issued guidance regarding mortgage reinsurance, which is used by mortgage insurance companies to reduce risk. Id. at 83. Under certain circumstances, mortgage companies were allowed to refer consumers to mortgage reinsurance companies that the mortgage lenders themselves owned. Id.

CFPB Switches Course

Contrary to HUD’s long-standing interpretation, the CFPB decided that RESPA prohibits these reinsurance practices. Id. Based on this changed interpretation of RESPA, the CFPB brought an administrative enforcement proceeding against PHH. Id. During the proceeding, the CFPB imposed a $109 million fine on PHH for reinsurance charges that were eventually passed on to borrowers. Id. PHH challenged the CFPB’s authority to enforce the fine in the court system. Id.

CFPB’s Arguments before the D.C. Circuit

Before the D.C. Circuit, the CFPB argued that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) authorizes the CFPB to bring enforcement actions but that Dodd-Frank contains no explicit statute of limitations to govern actions brought under this power. Id. As a result, the CFPB asserted that it is not bound by RESPA’s three-year statute of limitations. Id. at 12. This is significant because PHH argued that the vast majority of the allegedly prohibited charges were barred by the expiration of the statute of limitations. Id. Additionally, the CFPB argued that it was authorized to apply its changed interpretation of RESPA retroactively. Id. at 83.

D.C. Circuit Rejects the CFPB’s Position

The D.C. Circuit soundly rejected both of the CFPB’s arguments. First, the D.C. Circuit found that Dodd-Frank and RESPA together restricted the CFPB to bring cases only within the statute of limitations. Id. at 93. Nothing in Dodd-Frank explicitly states that the CFPB is not bound by any applicable statutes of limitation; if Congress had intended this to be the law, it would have said so. Id. at 98 (stating that Congress does not “hide elephants in mouseholes”) (internal citations omitted). The D.C. Circuit further noted that the CFPB’s limitless interpretation of its authority was “absurd.” Id. at 99.

Second, the D.C. Circuit found that the CFPB’s attempt to retroactively apply its changed interpretation of RESPA is unconstitutional. The D.C. Circuit ruled: “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation. The rule of law constrains the governors as well as the governed.” Id. at 87. (emphasis in original).

The D.C. Circuit remanded the administrative enforcement proceeding back to the CFPB. Id. at 100. Because of this decision, the agency will not be able to rely on its retroactive interpretation of RESPA and must consider the applicable statute of limitations when assessing potential fines. Id.

Although this decision from a three-judge panel of the D.C. Circuit could be reversed by the entire D.C. Circuit or the United States Supreme Court, this decision is potentially a significant win for financial institutions. First, mortgage companies that referred consumers to mortgage reinsurance companies that the mortgage lenders themselves owned, or relied on other HUD interpretations of RESPA, can take comfort in knowing that the CFPB cannot retroactively apply its changed interpretation of RESPA. Second, the CFPB’s ability to bring enforcement actions is governed by the applicable statutes of limitation, so the ability to enforce is not timeless or limitless.

[1] All references to pagination is to how the pages are numbered in the opinion released on the United States Court of Appeals for the District of Columbia’s website on October 11, 2016.

New York Appellate Court Holds That RPAPL 1304(4) Does Not Bar Actions Commenced More Than One Year After Mailing 90-Day Notice

By: Alexander J. Franchilli

On August 24, 2016, the New York Supreme Court, Appellate Division, Second Department, held that the 90-day notice required under Real Property Actions and Proceedings Law (“RPAPL”) § 1304(1) does not expire one year after its initial mailing. See Deutsche Bank Nat. Trust Co. v. Webster, 2016 N.Y. Slip Op 05846 (2d Dep’t 2016).  Under RPAPL § 1304(1), “a lender, an assignee or a mortgage loan servicer” must mail a notice containing statutorily prescribed language at least 90 days before commencing an action against the borrower of a home loan.

In Webster, the plaintiff commenced an action to recover a money judgment on a promissory note pursuant to RPAPL § 1301 on January 24, 2014. The plaintiff moved for summary judgment, and submitted a copy of a letter, dated April 15, 2011, to demonstrate compliance with the 90-day notice requirements of RPAPL § 1304.

The defendant cross-moved to dismiss the complaint, arguing, among other things, that the 90-day notice expired before the action was commenced.  In opposition, the plaintiff contended that the requirements of RPAPL § 1304 were not applicable because the plaintiff was not seeking to foreclose a mortgage.

Although the court determined that RPAPL § 1304 “is applicable to all legal actions involving home loans commenced against the borrower,” the court rejected the defendant’s argument that the 90-day notice had expired.

The court examined the language of RPAPL § 1304(4), which states: “[t]he notice and the ninety day period required by subdivision one of this section need only be provided once in a twelve month period to the same borrower in connection with the same loan.” Id.  The Court found that “the language does not state that the action must be commenced within 12 months of the RPAPL 1304 notice.”  Instead, the Court interpreted the language of RPAPL § 1304(4) as standing for the proposition that “if there are multiple defaults in the 12-month period, only one RPAPL 1304 notice is required.” Id.

This decision is significant for creditors because the Second Department has clarified that RPAPL 1304 does not require more than one 90-day notice and that such notice does not expire one year after it is mailed to the borrower.

Fifth Circuit Holds that a Request for Proof of Authority to Collect Does Not Constitute a “Qualified Written Request” Under RESPA

By:      Joshua A. Huber

On July 14, 2016, the Fifth Circuit Court of Appeals issued its opinion in In re Parker, holding that a qualified written request (“QWR”) pursuant to the Real Estate Settlement Procedures Act, 12 U.S.C. § 2605 (“RESPA”), does not encompass a borrower’s written request for proof of a lender’s status as the noteholder, or its authority to collect payments under a promissory note and deed of trust.[1]

The borrowers in In re Parker served their lender with correspondence titled “RESPA Qualified Written Request, Complaint, Dispute of Debt & Validation of Debt Letter,” which primarily questioned whether the lender was the owner of their promissory note with authority to collect payments.[2] The borrowers alleged in their subsequent lawsuit against the lender that this letter constituted a valid QWR and that the lender was liable under RESPA for its failure to respond and provide evidence of its authority.[3]

In rejecting the borrowers’ claim, the Fifth Circuit first noted that the borrowers were required to demonstrate, as a threshold matter, that the correspondence they sent to the lender was in fact a QWR within the meaning of RESPA.[4] The court observed that a valid QWR “must be related to the servicing of the loan,” which RESPA defines as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan . . . and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[5] Because the borrowers’ purported “QWR” requested only proof of the lender’s authority to collect payments under the promissory note and deed of trust, which does not relate to “servicing of the loan” under RESPA, the Fifth Circuit affirmed the dismissal of the borrowers’ claim.[6]

This is a significant development in RESPA jurisprudence, as it clarifies the limited scope and purpose of a QWR. The decision also provides lenders in the Fifth Circuit with a strong defense to RESPA violation claims premised on failure to respond to “show-me-the-note” correspondence from borrowers, as opposed to legitimate servicing-related inquiries.

[1] In re Parker, No. 15-41477, 2016 WL 3771837, at *4 & n.26 (5th Cir. Jul. 14, 2016).

[2] Id. at *1.

[3] Id. at *1 & n.4.

[4] Id. at *4.

[5] Id. (quoting 12 U.S.C. §§ 2605(e)(1)(A) & (i)(3))(emphasis added).

[6] Id. at *4 & n.6 (emphasis added).

Pa. Supreme Court Expands Act 6 Liability to Include Attorneys Representing Mortgage Lenders

By: Kevin McDonald

The Pennsylvania Supreme Court, in Glover v. Udren Law Offices, P.C., recently determined that a law firm, representing a residential mortgage lender in connection with foreclosure proceeding, can be liable to a borrower for three times the amount of attorneys’ fees charged by the mortgage lender if said fees are in violation of the Pennsylvania Loan Interest and Protection Law, commonly known as “Act 6”.  Section 406 of Act 6 limits the attorneys’ fees that a “residential mortgage lender” can contract for or receive from a borrower.  Section 502 of Act 6 provides for recovery of treble damages against a “person” who has collected such excess interest or charges.  “Person” is defined in Section 101 as “an individual, corporation, business trust, estate trust, partnership or association or any other legal entity, and shall include but not be limited to residential mortgage lenders.” Traditionally, law firms employed by residential mortgage lenders have been excluded from liability by the specific language of Section 406 as it applies only to “residential mortgage lenders.”  The Glover decision could expose such law firms to new claims by mortgage debtors because the Court has, for the first time, held that law firms are included for liability purposes under Section 502 if they have collected excessive attorneys’ fees in connection with the foreclosure in violation of Section 406. 

Mary E. Glover entered into a residential mortgage in 2002 with Washington Mutual Bank (later assigned to Wells Fargo Bank).  Following Glover’s unsuccessful attempts to obtain a loan modification due to financial difficulty, the bank initiated foreclosure proceedings by hiring Udren Law Offices, P.C. (“Udren”).  Udren took several actions on the bank’s behalf, including advising Glover of her unpaid debt and demanding missed payments and fees.  Eventually, the parties entered into a loan modification agreement that increased Glover’s principal balance, monthly payment and repayment period.  The increased principal included an amount of approximately $1,600 for escrow, attorney’s fees, and other charges.  Glover then filed a putative class action law suit against Udren in the Court of Common Pleas of Allegheny County, alleging that Udren had violated Act 6 by charging unearned and excessive attorney’s fees.  Because Udren was undisputedly not a residential mortgage lender under Act 6 (as the term is defined in Section 101), Udren filed preliminary objections asserting that Glover had failed to state an actionable claim and the Common Pleas Court agreed, finding that section 406 of Act 6 refers only to residential mortgage lenders and therefore, any violation of that provision did not give rise to a remedy against Udren under section 502. 

Glover’s appeal to the Superior Court argued that, because Act 6 permits a borrower to recover treble damages from a “person” who collects excess fees in connection with the mortgage foreclosure process, and defines “person” broadly to “include but not be limited to” residential mortgage lenders, the lower court had improperly narrowed the scope of the statute’s protections.  A divided panel of the Superior Court affirmed, holding that, because Section 406’s plain language regulates only the conduct of residential mortgage lenders, Section 502 does not authorize an action against a lender’s counsel for a Section 406 violation.  The majority rejected Glover’s contention that “person,” in Section 502, evidenced a legislative intent to make a broad set of actors liable for Section 406 violations, because the term was necessary to address, throughout Act 6’s various provisions, conduct by actors other than residential mortgage lenders.

The Supreme Court analyzed Act 6 with the objective purpose of ascertaining the Legislature’s intent in enacting the statute.  The Supreme Court read Sections 101, 406 and 502 together and determined that the plain and explicit terms permit a person who has paid charges prohibited or in excess of those allowed by Section 406 to recover treble damages in a suit at law against the person who has collected such excess charges.  The Supreme Court further reasoned that the Legislature expressly defined “person” to “include but not be limited to residential mortgage lenders” and under a straightforward application of the statute, Section 406 restricts the circumstances under which residential mortgage lenders may contract for or receive fees, while Section 502 provides a broad remedy against anyone who has collected such fees. 

The Supreme Court’s ruling focused solely on whether or not the term “person” as used in Section 502 of Act 6 provides for a remedy against any statutorily defined person collecting statutorily prohibited fees on behalf of residential mortgage lenders.  Having determined that it does, the Supreme Court remanded that matter for further proceedings without addressing the meaning of the term “collected” in Section 502.

This ruling is a significant development regarding Act 6 liability as the Supreme Court has issued a warning to mortgage foreclosure firms that they will be held liable to borrowers, with the potential of treble damages, if they are determined to be charging or collecting attorneys’ fees in excess of those allowed under Section 406.  Whether or not the remanded matter will address the law firm’s need to actually collect said fees before they can be found liable remains to be seen.

 

 

 

Spokeo: Not the Result Many Hoped (or Feared)

By Joe Patry

The United States Supreme Court’s decision in Spokeo v. Robbins re-emphasized the Constitutional requirement that a plaintiff must show a particularized and concrete injury to show standing to sue in federal court. In remanding a Fair Credit Reporting Act (“FCRA”), 15 U.S.C. § 1681 et seq. complaint to the Ninth Circuit, the Supreme Court found that the lower court failed to sufficiently analyze both requirements. This decision was widely anticipated to potentially cause a sea change in complaints based on violations of federal consumer statutes. Some had feared that this decision would potentially eliminate lawsuits based on statutory violations where the consumer suffers no actual damages. However, the decision merely requires the lower court to more fully analyze whether the consumer sufficiently alleged a concrete and actual injury.

In Spokeo, a six justice majority of the Supreme Court[1] examined whether a consumer had standing to bring a claim under the FCRA. Spokeo operates a “people search engine,” which allows visitors to the site to input a person’s name, phone number or email address, and then provides information about the subject of the search. See Spokeo at 1.[2] Mr. Thomas Robins learned that some of the information which Spokeo had on file for him was incorrect. Specifically, Spokeo states that he is married, has children, is in his 50s, has a job, is relatively affluent, and holds a graduate degree. Id. at 4. According to Mr. Robins, all of that information is incorrect. Id.

Mr. Robins filed sued in the United States District Court for the Central District of California and alleged that Spokeo had violated a provision of the FCRA which requires companies that provide consumer information to follow reasonable procedures to ensure that the information is accurate. Id. at 3. This particular provision of the FCRA allows actual damages or statutory damages of $1,000 per violation. Id. The trial court found that Mr. Robins did not have standing to bring his claim because he had not pled an injury in fact, which is required, as federal courts may decide only actual cases or controversies under Article III of the United States Constitution. Id. at 6. The Ninth Circuit reversed the dismissal, and found that the statutory violation was in and of itself sufficient to confer standing. Id. at 5. Spokeo appealed to the Supreme Court.

The Supreme Court began by briefly discussing the concept of standing, noting that the doctrine of standing developed to ensure that federal courts do not exceed their authority. Id. at 6. Further, the Supreme Court recited the three elements for plaintiff to have standing in federal court: (1) an injury in fact, (2) that is fairly traceable to the challenged conduct of the defendant, and (3) that is likely to be addressed by a favorable judicial decision. Id. To survive a motion to dismiss, a complaint must allege facts to support each element. Id.

Focusing on the injury in fact requirement, the Supreme Court highlighted that plaintiff must have suffered “an invasion of a legally protected interest,” which is “concrete and particularized, and “actual or imminent, not conjectural or hypothetical.” Id. at 7 (internal citations omitted). To be particularized, an injury must affect the plaintiff in a personal way. Id. However, an injury must also be concrete. Id. at 8.

In remanding, the Supreme Court found that the Ninth Circuit had not sufficiently analyzed whether Mr. Robins’ injury caused by the alleged FCRA violation was concrete and actually existed. Id. Although Congress can create statutory violations for intangible harms, Article III still requires a concrete injury in the context of a statutory violation. Id. It is not enough for a plaintiff to allege solely that a statute has been violated. Id. at 10. For example, a provision of the FCRA requires the credit reporting agencies to inform consumers when it has provided information to third parties such as Spokeo. Id. at 10-11. There may be no statutory violation if the credit reporting agency fails to provide the notice to the consumer but the information provided to Spokeo or other third parties was accurate. Id. Or, there may be no harm from even incorrect information – i.e., if an incorrect zip code was provided, the Court found that a consumer could not possibly suffer any harm from this harmless incorrect information. Id.

Ultimately, depending on what happens on remand, this issue may be back before the Supreme Court. Depending on the Ninth Circuit’s decision on remand, the Supreme Court may again have the opportunity to issue an opinion that significantly impacts consumers’ ability to sue for statutory violations for which they have no actual damages. However, Spokeo was not the potential sea change that some had predicted.

[1] Justice Alito wrote the opinion, joined by Chief Justice Roberts, and Justices Kennedy, Thomas and Breyer. Justice Thomas concurred and Justices Ginsburg and Sotomayor dissented.

[2] All references to pages are to as the opinion is paginated in the version available on the Supreme Court’s website.

Fourth Circuit Holds that Defaulted Status of Debt Has No Bearing on Whether a Person Qualifies as a “Debt Collector” Under the FDCPA

By:      Joshua A. Huber

On March 23, 2016, the Fourth Circuit Court of Appeals issued its opinion in Henson v. Santander Consumer USA, Inc., holding that the default status of a debt has no bearing on whether an entity qualifies as a “debt collector” under the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 (“FDCPA”).[i] The Fourth Circuit’s reading of the plain language of the FDCPA’s “debt collector” and “creditor” definitions, found in 15 U.S.C. § 1692(a)(6) and (a)(4), respectively, rejects the argument routinely advanced by borrowers, and commonly by courts throughout the country, that an entity who acquires a debt that is already in default is automatically a “debt collector.”

Henson involved a portfolio of defaulted auto loans purchased by Santander from CitiMortgage.[ii] When Santander sought to collect on the defaulted loans, the Henson plaintiffs filed suit under the FDCPA—which applies only to “debt collectors,” and not “creditors”—and maintained that the default status of debt determined whether a purchaser of debt, such as Santander, was a “debt collector” or a “creditor.”[iii]

The Henson plaintiffs’ argued, in part, because the FDCPA excludes from the definition of “creditor” any person that “receives an assignment or transfer of a debt in default solely for the purpose of facilitating collection of such debt for another,” such person must be a “debt collector.[iv]    The Court rejected this argument and observed that the exclusion on which the Henson plaintiffs relied did not depend only on the default status of the debt. Rather, “the exclusion applies only to a person who receives defaulted debt ‘solely for the purpose of facilitating collection . . . for another.’ ”[v]

The Court further stated that even if an entity falls within the enumerated statutory exclusion from the definition of “creditor,” an FDCPA plaintiff must still demonstrate that the defendant meets the substantive definition of a “debt collector” as set forth in the FDCPA’s main text.[vi]  The Court summarized that definition to include: “(1) a person whose principal purpose is to collect debts; (2) a person who regularly collects debts owed to another; or (3) a person who collects its own debts, using a name other than its own as if it were a debt collector.”[vii]

Thus, the material distinction between a “debt collector” and a “creditor,” the Court noted, is whether a person’s regular collection activity is only for itself (a creditor) or for others (a debt collector), with the primary exception being an entity whose principal purpose is the collection of debts—not, as the Henson plaintiffs urged, whether the debt was in default when the person acquired it.

This is a significant development in FDCPA jurisprudence and, by moving the focus away from the status of the debt at the time of assignment, will provide lenders who seek to collect their own debts with a strong defense to future FDCPA liability.

[i] Henson v. Santander Consumer USA, Inc., —F.3d—, 2016 WL 1128419, at *3 (4th Cir. Mar. 23, 2016).

[ii] Id. at *1.

[iii] Id. at *1-2.

[iv] Id. at *2 (citing 15 U.S.C. § 1692a(4)) (emphasis in original).

[v] Id. at *3 (emphasis in original).

[vi] Id. at *4.

[vii] Id. at *3 (emphases in original).

Ohio Supreme Court Decides A Defectively Executed Recorded Mortgage Acts As Constructive Notice to the World (Including Bankruptcy Trustees)

By: Chrissy Dunn Dutton

The Ohio Supreme Court recently issued its decision in In re Messer, Slip Opinion No. 2016-Ohio-510, holding that a defectively executed recorded mortgage acts as constructive notice of that mortgage to the world.

In the opinion, the Court decided the following two questions of state law, which were certified from bankruptcy court: (1) whether R.C. 1301.401 applies to all recorded mortgages in Ohio; and (2) whether R.C. 1301.401 acts to provide constructive notice to the world of a recorded mortgage that was deficiently executed under R.C. 5301.01.

The court unanimously answered yes to both questions.

R.C. 1301.401(A) and 1301.401(C) provide that the recording of certain documents with the county recorder is constructive notice “to the whole world of the existence and contents of [the] document as a public record and of any transaction referred to in that public record…” and that “[a]ny person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record” as of the date and time of recording.

R.C. 5301.01, which sets forth the requirements for a mortgage in Ohio, provides, in relevant part, that a mortgage shall be signed by the mortgagor and the signing shall be acknowledged by the mortgagor in front of an appropriate state official who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgment.

The notary acknowledgment on the mortgage at issue was left blank, providing no indication as to whether the borrowers executed the mortgage in front of a notary. When the borrowers filed a Chapter 13 bankruptcy and a companion adversary proceeding, seeking to avoid the mortgage as defectively executed under R.C. 5301.01, the bankruptcy court determined that its interpretation of R.C. 1301.401 would be dispositive. However, finding no interpretation of that statute by any Ohio court, the bankruptcy court certified the questions of state law to the Ohio Supreme Court. In its order for certification to the Supreme Court, the bankruptcy judge noted that the borrowers may have been able to avoid the mortgage before O.R.C. §1301.401 was enacted. However, the court questioned whether O.R.C. §1301.401 changed this result.

The full impact of the decision remains to be seen, as the bankruptcy court has not yet issued a decision on whether the mortgage can be avoided in the underlying adversary proceeding. However the Supreme Court decision is likely dispositive of that issue. The finding that a recorded but defectively executed mortgage puts subsequent parties (including bankruptcy Trustees) on constructive notice is therefore likely to defeat avoidance actions typically brought under Sec. 544 of the U.S. Bankruptcy Code.