CFPB Issues Proposed Amendment to Home Mortgage Disclosure Act

By: Jessica McElroy

On April 13, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a Notice of Proposed Rule Making[1] targeted at amending Regulation C to make technical corrections to and clarify certain requirements adopted by the CFPB’s Home Mortgage Disclosure final rule (“2015 HMDA Final Rule”), which was published on October 28, 2015.[2]

Regulation C implements the Home Mortgage Disclosure Act (“HMDA”).[3] HMDA has historically provided the public and public officials with information about mortgage lending activity by requiring financial institutions to collect, report and disclose certain data pertaining to mortgage activities. The Dodd-Frank Act amended HMDA and transferred rule-making authority to the CFPB.[4] The Dodd-Frank Act additionally expanded the scope of information that institutions must collect and disclose under HMDA.[5]

The 2015 HMDA Final Rule modified the types of institutions and transactions subject to Regulation C, the types of data that institutions are required to collect and the processes for reporting and disclosing the required data.[6] Most of the modifications take effect in January 2018.

The CFPB now proposes establishing transition rules for two data points: loan purpose and the unique identifier for the loan originator. According to the CFPB, the rules would allow financial institutions to report “not applicable” for these data points when reporting certain purchased loans that were originated before the regulatory requirements took effect. Additionally, the proposal would facilitate reporting the census tract of the property securing the covered loan required by Regulation C via a geocoding tool that the CFPB intends to make available on its web site. This tool would allow financial institutions to identify the census tract in which a property is located. The proposal also includes a safe harbor provision for institutions that obtain the incorrect census tract number from the CFPB’s geocoding tool, provided that an accurate property address is entered and the tool returned a census tract for the address entered.

Comments on the proposal are due 30 days after the Notice of Proposed Rulemaking is published in the Federal Register.

Click below for the proposal: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201704_cfpb_NPRM_HMDA.pdf.


 

[1] See https://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/technical-corrections-and-clarifying-amendments-home-mortgage-disclosure-october-2015-final-rule/ (last accessed April 17, 2017).

[2] See https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201704_cfpb_NPRM_HMDA.pdf.

[3] 12 U.S.C. § 2801 et seq.

[4] Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, section 2097- 101 (2010).

[5] Id.

[6] October 2015 HMDA Final Rule, 80 FR 66128, 29.

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.

Texas Statute Provides Clarity for Unilateral Rescission of Acceleration

By: Joshua A. Huber

In Texas, lenders must foreclose a deed of trust lien within four (4) years of acceleration,[i] and there is little dispute regarding what actions are required to “accelerate” a loan for purposes of the statute of limitations.[ii] Whether, and how, a lender can unilaterally “decelerate” a loan – that is, rescind a prior acceleration – was far less clear and generated extensive litigation in Texas by borrowers who, as a result of a delay in the foreclosure process, claimed that their lenders were time-barred from enforcing their lien rights.[iii]

Recent legislation now provides clarity on this issue. Texas House Bill 2067, effective September 1, 2015 and codified as Section 16.038 in the Texas Civil Practice and Remedies Code, makes clear that servicers may unilaterally rescind a prior valid acceleration, thereby avoiding the four (4) year statute of limitations. As recently noted by the Fifth Circuit, “[t]he new statute provides a specific mechanism by which a lender can waive its earlier acceleration.”[iv] Section 16.038 allows a lender or loan servicer to unilaterally rescind acceleration of the debt by serving each debtor at their last known address, by first class or certified mail, with notice that the accelerated maturity date is rescinded or waived. The service requirements for such notice tracks that of Tex. Prop. Code § 51.002(e) and is complete when mailed, not received.[v]

Despite the enactment of this Texas statute, borrowers have continued to rely on statute of limitations arguments to attempt to avoid foreclosure. However, the new law provides clear guideposts which, if followed, will afford servicers and lenders a strong defense and assurances that delays resulting from loss mitigation, litigation or other factors will not adversely affect their ability to enforce deeds of trust in Texas.

[i] See Tex. Civ. Prac. & Rem. Code § 16.035(a).

[ii] Boren v. U.S. Nat. Bank Ass’n, 807 F.3d 99, 104 (5th Cir. 2015) (acceleration requires both a notice of intent to accelerate and a notice of acceleration).

[iii] See, e.g., Callan v. Deutsche Bank Truste Co. Ams., 93 F.Supp.2d 725, 734 (S.D. Tex. Mar. 21, 2015) (observing that “there is no Texas case law on the validity of unilateral notices of rescission of acceleration.”).

[iv] Boren, 807 F.3d at 106.

[v] See Tex. Civ. Prac. & Rem. Code § 16.038(c).

HOUSE PASSES BILLS TO REPEAL CFPB AUTO LENDING GUIDANCE AND EXPAND SAFE HARBOR FOR MORTGAGE LENDERS

By: Louise Bowes

On November 18, 2015, the House of Representatives passed H.R. 1737, known as the Reforming CFPB Indirect Auto Financing Guide Act (the “Auto Financing Act”), which rejected the position taken by the CFPB in its March 2013 bulletin on indirect auto lending. Although intended to provide guidance to auto lenders regarding compliance with the Equal Credit Opportunity Act, the proponents of the Auto Financing Act have concluded that the effect of the CFPB’s bulletin has been to regulate auto lenders, which the CFPB is not permitted to do pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”). The bulletin has resulted in uncertainty in the auto lending market, as it impacts the interest rates lenders may offer to consumers. Although the bulletin is nonbinding, it has functioned as a rule because lawmakers have had no opportunity to comment on it.   Accordingly, the Auto Financing Act provides that any replacement to the CFPB’s bulletin must go through the rulemaking process to allow for comments.

The House of Representatives also passed another bill on the same day, the Portfolio Lending and Mortgage Access Act, H.R. 1210 (the “Mortgage Access Act”). The Mortgage Access Act provides that depository institutions can receive safe harbor protection for “qualified mortgages,” or “QMs,” even if the loans do not comply with Dodd Frank’s “ability to repay” requirement. This requirement, implemented as part of the CFPB’s amendments to Regulation Z, provides that a lender must make a reasonable, good-faith determination that a potential borrower has the ability to repay a loan prior to consummation. 12 C.F.R. 1026.43(c). To receive protection under the Mortgage Access Act without satisfying the ability to repay requirement, the lender must keep the loan in question on its own books. Lenders have been hesitant to issue new loans that do not qualify as QMs because such loans do not receive safe harbor protection, which would insulate the lender from claims made under the Truth in Lending Act and Regulation Z related to the qualified mortgage requirements. Proponents of the Mortgage Access Act believe that the unavailability of safe harbor protection for non-QM loans has resulted in potential borrowers being refused non-QM loans they could afford to repay.   Although removal of the ability to repay requirement may afford less protection to consumers, supporters of the Mortgage Access Act believe that requiring lenders to keep these loans on their own books will deter them from issuing loans to borrowers who cannot afford them.

If enacted, the Auto Financing Act and Mortgage Access Act may allow both auto lenders and mortgage lenders more flexibility in their lending practices; however, the White House has indicated that it opposes both Acts, and has specifically stated that President Barack Obama will veto the Auto Financing Act if given the opportunity.

U.S. Regulators Approve Risk Retention Rules For Mortgage Backed Securities

By: Daniel A. Cozzi

On October 22, 2014 The Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; U.S. Securities and Exchange Commission; Federal Housing Finance Agency (FHFA); and Department of Housing and Urban Development adopted rules to implement the credit risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act, enacted in 2010, requires the implementation of stricter rules governing mortgage-backed securities. The adopted rules seek to balance the importance of the securities market in providing credit to homeowners with appropriate underwriting standards, in light of the 2008 financial crisis. (“During the financial crisis, securitization transactions displayed significant vulnerabilities arising from inadequate information and incentive misalignment among various parties involved in the process.”) See Joint Final Rule to implement the requirements of section 941 of the Dodd–Frank Act.

Under Dodd-Frank, firms which issue mortgage-backed securities must retain a portion of the risk or demonstrate that the mortgages are held by borrowers with an ability to repay the debt. These risk retention requirements are meant to ensure that lenders retain some “skin in the game.” The rules require that lenders retain 5% of the risk associated with mortgages packaged as securities or comply with Consumer Financial Protection Bureau rules governing borrower debt-to-income ratios. The latter exception would require that lenders verify that a borrower can repay the debt and comply with other requirements, such as verification that the borrower’s debt payments do not exceed 43% of his or her income.

The new rules go into effect in the Fall of 2015 and will only impact the market for private securities. Securities sold to Fannie Mae and Freddie Mac are exempt from the new rules.

Third Circuit Affirms Dismissal of RESPA Class Action against Bank of America

By: Louise Bowes

In Riddle v. Bank of America Corporation, et al., the United States Court of Appeals for the Third Circuit recently affirmed a lower court’s dismissal of a putative class action suit against Bank of America because the borrowers’ claims under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) were time-barred. 2014 U.S. App. LEXIS 19730 (3d. Cir. Oct. 15, 2014).

The putative class plaintiffs purchased homes in 2005 with mortgages obtained from Bank of America, and were required to obtain private mortgage insurance in connection with their loans. In 2012, the borrowers received advertisements from their legal counsel regarding possible causes of action they may have related to their private mortgage insurance. Although the borrowers had not previously investigated the reinsurance arrangement in connection with their mortgage insurance, they brought suit against Bank of America, alleging that the reinsurance arrangement between the bank and the insurer was in violation of RESPA.

The United States District Court for the Eastern District of Pennsylvania held that the plaintiffs’ claims were time-barred by RESPA’s one-year statute of limitations. The District Court also held that their claims did not meet the requirements for equitable tolling because the borrowers did not exercise reasonable diligence in investigating their claims, and the defendants did not mislead the plaintiffs.

On appeal, the Third Circuit affirmed the District Court’s decision, on the basis that the plaintiffs did “absolutely nothing” to investigate the reinsurance of their mortgage insurance during the seven-year period between when their claims arose and when they brought suit. The Court also noted that although the plaintiffs’ lack of reasonable diligence was a sufficient basis on which to deny equitable tolling, there was also inadequate evidence that the defendants misled the plaintiffs.

“Totality of the Circumstances” Standard Used in New York to Sanction Mortgagee for Lack of “Good Faith” Negotiation in Foreclosure Matter

By: Jill E. Alward and Timothy W. Salter

New York’s Appellate Division, Second Department, recently ruled that a mortgagee’s conduct in evaluating a borrower’s loan modification application should be judged using the “totality of the circumstances” standard to determine whether the mortgagee negotiated in good faith during mandatory foreclosure settlement conferences. Applying that standard in US Bank N.A. v. Sarmiento, 2014 NY Slip Op 05533 (2d Dep’t July 30, 2014), the Appellate Division affirmed a lower court’s holding that a foreclosing plaintiff failed to negotiate in good faith.

In Sarmiento, the plaintiff, over the course of a series of settlement conferences, offered the borrower an in-house loan modification but denied the borrower’s HAMP application four times. The borrower, after refusing to accept the in-house modification, moved for sanctions, which sought to bar the plaintiff from collecting any interest, costs, or attorneys’ fees from the date of the first settlement conference (December 1, 2009). In addition, the borrower asked the court to direct the plaintiff to review the borrower’s loan for HAMP “using correct information and without regard to interest or fees that have accrued on the subject loan since December 1, 2009.” The lower court granted the borrower’s motion in its entirety.
On appeal, the plaintiff argued that the lower court lacked the authority to impose sanctions for violating the good faith requirement of CPLR 3408(f) and further applied the wrong standard in support of its holding. The Second Department rejected both arguments.

In summarizing the offending conduct, the Second Department held that “[w]here a plaintiff fails to expeditiously review submitted financial information, sends inconsistent and contradictory communications, and denies requests for a loan modification without adequate grounds…such conduct could constitute the failure to negotiate in good faith to reach a mutually agreeable resolution.” The court further held that while “any one of the plaintiff’s various delays and miscommunications, considered in isolation, [did] not rise to the level of lack of good faith,” the plaintiff’s conduct, when reviewed using the “totality of the circumstances” standard, “evidenced a disregard for the settlement negotiation[,]” regardless of whether the borrower ultimately qualified for a HAMP modification.

While the court warned that its holding should be construed as a deviation from the principal limiting a court’s role in a foreclosure action “to interpretation and enforcement of the terms agreed to by the parties,” it ultimately alters and expands the standard of review for determining a mortgagee’s “good faith” during the foreclosure settlement process. The court’s holding has already been cited by at least one court, and does not appear to be an isolated ruling.