The Consumer Financial Protection Bureau issued its latest set of Supervisory Highlights and reminded us that “unforeseen” means “unforeseen.”

The CFPB’s regulations generally prohibit reducing a loan originator’s compensation in selective cases. While lower compensation sounds good for consumers, the CFPB asserts that allowing loan originators to decrease their compensation in selective cases is actually harmful at the macro level, because it incentivizes them to offer most consumers higher-priced loans at the outset. However, the CFPB determined that allowing compensation concessions to cover unforeseen increases in closing costs does not raise concerns about improper incentives, so long as those instances are truly unforeseen and are documented for the examiners.

According to the Supervisory Highlights, the CFPB found that certain loan originators received lower compensation to cover closing costs that were not unforeseen. The agency’s examiners found that the loan originators disclosed to consumers certain costs that were either known to be inaccurate or that resulted from clerical errors. Those amounts were covered by lender credits initially, but then recouped from the loan originators’ compensation. While it may seem reasonable to make a loan originator pay for his/her mistakes, the CFPB found that the mistakes did not come within the “unforeseen” exception. Accordingly, the loan originator must receive his/her standard compensation, and the lender must generally absorb those costs.

The only concrete example of an “unforeseen” cost that the CFPB has provided is a rate lock extension fee when closing is delayed due to an unforeseen title issue. The CFPB has otherwise explained that the “unforeseen” exception does not apply to events that are within a loan originator’s control or when the loan originator knows or reasonably is expected to know the amount of the closing cost in advance. If a loan originator makes repeated pricing concessions for the same categories of closing costs across multiple transactions, the CFPB continues to insist that the lender, and not the loan originator, must pay the price.

As we previously predicted, the Consumer Financial Protection Bureau (CFPB) has asked the Supreme Court to reverse the recent Fifth Circuit decision finding that the agency’s funding is unconstitutional. In a petition for certiorari filed less than a month after the Fifth Circuit decision, the CFPB asks the Supreme Court to hear the case and decide it this term. The CFPB’s petition argues that the Fifth Circuit’s conclusion that the agency’s funding violates the Appropriations Clause was wrong for numerous reasons. In the CFPB’s words:

The court of appeals relied on an unprecedented and erroneous understanding of the Appropriations Clause to hold the CFPB’s statutory funding mechanism unconstitutional. Congress enacted a statute explicitly authorizing the CFPB to use a specified amount of funds from a specified source for specified purposes. The Appropriations Clause requires nothing more. The court of appeals’ novel and ill-defined limits on Congress’s spending authority contradict the Constitution’s text, historical practice, and this Court’s precedent. And the court of appeals compounded its error by adopting a sweeping remedial approach that calls into question virtually every action the CFPB has taken in the 12 years since it was created.

As the last sentence suggests, in addition to arguing that the Fifth Circuit’s Appropriations Clause analysis was erroneous, the CFPB argues that the Fifth Circuit’s remedy analysis—which struck down the CFPB’s Payday Lending Rule and suggested that all of the agency’s actions were similarly subject to challenge—was also wrong.

Given the implications of the Fifth Circuit’s ruling, we expect the Supreme Court to grant cert and decide the case this term—that is, by June 2023.

In a consequential decision, a panel of the Fifth Circuit Court of Appeals last week ruled that the US Consumer Financial Protection Bureau (“CFPB”) is unconstitutionally funded and that its promulgation of a Payday Lending Rule—and presumably all of its actions—are therefore invalid. Read our summary of the opinion and discussion of its likely implications here.

On August 10, 2022, the Consumer Financial Protection Bureau (“CFPB”) issued an interpretive rule clarifying its position that digital marketers providing consumer financial services companies with customer targeting and advertisement delivery services are subject to the Consumer Financial Protection Act as “service providers.” Critically, the rule takes the position that tech companies offering such marketing services fall within the scope of the CFPB’s unfair, deceptive, and abusive acts or practices (“UDAAP”) enforcement authority. Read our recent Legal Update for more details.

Mayer Brown has launched a cross-office, multidisciplinary Residential Finance Market Stress Task Force (the “Task Force”) to advise market participants navigating the current market stress. As one of a discrete group of law firms with significant expertise in residential finance transactional, restructuring, capital markets, regulatory, government enforcement and litigation practices, the team offers particular insight on a range of issues — from rescue financings to address liquidity issues to lender liability and related M&A transactions and from regulator oversight to civil and administrative claims.

“The residential mortgage market is anything but static,” said Mayer Brown Chair Jon Van Gorp, who has advised on novel mortgage finance issues throughout his career. “Dynamic factors constantly reshape the mortgage industry, including the rise of financial innovation, the expanded role of non-bank mortgage companies and, of course, the impact of market forces, both positive and negative. Our new Task Force is uniquely suited to advise clients on the latest changes and how to navigate the new headwinds of market stress from all angles.”

The Task Force is comprised of more than a dozen lawyers across the firm’s US offices, including capabilities pulled from its Banking & Finance, Capital Markets, Financial Services Regulatory & Enforcement, M&A and Restructuring practices, and litigation to provide a coordinated approach to special situations in the residential finance market.

“The residential finance industry has whiplash from the past two years,” said Lauren Pryor, leader of Mayer Brown Residential Finance Market Stress Task Force, partner in the firm’s Financial Services Regulatory & Enforcement practice and co-head of the Financial Institutions M&A group. “We went from a frozen market in March 2020 to the highest volumes and profits in 50 years — and now to drastically reduced volumes, compressed margins, decreased inventory and rising interest rates. Market participants need to be prepared to move quickly and decisively in the current environment.”

“We’ve been down this road before, particularly following the subprime implosion, and we’ve learned that legal problems can’t be simply segmented into discrete disciplines and instead require an integrated, holistic approach to problem solving; the different disciplines are inextricably tied together,” added Laurence Platt, partner in Mayer Brown’s Financial Services Regulatory & Enforcement practice.

View the firm’s key issues page
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Pay close attention to New Jersey Bill A793, the Community Wealth Preservation Act, which the New Jersey legislature passed at the end of June and sent to the Governor for consideration.  While I’m not steeped in the intricacies of state foreclosure laws, it appears the Act would cap a holder’s bid at foreclosure sale to 50% of the outstanding indebtedness and permit family members of the borrower to bid higher.  Sure seems unenforceable to me!

Apparently time flies when you’re Director Chopra of the Consumer Financial Protection Bureau (“CFPB”). On June 17, Director Chopra issued a blog post titled “Rethinking the Approach to Regulations,” indicating that the agency will move toward “simpler and clearer rules” that are easy to understand and enforce. As part of that effort, the agency will review certain rules that it either inherited or “pursued in its first decade of existence.” Among those rules is the CFPB’s Qualified Mortgage (“QM”) Rules.

The passage of time has admittedly been fuzzy since the pandemic. However, the CFPB has by all accounts undertaken a recent (and seemingly deep) review of the QM Rule. Beginning with a request for information in 2017, and ending with final rules in 2021, the CFPB issued a total of 12 Federal Register notices and rules, addressing everything from general QMs, temporary QMs (the “GSE Patch”), and seasoned QMs. In fact, the general QM definition is still in transition – switching to the new APR-based QM will not be mandatory until October. For an agency that is barely a decade old, the assertion that rules the agency pursued way back in its “first decade” are stale seems inapplicable to the QM Rule.

Nonetheless, Director Chopra indicated that the agency will, with regard to the QM Rule, “explore ways to spur streamlined modification and refinancing in the mortgage market.” That brings to mind the current QM status applicable to “non-standard” mortgage loans that are refinanced into standard loans. That non-standard refinancing QM, which dates back to the “first decade” (i.e., 2014) is very narrow. It allows a lender to achieve QM status by refinancing an adjustable rate, interest-only, or negative amortization loan into a loan without those features, but only if the lender is the current holder or servicer of the existing loan, the monthly payments for the new mortgage will be materially lower, and the consumer has generally made timely payments on the existing loan. The lender must consider whether the refinancing will prevent a default. In that vein, the new loan can only achieve this QM status if the existing non-standard loan was originated before January 10, 2014, and if the lender receives the consumer’s application for the new loan within two months after the existing loan has recast. (Otherwise the loan must meet a different QM definition or comply with the ability-to-repay requirements for non-QMs.) Perhaps the CFPB intends to consider ways to create a more usable QM status for streamlined refinancings in this decade. (Of course, even if the CFPB creates a new streamlined-refi QM, lenders would still need to consider whether state ability-to-repay requirements apply.)

While the June 17th blog post also mentioned spurring “streamlined modifications,” such transactions (which do not entail the satisfaction and replacement of the existing obligation) are not subject to the federal ability-to-repay/QM requirements. It is unclear what the agency’s proposals will be for spurring such modifications through the QM Rule.

Director Chopra also mentioned “assessing aspects of the ‘seasoning’ provisions.” So-called “seasoned QMs” are a recent (i.e., second decade) category. Seasoned QM status applies (or, more accurately, will apply) to a narrow set of loans that experience strong payment performance for 36 months. In very general terms (the specific parameters are quite detailed), a first-lien, fixed-rate, fully-amortizing loan that the lender has either held in portfolio or has transferred only once (and has not securitized), and on which the borrower has been able to make timely payments (which generally include payments in accordance with pandemic/disaster-related accommodations) for 36 months will achieve safe harbor QM status. While this seasoned QM status could be valuable in curing certain calculation deficiencies, a lender still must have considered and verified the borrower’s income, assets, and debt obligations, and met other QM-related requirements at the time of origination.

In spite of the Director’s assertion that “many of these rules have now been tested in the marketplace for many years and are in need of a fresh look,” the seasoned QM status has only been available for loans for which an application was received on or after March 1, 2021. The universe of loans that could season into QM status after 36 months is thus not yet fully determined, so once again the Director’s assertions – that the seasoned QM rule has been tested for many years – seem inapplicable here. While the CFPB hoped the seasoned QM would encourage innovation and broaden the credit box, the agency warned us that it was “considering whether to initiate a rulemaking to revisit” that category.

The blog post does not specify the nature of the agency’s review process, or whether it will include notice-and-comment rulemaking. It merely states that the agency aims for “simple bright lines” that protect consumers, promote compliance, and foster consistent interpretation and enforcement among agencies. The CFPB insists that it will continue to communicate clearly and that it welcomes public input. As it re-rethinks the QM Rule, even before that Rule is fully rolled out, clarity and public input will be welcome.

After an almost two-year regulatory process, the California Department of Financial Protection and Innovation (DFPI) adopted final administrative regulations to implement the state’s 2018 commercial financing disclosure law. Most importantly, the final rules come with a long-awaited effective date: December 9, 2022. The effective date honors prior DFPI statements that a six-month window for compliance would be afforded to covered providers of business-purpose financing.

Read more in Mayer Brown’s Legal Update.

In a ruling with important implications for the Consumer Financial Protection Bureau (Bureau or CFPB), the Ninth Circuit has revived the CFPB’s claims for substantial civil penalties and restitution in a lawsuit that was first filed some seven years ago. In a May 23, 2022 opinion, the court reversed and remanded a district court decision that had limited the civil penalties awarded to the Bureau and that had declined to award any restitution.

The case involved an enforcement action brought by the CFPB against CashCall and its founder, sole owner and CEO. As we’ve previously discussed, here and here, the CFPB alleged that servicing and collecting on loans that are void or uncollectable under state law because of state licensing or usury statutes constitutes a federal deception violation. The district court granted summary judgment to the CFPB on the merits of its claims, finding that collecting on such loans constituted deceptive conduct because it created the “‘net impression’ that the loans were enforceable.” In reaching this conclusion, the district court had also held that although the loans were made by a separate entity (Western Sky Financial), CashCall, which purchased the loans days after they were made, was the “true lender” on the loans because “the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest.”

Having determined liability on summary judgment, the district court held a bench trial to determine the remedy. That’s where the CFPB’s success had largely ended. The district court, relying on the fact that the defendants had sought legal advice and that at the time there was no case law clearly establishing their lending model improper, denied the CFPB’s request to impose civil penalties based on recklessness, and instead imposed civil penalties based on the lowest tier of civil penalties. The district court also denied the CFPB’s request for restitution because the agency “did not show that Defendants intended to defraud consumers or that consumers did not receive the benefit of their bargain.” Both CashCall and the CFPB appealed.

On appeal, the CFPB fared much better. The Ninth Circuit affirmed the district court’s holding that “all of the loan transactions at issue here were conducted by CashCall, not Western Sky” given that CashCall provided the money with which Western Sky made loans, purchased the loans shortly after they were made and bore all economic risks and benefits of the transaction. As a result, state laws applied, as opposed to tribal law, which CashCall had argued should apply to loans made by Western Sky. In reaching this conclusion, however, the Ninth Circuit expressly disclaimed any statement as to who the “true lender” of the loans was or any implications for more traditional bank partnerships: “To the extent that CashCall invokes cases involving banks, we note that banks present different considerations because federal law preempts certain state restrictions on the interest rates charged by banks…. We do not consider how the result here might differ if Western Sky had been a bank. And we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”

The Ninth Circuit went on to affirm the district court’s finding that because state law applies—and rendered the loans void or uncollectible—attempting to collect on the loans was a deceptive practice because it “[led a consumer to believe an invalid debt is actually a legally enforceable obligation.”

The Ninth Circuit then went on to address remedies, and here it reversed the district court’s rulings. First, the court held that once CashCall ceased operating its lending program in light of its counsel’s advice to do so because of a changing regulatory and litigation environment, its continued collection on outstanding loans met the recklessness factor for heightened civil money penalties. In the Ninth Circuit’s words, at that point “the danger that CashCall’s conduct violated the statute was ‘so obvious that [CashCall] must have been aware of it.’” The Ninth Circuit thus vacated the $10 million penalty the district court had imposed and remanded the case with instructions that the district court recalculate the penalty for the latter time period using the higher penalty amount applicable to reckless conduct.

Second, the Ninth Circuit reversed as clear error the district court’s holding that restitution was inappropriate because CashCall had not intended to defraud borrowers and consumers had “received the benefit of their bargain.” In so doing, the Ninth Circuit noted that knowledge or intent is not required for an award of restitution and that “whether consumers received the benefit of their bargain is not relevant” if the conduct was illegal. The court therefore remanded the matter to the district court to determine whether, and if so how much, restitution was appropriate applying the correct legal principles.

The Ninth Circuit decision represents a substantial vindication for the CFPB, both with respect to the legal theory underpinning their case (which they have used in other cases as well) and, more importantly, in terms of the remedies available to the agency. The district court’s original decision had been one a series of remedial rebukes the courts had handed the Bureau; the Ninth Circuit’s decision is likely to further embolden the agency in seeking substantial monetary relief in its enforcement actions.

On May 9, 2022, the CFPB issued an Advisory Opinion outlining its position that the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, extend beyond applicants seeking credit to include those who have received credit. The 16-page Advisory Opinion lays out the Bureau’s position that the statutory text, legislative purpose and judicial precedent support this conclusion. The Advisory Opinion points out that this has been the “longstanding position” of the Bureau and echoes arguments made last year in an interagency amicus brief filed with the Court of Appeals for the Seventh Circuit. As an interpretive rule, the Advisory Opinion is exempt from the notice-and-comment rulemaking procedures under the Administrative Procedure Act.

ECOA defines an “applicant” as any person who applies to a creditor directly for an extension, renewal or continuation of credit (or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit). Regulation B defines “applicant” more broadly as “any person who requests or who has received an extension of credit from a creditor.” The Bureau cites to ECOA’s definition of “adverse action” to support its position that the legislative intent was to cover consumers who applied for and received credit and are now existing borrowers. Specifically, ECOA defines “adverse action” as “a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or on substantially the terms requested.” The Advisory Opinion also points to ECOA’s broad anti-discrimination provision, which prohibits creditors from discriminating against applicants in connection with any aspect of a credit transaction.

Although the Advisory Opinion acknowledges that several district courts have interpreted “applicant” to include only consumers actively seeking credit, the Bureau states that this interpretation is “not persuasive.” Citing to courts that have read the statute more broadly to protect existing borrowers—including the only circuit court to have addressed the issue—the Bureau pointed to language in ECOA protecting people from discrimination in the “denial or termination of credit.” In the Advisory Opinion, the CFPB seemingly criticizes creditors that “fail to acknowledge” ECOA and Regulation B apply to borrowers even after origination, including the provision of adverse action notices in connection with a revocation of credit or an unfavorable change in the terms of credit.

In issuing the Advisory Opinion, Director Chopra stated that the CFPB is “ramping up its efforts to issue guidance and advisory opinions” and suggests that this opinion is intended to make clear that anti-discrimination protections do not vanish once a customer obtains a loan.