Last week, we wrote about how the Bureau of Consumer Financial Protection (“Bureau”) under Acting Director Mick Mulvaney had surprisingly doubled down on claims of unfair, deceptive and abusive practices (“UDAAP”) brought under former Director Richard Cordray in a case against a lead aggregator (back when the Bureau referred to itself as the Consumer Financial Protection Bureau). As if to prove the point that the Bureau is not backing off aggressive UDAAP claims, the very next day the Bureau filed a brief in another case similarly supporting novel UDAAP claims brought under Cordray. The Bureau’s brief was filed in opposition to a motion to dismiss by defendants Think Finance, LLC and related entities. The case involves Bureau claims that Think Finance engaged in unfair, deceptive and abusive conduct when it attempted to collect on loans that were, according to the Bureau, void under state law. Continue Reading UDAAP Strikes Again: The New BCFP Seems a Lot Like the Old CFPB
The Office of Students and Young Consumers (Office of Students) has been an important component of the Consumer Financial Protection Bureau (CFPB or the Bureau) since its creation in 2011. On May 9, 2018, the CFPB’s Acting Director announced plans to fold the Office of Students into the Office of Financial Education. The Student Loan Ombudsman, a position the Dodd-Frank Act created, will also reportedly be part of the Office of Financial Education. This move could signal a major shift in the CFPB’s approach to the student loan market.
As its name indicates, the Office of Financial Education focuses on consumer education. Specifically, its stated focus is “strengthen(ing) the delivery of financial education . . . and creat[ing] opportunities for people to obtain the skills to build their financial well being.” Given that mission, some have speculated that the recent movement of the Office of Students within the Bureau’s Office of Financial Education may lead to fewer examinations, investigations, and enforcement actions against participants in the private student loan market. Continue Reading CFPB to Eliminate Student Loan Office
Much has been written about Mick Mulvaney’s statements about how the Consumer Financial Protection Bureau (CFPB) will no longer “push the envelope” when it comes to enforcement and no longer engage in “regulation by enforcement.” But a little-noticed filing by the CFPB in the Ninth Circuit last month suggests that the CFPB is not necessarily scaling back its enforcement efforts with respect to novel claims under its authority to prevent unfair, deceptive, and abusive acts and practices (UDAAP). Continue Reading Meet the New Boss; Same as the Old Boss? The CFPB’s Take on UDAAP Might Surprise You
On May 8, 2018, the United States Department of Justice and KleinBank reached a settlement agreement resolving allegations that the bank engaged in mortgage lending discrimination by failing to adequately serve predominantly minority neighborhoods (so-called “redlining”) in and around the Twin Cities of Minneapolis and St. Paul, Minnesota. The settlement resolves one of the only redlining investigations to ever land in court, and marks the Trump DOJ’s first fair lending settlement.
DOJ filed its complaint against KleinBank on January 13, 2017, one week before the inauguration of President Trump, suggesting that the Obama administration’s DOJ may have been concerned that the Trump administration would be disinclined to pursue fair lending cases aggressively. Given recent activities at the Consumer Financial Protection Bureau, this worry may have been well-founded.
The complaint alleges that, from 2010 until at least 2015, KleinBank intentionally avoided lending to residents of predominantly minority neighborhoods in the Twin Cities area because of the race or national origin of the residents of those neighborhoods. Specifically, the DOJ alleged that KleinBank carved majority-minority census tracts out of its Community Reinvestment Act assessment area, located its branch and mortgage loan officers in majority-white census tracts (and not majority-minority census tracts), and directed marketing and advertising predominantly toward residents in majority-white census tracts. While most targets of redlining claims have sought to settle the allegations in short order, KleinBank took the rare step of fighting the DOJ’s claims in litigation.
Prior to the settlement, on March 30, 2018, the district court handling the case adopted a magistrate’s recommendation that KleinBank’s motion to dismiss be denied. The magistrate’s report and recommendation are under seal, making it impossible to fully analyze the rationale underlying the decision. However, the court noted that contrary to KleinBank’s contention, the government had sufficiently plead the intent element of a disparate treatment claim by, among other things, alleging that the bank intentionally drew its assessment area to avoid minority areas and intentionally avoided marketing to such areas.
Under the settlement agreement, KleinBank is required to open (and operate for at least three years) one new full-service branch office in a majority-minority census tract. Redlining resolutions that require banks to open branch offices are noteworthy considering the rapid increase in online banking activities and the cost associated with opening a full service branch.
The settlement agreement also requires KleinBank to invest $300,000 through a special purpose credit program to increase the amount of credit it extends in minority neighborhoods. Further, the bank must invest another $300,000 in advertising, outreach, financial education, and credit repair in order to “assist in establishing a presence in majority-minority census tracts in Hennepin County.
A few aspects of this agreement stand out. First, the DOJ’s use of a settlement agreement rather than a consent decree is notable. Most DOJ cases are resolved using consent decrees, which are generally easier for the government to enforce. Second, many of the settlement agreement provisions are less onerous than the terms of other recent redlining settlements. For example, the agreement does not subject KleinBank to a civil money penalty, and provides for flexibility on the timing of the bank’s advertising and loan subsidy obligations. This suggests that the Trump DOJ may be taking a more subdued approach to fair lending cases than did its predecessor.
Time will tell if the KleinBank settlement is a red herring or harbinger for more federal fair lending enforcement.
Several of Mayer Brown’s Consumer Financial Services lawyers will be featured at the upcoming Legal Issues and Regulatory Compliance Conference in Los Angeles, sponsored by the Mortgage Bankers Association.
On Sunday, April 29th, Ori Lev will participate on a panel analyzing unfair, deceptive, or abusive acts or practices (UDAAP), as part of the conference’s Applied Compliance track.
On Monday, April 30th, Kris Kully will participate in a panel attempting to look on the bright side of HMDA — how understanding that additional data will be useful not just for lenders’ compliance function, but also for production growth, and perhaps even operational efficiencies.
On Tuesday, May 1st, Krista Cooley will discuss the latest developments in False Claims Act enforcement.
In addition, Phil Schulman will address “TRID 2.0” — with the resolution of the PHH decision, how can lenders work with other service providers to market their loans to potential borrowers? Phil also will participate in the RESPA Section 8 “Deep Dive” Compliance Roundtable later that afternoon.
On Wednesday, May 2nd, Keisha Whitehall Wolfe will participate in what promises to be a lively discussion about “Compliance in Action,” discussing real life examples related to analyzing, addressing, responding to, and resolving compliance issues.
The ABA Business Law Section is holding its 2018 Spring Meeting in Orlando next week and will offer nearly 90 CLE programs and many more committee meetings and events.
Mayer Brown’s Matthew Bisanz will co-moderate, and Anjali Garg will participate on, a panel on April 13th discussing current developments in UDAP/UDAAP enforcement involving financial institutions, including considerations for advertising disclosures and the potential for increased state enforcement activity. Matthew and Anjali are members of Mayer Brown’s Financial Services Regulatory and Enforcement Group in Washington, DC.
Also on April 13th, restructuring partner Luciana Celidonio (Tauil & Chequer, São Paulo) will participate on a panel exploring the issues and actors involved in international bond defaults.
For more information, please visit the event webpage.
On February 7, 2018, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released the third installment of its call for comments on the Bureau’s functions. The latest request for information (“RFI”) on the CFPB’s enforcement processes should spark the interest of previously investigated and yet-to-be investigated entities alike. Comment letters should include specific suggestions on how the Bureau can change the enforcement process and identify specific aspects of the CFPB’s existing enforcement process that should be modified. In addition to considering the regulations governing CFPB investigations, 12 C.F.R. part 1080, commentators should consider reviewing the CFPB Office of Enforcement’s Policies and Procedures Manual, which governs the enforcement process. According to the RFI, commentators should include supporting data or information on impacts and costs, where available.
The RFI requests comments on the following topics:
Since the Consumer Financial Protection Bureau’s inception in 2011, the Office of Fair Lending and Equal Opportunity (Office of Fair Lending) has been a powerful force within the agency. This week, Acting Director Mick Mulvaney announced that the Office of Fair Lending will be transferred from where it currently resides – in the Division of Supervision, Enforcement, and Fair Lending (SEFL) – to the Office of the Director, where it will become part of the Office of Equal Opportunity and Fairness. Despite the similar nomenclature, the priorities of the Office of Fair Lending and the Office of Equal Opportunity and Fairness are vastly different, with the latter having oversight over equal employment opportunity and diversity and inclusion initiatives within the CFPB. The move likely signals a substantial curtailment of CFPB fair lending enforcement activities.
Section 1013 of the Dodd-Frank Act mandated the establishment of an Office of Fair Lending and the statutory language provides that the Office of Fair Lending “shall have such powers and duties as the Director may delegate to the Office, including”:
- Providing oversight and enforcement of federal fair lending laws (including ECOA and HMDA);
- Coordinating fair lending efforts with other federal agencies and state regulators;
- Working with the private industry and consumer advocates on the promotion of fair lending compliance and education; and
- Providing annual reports to Congress on the Bureau’s efforts to fulfill its fair lending mandate.
The CFPB to date had in fact given the Office of Fair Lending the powers and duties listed in the statute, and Office of Fair Lending attorneys played a substantial role in overseeing fair lending examinations and bringing fair lending enforcement actions. Indeed, the Office of Fair Lending has come under fire for “regulation through enforcement” and for “pushing the envelope” through its aggressive enforcement of federal anti-discrimination statutes against lenders on the basis of statistical analyses (i.e., dealer markup and redlining). It is clear that, as a result of the restructuring, the Office of Fair Lending will no longer have supervisory or enforcement responsibilities. According to an email sent by Mulvaney to CFPB staff that was leaked to several news outlets, the Office of Fair Lending’s new focus will be on advocacy, coordination, and education. Although SEFL as a whole still maintains responsibility for fair lending supervisory and enforcement matters, this restructuring signals a de-emphasis on fair lending and likely will lead to a significant decrease in the number of fair lending examinations, investigations and enforcement actions brought by the Bureau. Indeed, Congress presumably required the establishment of a separate fair lending office out of recognition that having such an office would ensure a persistent attention to fair lending issues. Stripping the office of supervisory and enforcement responsibilities will similarly result in less of a focus on those issues. While SEFL leadership and staff are likely to continue to pursue fair lending matters, those matters will now compete for attention and resources with the myriad other issues over which the CFPB has jurisdiction.
In its Fair Lending Report released last year, the Bureau’s then-Director Cordray touted its “historic resolution of the largest redlining, auto finance, and credit card fair lending cases.” Cordray also identified redlining, mortgage loan servicing, student loan servicing, and small business lending as the Bureau’s fair lending priorities going forward. Under the Bureau’s new leadership, fair lending issues evidently will no longer be a top priority. With the rollback in the CFPB’s fair lending enforcement activities, there may be an uptick in consumer advocacy groups seeking other avenues for fair lending relief, such as class action litigation and complaints filed with HUD and state agencies tasked with enforcing state anti-discrimination laws.
The U.S. Court of Appeals for the D.C. Circuit (the “court”) has issued its long-awaited en banc decision in PHH v. CFPB. In a January 31, 2018 opinion, the court rejected the three-judge panel’s conclusion that the structure of the Consumer Financial Protection Bureau (“CFPB”) is unconstitutional. But the en banc court reinstated the panel’s decisions that the CFPB’s interpretation of the Real Estate Settlement Procedures Act (“RESPA”) is unlawful and may not stand and that the CFPB is subject to a three-year statute of limitations even when bringing RESPA claims administratively.
As is well known, on October 11, 2016, a three-judge panel of the court had overturned a $109 million disgorgement order that the CFPB had imposed on PHH Corporation (“PHH”) for its involvement in an allegedly unlawful mortgage reinsurance arrangement. Pursuant to that arrangement, PHH did business with mortgage insurance companies that purchased reinsurance from a wholly-owned subsidiary of PHH. The court held, by a 2-1 vote, that the CFPB’s single-director structure allowing the President to remove the Director during his/her five-year term only for cause violates the Constitution’s separation-of-powers principles. The court severed the for-cause limitation, thereby effectively allowing the President to remove the Director at will at any time.
The three-judge panel also unanimously rejected the CFPB’s interpretation of Section 8 of RESPA, concluding that, contrary to the CFPB’s determination, Section 8(c)(2) of the statute provides an actual exemption to the anti-kickback provision in Section 8(a). On February 16, 2017, the court granted the CFPB’s petition for rehearing en banc, vacating the panel decision and setting up review by the full D.C. Circuit. Nearly a year later, the court ruled on these matters.
In a 7-3 majority ruling, the court held that the CFPB is not unconstitutionally structured and that the for-cause limitation on the President’s removal authority is a permissible exercise of congressional authority. This part of the decision, however, seems less momentous in the wake of former CFPB Director Richard Cordray’s resignation in November 2017 and President Trump’s appointment of Office of Management and Budget Director Mick Mulvaney as the CFPB’s Acting Director.
Of more immediate significance to the settlement service industry is the court’s decision to reinstate the three-judge panel decision respecting RESPA. The panel had found that Section 8(c)(2) was indeed an exemption to the Act’s Section 8(a) anti-kickback provisions, provided that reasonable payments are made in return for services actually performed or goods actually furnished. As a result of the court’s reinstatement, real estate brokers, lenders and title companies that were waiting on the sidelines for this decision may take another look at advertising agreements, desk rentals, and other services agreements.
The panel opinion also had rejected the CFPB’s contention that no statute of limitations applies to administrative enforcement of RESPA. That aspect of the reinstated opinion is likely to be helpful to respondents facing administrative claims under other federal consumer financial laws as well.
Finally, despite the 7-3 ruling on the constitutional issues and differences of opinion regarding the proper interpretation of RESPA, one thing all of the judges seem to agree on is that an agency cannot seek penalties for past conduct that violates a novel legal interpretation first advanced in an enforcement case. That is, “regulation by enforcement” is permissible as a way to announce new legal principles, but, for due process reasons, it cannot be a basis to penalize past conduct.
It remains to be seen if PHH will seek Supreme Court review of the constitutional holding or will instead try its luck on remand in front of the Mulvaney-led CFPB.
On January 24, 2018, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced that it is seeking public comment on all aspects of its civil investigative demand (“CID”) process. This Request for Information (“RFI”) is the first in a series of RFIs in which the Bureau plans to seek comment on its enforcement, supervision, rulemaking, market monitoring, and education activities.
The RFI comes on the heels of Acting Director Mick Mulvaney’s announcement that the CFPB will no longer “push the envelope” when it comes to enforcement. Consistent with that sentiment, the RFI explains that the CFPB is “especially interested in better understanding how its processes related to CIDs may be updated, streamlined, or revised to better achieve the Bureau’s statutory and regulatory objectives, while minimizing burdens.” Because responding to the CFPB’s CIDs has often proved to be an arduous and costly endeavor, this RFI is likely to be a welcome opportunity for many regulated entities. Continue Reading CFPB Requests Comments on Civil Investigative Demand Process