On October 17, 2017, in response to an investigation concluding that title insurance companies and agents were spending millions of dollars a year in “marketing costs” provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, free classes, and vacations that ultimately were passed on to consumers through heightened title insurance rates, the New York Department of Financial Services (“DFS”) issued Insurance Regulation 208, in which it identified a non-exhaustive list of prohibited inducements and permissible marketing expenses. The new rule went into effect on February 1 of 2018. Five months later, on July 5th, 2018, the New York State Supreme Court (the state’s trial-level court) annulled the part of the DFS regulation addressing marketing practices, holding that any such rule must be issued by the state legislature, not a regulating agency. Continue Reading New York Court Annuls DFS Effort to Curb Unscrupulous Title Practices
A creditor’s inability to reset fee tolerances with a revised Closing Disclosure more than four business days before closing has been one of the more adverse unintended consequences of the TILA-RESPA Integrated Disclosure (“TRID”) regulations that became effective in October 2015. However, a fix is on the horizon. On Thursday, April 26, 2018, the Consumer Financial Protection Bureau (“CFPB”) announced final amendments to TRID to eliminate the timing restrictions that have plagued creditors and, in certain cases, increased creditors’ costs to originate residential mortgage loans. With an effective date 30 days after the final amendments are published in the Federal Register, this change is a welcome relief to mortgage lenders. Continue Reading A Ray of Light Through the “Black Hole”: TRID Amendment Permits Tolerance Reset with Revised Closing Disclosure
On February 6, 2018, the Pennsylvania Department of Banking and Securities issued draft regulations in response to the state’s recent law requiring licensing of mortgage loan servicers. The new regulations provide a great deal of information about what servicers will be required to do, but no additional guidance on exactly which entities must obtain the new license.
As we wrote previously, Pennsylvania Senate Bill 751 (also referred to as “Act 81” of 2017) amended the state’s Mortgage Licensing Act to require a person servicing mortgage loans to obtain a license. “Servicing a mortgage loan” for that purpose is defined as “collecting or remitting payment or the right to collect or remit payments of principal, interest, tax, insurance or other payment under a mortgage loan,” without limiting that phrase (and thus without limiting the licensing obligation) to servicing activity conducted only for others. As we indicated, that could be interpreted to require licensing even of persons servicing their own portfolio, unless the servicer also originated the loans (or unless an exemption otherwise applies, such as for banking institutions, their subsidiaries, or their affiliates, which are exempt from licensing upon registering). The legislation also does not indicate whether the licensing obligation applies to an entity that merely holds mortgage servicing rights without directly servicing the loans.
Unfortunately, the Department’s recent draft regulations do not provide guidance on whether such entities must obtain the license. Continue Reading Pennsylvania Drafts Mortgage Servicing Regulations to Track RESPA Requirements
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.
New title insurance regulations in New York restrict the marketing practices of title insurance agencies and affect the operation of affiliated businesses.
The New York Department of Financial Services (“DFS”) issued two final regulations on October 17, 2017 that follow a DFS investigation into the marketing practices and fees charged by title insurance industry members. The DFS stated that the investigation revealed that members of the title industry spend millions each year in “marketing costs” provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, and vacations and then include those expenses in the calculation of future title insurance rates. The DFS had already implemented emergency regulations to address those practices. The recent final regulations represent permanent guidelines on certain behavior the DFS deems prohibited and permissible under the state’s title insurance statutes. Continue Reading New York Takes Aim at Title Insurance Marketing Practices
No AfBA disclosure — no safe harbor!
By Consent Order dated September 27, 2017, the Consumer Financial Protection Bureau took action against Meridian Title Corporation for violating Section 8 of the Real Estate Settlement Procedures Act of 1974 by failing to furnish affiliated business arrangement (AfBA) disclosures to consumers. Meridian, an Indiana title and settlement agent, referred over 7,000 customers to its affiliated title insurer, Arsenal Insurance Corporation, without providing written AfBA disclosures notifying consumers of the entities’ affiliation and consumers’ rights. It also received compensation above and beyond its standard allowable commission set forth in the companies’ agency agreement. Under the Consent Order, Meridian agreed to disclose its affiliation with Arsenal, implement certain compliance measures, and set aside $1.25 million for affected consumers, with any portion of that amount not ultimately provided to consumers to be paid to the CFPB.
As indicated above, the underlying basis for action in this case was Meridian’s failure to provide written AfBA disclosures to consumers it referred to Arsenal. The disclosure requirement is black and white – payments under an AfBA cannot qualify for RESPA’s Section 8(c)(4) exception to the anti-kickback and fee-splitting provisions unless the referring entity provides written disclosures to customers meeting certain form and content requirements. Failure to furnish the disclosures leaves payments between the entities subject to scrutiny to determine whether they constitute payments for referrals or qualify for some other exception, Continue Reading CFPB Requires Title Agent to Pay Up To $1.25 Million to Consumers Referred to Affiliated Title Insurer
The Consumer Financial Protection Bureau announced a final rule to clarify the TILA/RESPA Integrated Disclosure requirements. The rule finalizes many of the CFPB’s earlier proposals, some with modifications. However, the agency still has not formally addressed important issues (like a lender’s ability to cure errors and the disclosure of title insurance premiums where a simultaneous discount applies), and it offers a new proposal to address the “black hole” on resetting fee tolerances. The final regulations will take effect 60 days after publication in the Federal Register.
Mayer Brown’s Legal Update discusses the CFPB’s latest attempt to strike a balance between the disclosure burdens on lenders or closing agents and ensuring consumers receive clear and useful information.
The long awaited en banc oral argument in the PHH v. CFPB appeal was heard this morning. Based upon the questions asked by the judges, and with the caveat that such questioning is not always an indicator of how a court will rule, it seems likely that the D.C. Circuit will not find the CFPB to be unconstitutionally structured. While Judge Kavanaugh, author of the roughly 100-page 3-judge panel decision last October, tried mightily to defend his position that a single director removable only for cause thwarts the President’s Article II authority, most of the judges did not seem to share his views. Some judges, like Judge Griffith, implied that the Court was bound by the Supreme Court’s decision in Humphrey’s Executor v. United States, which upheld the constitutionality of removal-for-cause provisions as pertains to the multi-member Federal Trade Commission. Other judges appeared to believe there was sufficient accountability for the CFPB Director because he or she can be removed for cause. Judge Pillard defended the independence of financial regulatory agencies such as the CFPB. On the whole, fewer judges seemed inclined to declare the for-cause provisions unconstitutional than to keep the status quo.
Notably, only about 60 seconds of the 90 minute oral argument addressed RESPA concerns, in particular Section 8(c)(2). The judges’ RESPA-related questions concerned whether the industry had notice that RESPA prohibited the conduct in question (which had been blessed by a 1997 Letter from HUD permitting captive reinsurance if the Section 8(c)(2) safe harbor provisions were met) and whether the CFPB was bound by RESPA’s 3-year statute of limitations. Questions about both issues were directed to CFPB counsel. He stated that the statute itself provided ample notice of its prohibitions in Sections 8(a) and 8(c)(2). He also said the Bureau was bound by the generally-applicable 5-year statute of limitations at least insofar as penalties are concerned, but he did not concede the Bureau was otherwise bound by RESPA’s limitations period in an administrative proceeding. That said, given how little attention was directed to the RESPA questions, it is likely that the full 11-member panel will affirm the 3-judge panel’s views on RESPA expressed last October.
It would appear that Director Cordray will remain at his desk until his term expires in July 2018. He may, however, need to revise his interpretation of Section 8(c)(2).
Financial services companies that hoped for immediate regulatory relief when the Trump Administration assumed control may have to wait a bit longer, because the newly announced freeze on federal regulations does not appear to apply across the board. “Independent regulatory agencies,” such as the Consumer Financial Protection Bureau (“CFPB”), the Federal Reserve Board, the Office of the Comptroller of the Currency (“OCC”), the Federal Deposit Insurance Corporation (“FDIC”), and the Securities and Exchange Commission (“SEC”) may be excluded from that moratorium. Continue Reading How Solid is the “Freeze”? Some Agencies May Be Excluded from White House Regulatory Moratorium
The Consumer Financial Protection Bureau (CFPB) has issued an updated small entity compliance guide for compliance with the Mortgage Servicing Rules after the CFPB’s recent amendments to the rules take effect, generally on October 19, 2017.
The existing guide is still relevant for compliance before the new amendments take effect.
To learn more about the amendments to the Mortgage Servicing Rules, read the Mayer Brown white paper.