On July 23, the Consumer Financial Protection Bureau (CFPB) sued a national mortgage lender and two of its officers for allegedly violating Regulation Z’s loan originator compensation rule (the LO Comp Rule or the Rule) by paying bonuses to employees for steering borrowers to loans with higher interest rates. (See here.) The case was referred to the CFPB by investigators with the Utah Department of Commerce, Division of Real Estate. This is the first publicly announced judicial action the CFPB has brought enforcing the Rule. Read More
Title issues that arise by virtue of the controversial use of eminent domain could impair the sale or insurance of residential mortgage loans but have received scant attention. A city seizes “underwater” loans through eminent domain, waves its magic wand, says Abracadabra or Bibbidi Bobbidi Boo, and then the mortgage lien of the prior loan holder evaporates into thin air. The city is free to write down loan principal and, for a fee, arrange for private interests to refinance the no longer underwater loan for a grateful borrower. In this land of make believe, the prior holder accepts the city’s offer of reasonable compensation without a fight. Yeah, right! The more likely result is that holders of seized mortgages will resort to litigation to stop the governmental seizure of their loans. Regardless of the ultimate outcome of that litigation, the mere filing of litigation could cloud title on the new refinancings and make them unmarketable and uninsurable. Read more to see why.
To read the full alert, click here.
On July 16, 2013, the Senate confirmed Richard Cordray as the first Director of the Consumer Financial Protection Bureau. The 66-34 vote to confirm Cordray ends nearly two years of uncertainty over his position. Read More
The Consumer Financial Protection Bureau (CFPB or Bureau) recently elaborated on some of the factors it will consider in determining what actions to bring, if any, against those subject to its enforcement authority. In a bulletin very reminiscent of the Securities and Exchange Commission’s so-called Seaboard Report, the CFPB announced that it may consider a party’s conduct favorably if the conduct “substantially exceeds” what is required by law in its interactions with the Bureau. Specifically, the CFPB “may” in its discretion award some form of affirmative credit in an enforcement action, such as potentially reducing the sanctions or penalties it seeks, if a party meaningfully engages in responsible business conduct.
Like the SEC’s Seaboard Report, CFPB Bulletin 2013-06 – while encouraging responsible business conduct – is full of caveats. The CFPB makes no promises in the bulletin. No matter how “substantial” or “meaningful” a party’s responsible business conduct in the course of an investigation, the Bureau’s evaluation will depend on the circumstances. Whatever “best protects consumers” is ultimately the Bureau’s main priority, because consumer protection is its singular purpose.
The bulletin lays out four broad categories of responsible business conduct: self-policing for potential violations, self-reporting to the CFPB, remediating any harm resulting from violations, and cooperating in investigations beyond what the law requires. In many cases mirroring the language of the Seaboard Report, the CFPB lists some of the factors it will consider in determining whether and how much to take into account those four categories of conduct.
- Self-policing: Some of the factors the CFPB will consider are the nature of the violation, whether senior management turned a blind eye toward obvious indicia of misconduct, and whether the conduct was pervasive or an isolated act. Unlike the Seaboard Report, the bulletin also poses the question, “Was the conduct significant to the party’s profitability or business model?”
- Self-reporting: The CFPB particularly emphasizes this category because self-reporting reduces the need for the CFPB to expend its own resources. In deciding whether to favorably consider self-reporting of violations or potential violations of federal consumer financial laws, the CFPB will consider, among other things, whether affected consumers received appropriate information related to the violations or potential violations within a reasonable period. The CFPB may be less inclined to consider self-reporting favorably if the party waited to report the violation until the disclosure was likely to happen anyway through, for example, impending supervisory activity.
- Remediation: Remediation involves stopping the misconduct immediately, implementing an effective response that includes disciplining individuals responsible for the misconduct, preserving information, and redressing the harm. The CFPB will consider whether the party improved its internal controls and procedures to “remove harmful incentives” and “encourage proper compliance.”
- Cooperation: It appears that a party will have to really, really cooperate for the Bureau to reward it with affirmative credit. To receive credit for cooperation, a party cannot just meet its obligations under the law. Rather, it must take “substantial and material steps above and beyond what the law requires” in interacting with the CFPB. The CFPB will ask whether the party cooperated promptly and completely throughout the course of the investigation, and whether it conducted (or hired an unbiased third party to conduct) a full and impartial internal investigation and promptly provided the CFPB with a thorough written report of its findings.
How the CFPB will in practice choose to apply the principles outlined in the bulletin remains to be seen. At the end of the day, there is no magic formula, no rule, and no promise. To quote the SEC in its Seaboard Report, “[b]y definition, enforcement judgments are just that – judgments.”
The use of statistical sampling to evidence compliance violations without actually performing loan level reviews is at the center of a new enforcement regime that the U.S. Department of Housing and Urban Development (“HUD” or “Department”) announced on Tuesday it is considering to monitor and sanction Federal Housing Administration (“FHA”) approved mortgagees. The announcement, published as a Notice in the Federal Register, raises a host of questions, not the least of which is how HUD will implement these proposed enforcement efforts given the potential draconian consequences for FHA program participants. Those who already perceive that the risks of doing business with the federal government are increasingly excessive, should sit up and take notice. HUD has offered lenders 60 days to comment on the Notice, and lenders would be wise to carefully consider the changes and make their voices heard.
To read the full alert, click here.
In a victory for the Mortgage Bankers Association (“MBA”), a federal Court of Appeals has vacated an “Administrator’s Interpretation” issued in 2010 by the U.S. Department of Labor Wage and Hour Division (“DOL”) regarding the non-exempt status of mortgage loan officers. This court decision reinstates a prior Opinion Letter issued by the DOL in 2006 that had concluded loan officers in the mortgage banking industry generally may qualify as exempt from overtime under the administrative exemption of the federal Fair Labor Standards Act (“FLSA”). MBA had challenged the contrary 2010 Interpretation because it had been issued by the DOL without first conducting the “notice and comment” rulemaking process required under the Administrative Procedure Act (“APA”). The Appeals Court agreed with the MBA, but took no position on the merits of whether mortgage loan officers may in fact qualify under the administrative exemption to be exempt from the payment of overtime wages. Thus, the DOL may subsequently readopt the 2010 Interpretation after conducting the proper rulemaking procedures. In the interim, however, mortgage industry employers may choose to rely on the 2006 Opinion Letter to potentially escape overtime liability regarding their loan officers if they follow the guidance of that letter.
To read the full alert, click here.
On May 29, 2013, the CFPB finalized certain amendments to its January 2013 Ability to Repay/Qualified Mortgage Rule. In addition to clarifying how loan originator compensation will be factored into the QM’s three percent limit on points and fees (as discussed in a recent K&L Gates Consumer Financial Services Watch blog post), the May 2013 amendments (which will become effective at the same time as the QM Rule, in January 2014) will exempt new categories of creditors and transactions from the Rule’s ability to repay requirements; expand the definition of QM to include a new set of loans made by small portfolio lenders; and create a two-year window in which certain balloon payment loans will enjoy QM status, without requiring that such loans be made to borrowers in rural or underserved areas. Read More