CFPB's Spring 2018 Regulatory Agenda

The CFPB announced its Spring 2018 rulemaking agenda on May 10, 2018.  The agenda sets forth the regulatory activities the Bureau expects to consider during the next year, and the expected dates of action.  There are some notable entries and omissions that I'd like to highlight for you in this post.   

HMDA “Reconsideration” Proposed Rule.  The agenda has an entry for the HMDA “reconsideration” rule that the CFPB announced in December 2017.  In that announcement, the CFPB stated that it planned to “reconsider” aspects of the HMDA rule, including the scope of the rule and the rule’s discretionary data points.  It is good news to see this rule on the agenda, but note that the proposed rule isn’t expected until January 2019.  It would seem unlikely the CFPB could finalize any amendments before the new data will need to be reported in 2019.  This means that lenders should be prepared to fully comply with the new HMDA rule and ensure the data they submit is accurate. 

Business Loan Data Collection Rule.   The agenda retains an entry for a rulemaking to implement Dodd-Frank Act section 1071, which added section 1691c–2 to ECOA requiring the CFPB to issue rules creating a data collection and reporting requirement for small, women-owned, and minority-owned business loans, similar to HMDA.  The agenda lists this entry with “prerule activities” scheduled for March 2019, which may mean a small business review panel under SBREFA.  Note that the CFPB issued a Request for Information for this rulemaking in May 2017.  The comment period closed in September 2017.  It is noteworthy that the CFPB is continuing to work on this rulemaking, which could create a substantial new regulatory burden. 

Larger Participant Rule for Personal Loans.   The CFPB had been working on a rulemaking to give itself supervisory authority over larger participants in the consumer installment and vehicle title loan markets, using authority under the Dodd-Frank Act.  The previous Fall 2017 agenda had this rulemaking slated for a proposed rule this May 2018.  But this most recent Spring 2018 agenda has not only taken this rule off the back burner, but taken it off the stove entirely, placing it on an “inactive list.”  This is a win for fintech and other unsecured lenders, such as marketplace lenders, because CFPB supervision would have exposed them to potentially far greater compliance liability and costs, e.g., under TILA and fair lending.  Still, we are hearing ever more about aggressive state regulators trying to fill in where any CFPB gaps arise.

You can find the CFPB’s agenda here: https://www.consumerfinance.gov/about-us/blog/spring-2018-rulemaking-agenda/.

There are other interesting entries and omissions on the CFPB’s new agenda.  Let us know if you’d like to discuss. 

 

CFPB Issues TRID Black Hole Final Rule

The Bureau of Consumer Financial Protection (CFPB) issued its long-awaited Black Hole final rule today, eliminating one of the major headaches of the TRID rule.  Specifically, the final rule amends TRID to allow lenders to disclose revised estimates for resetting the tolerances on any Closing Disclosure (including the initial and corrected CDs), without regard to how many business days before closing the change occurred.  The rule is effective 30 days after publication in the Federal Register without regard to whether an application was received on or after the effective date.  This represents a solid victory for the industry, thanks to the efforts of the major trade associations and a number of individual institutions.  You can access the final rule here: https://www.consumerfinance.gov/about-us/newsroom/bureau-consumer-financial-protection-finalizes-amendment-know-you-owe-mortgage-disclosure-rule/

I want to highlight an issue that could be a cause for concern, which relates to the accuracy of the CD.  As you may know, the Black Hole provision has the effect of disincentivizing lenders from providing the initial CD very early in the transaction, because doing so can create a long period of time that falls in the Black Hole, meaning the lenders would have to absorb legitimate cost increases during this long period.  Some commenters to the proposed rule cautioned the CFPB against eliminating this disincentive, because lenders might provide CDs very early in the process with largely inaccurate information, possibly as early as the day after the initial LE is provided, which could cause consumer confusion and other market issues. 

The CFPB, in response to these concerns, stated in the preamble that it believes the existing accuracy standard for the CD will prevent lenders from providing the CD very early.  The CFPB clarified that the accuracy standard that applies to any estimated information on the CD is the “best information reasonably available” standard, and cautioned that this standard requires lenders to perform “due diligence” to obtain information before providing any CD.  The preamble references an existing commentary example of a lender that does not request the actual cost of the lender’s title insurance policy from the title company before providing a CD, and states that the lender has not exercised due diligence, i.e., it has not satisfied the accuracy standard for the CD.  The CFPB stated that it “will continue to monitor the market for practices that do not comply with the rule’s Closing Disclosure accuracy standard.”  This preamble language could signal that this will become an issue in federal and state TRID examinations. 

Please let me know if you’d like to discuss the accuracy standards that apply to the information on the CD, or if you have any other questions. 

CFPB’s New Strategic Plan and “Call for Evidence”

I am writing to highlight some recent issuances by the CFPB. First, the CFPB is issuing a series of Requests for Information to obtain feedback from the public regarding the CFPB’s operations, which it is calling its “Call for Evidence.” The CFPB has already issued several, which are summarized below, and plans to issue several more. Second, the CFPB issued a new Strategic Plan in February, which signals a new direction for the CFPB in terms of its focus on UDAAP, enforcement, and regulatory reform. I hope you find this information helpful. Please let me know if you have any questions.

I.  CFPB’s “Call for Evidence” on its Operations

A.  The Call for Evidence

On January 17, 2018, the CFPB issued a press release announcing that it planned to issue a series of Requests for Information (“RFIs”) seeking comment on enforcement, supervision, rulemaking, market monitoring, and education activities. The CFPB stated that the purpose of these RFIs is to “ensure the Bureau is fulfilling its proper and appropriate functions to best protect consumers.”

This represents an excellent opportunity for the industry to inform changes at the CFPB, considering that the CFPB’s new leadership is likely more receptive to the industry’s concerns. Some have suggested that this RFI process might not result in real change, because Acting Director Mulvaney’s position is temporary under the Federal Vacancies Reform Act (“FVRA”) and new permanent leadership may not focus on this endeavor or the RFIs. But consider that Acting Director Mulvaney could be at the CFPB for a while, as he is permitted to serve under the FVRA while a nomination for Director is pending in the Senate, and there is another 210-day clock that begins to run if that nominee is rejected or withdrawn.  Mulvaney is also permitted to serve while a second nomination is being considered by the Senate, and he also gets another 210-day clock if that nominee is rejected or withdrawn.  This means Mulvaney could potentially be in his acting role for some time, and he could accomplish some significant changes during his tenure. In addition, the Trump administration could appoint a new Director who is also interested in reforming the CFPB’s activities, and the administrative record from this RFI process would provide a very useful resource to a new Director’s reform efforts.

Please note, though, that if you would like to comment on any of these RFIs, it may be prudent to comment anonymously through a third party, such as a law firm or trade association, for a number of reasons. This may be especially true for certain RFIs. For example, comments will become part of the administrative record, which will be publicly available, and institutions may not want to identify themselves as being familiar with the CFPB’s CID or enforcement processes. In addition, an institution may be concerned about submitting negative comments on particular experiences with CFPB processes, as they could be tied back to its previous interactions with the CFPB, and possibly with particular staff members. There are other reasons why an institution may wish to comment anonymously. Please contact me for assistance with commenting on any of these RFIs.

B.  The RFIs Issued to Date

The CFPB has issued the following RFIs so far, with the following comment deadlines:

i. CIDs. This RFI was published on January 26, 2018. It requests information on the CFPB’s CID processes “to consider whether any changes to the processes would be appropriate.” The CFPB asked questions on specific topics such as:

  • “Specific steps that the Bureau could take to improve CID recipients’ understanding of investigations, whether through the notification of purpose included in each CID or through other avenues;”
  • “The nature and scope of requests included in Bureau CIDs, including whether topics, questions, or requests for written reports effectively achieve the Bureau’s statutory and regulatory objectives, while minimizing burdens;” and
  • “The timeframes associated with each step of the Bureau’s CID process, including return dates, and the specific timeframes for meeting and conferring, and petitioning to modify or set aside a CID.”

The comment deadline is March 27, 2018. As explained above, this is a particularly sensitive topic for many reasons and it may be prudent for institutions to comment anonymously through third parties, such as trade associations or law firms.

ii. Administrative Adjudication. This RFI was published on February 5, 2018. It requests information on the CFPB’s rules for administrative enforcement proceedings under 12 C.F.R. Part 1081. The RFI requests comments on certain specific topics, including:

  • “Whether, as a matter of policy, the Bureau should pursue contested matters only in Federal court rather than through the administrative adjudication process;”
  • The requirements for the contents of the CFPB’s notice of charges; and
  • The requirement that respondents file an answer to a notice of charges within 14 days.

The comment deadline is April 6, 2018.

iii. EnforcementThis RFI was published on February 12, 2018. It requests information on the CFPB’s enforcement processes to assist the CFPB in considering changes to its processes. The CFPB requested comment on specific topics, including:

  • “Communication between the Bureau and the subjects of investigations, including the timing and frequency of those communications, and information provided by the Bureau on the status of its investigation;”
  • “The length of Bureau investigations;” and
  • The CFPB’s Notice and Opportunity to Respond and Advise (NORA) process;
  • The calculation of civil money penalties (CMPs); and
  • The standard provisions in CFPB consent orders.

The comment deadline is April 13, 2018. As explained above, this is a particularly sensitive topic for many reasons and it may be prudent for institutions to comment on this RFI through a third party.

iv. Supervision ProgramThis RFI was published on February 20, 2018. It requests information on the CFPB’s supervision program to assist the CFPB in considering changes to the program. The CFPB requested comment on specific topics, including:

  • “The timing, frequency, and scope of supervisory exams;”
  • “The timing, method or process used by the Bureau to collect information and documents from a supervised entity prior to the commencement of an examination;”
  • “The effectiveness and accessibility of the CFPB Supervision and Examination Manual;”
  • “The efficiency and effectiveness of onsite examination work;” and
  • “The effectiveness of Supervision’s communications when potential violations are identified, including the usefulness and content of the potential action and request for response (PARR) letter.”

The comment deadline is May 21, 2018. It may also be prudent for institutions to comment on this RFI anonymously through a third party.

v. External EngagementThis RFI was published on February 26, 2018. It requests information on the CFPB’s public and non-public engagement processes, including its field hearings, town halls, roundtables, and meetings of the Advisory Board and Councils. The CFPB requested comment on specific topics, including:

  • “Strategies for seeking public and private feedback from diverse external stakeholders on the Bureau’s work;”
  • “Processes for transparency in determining topics, locations, timing, frequency, participants, and other important elements of both public and private events;”
  • Methods of soliciting input from outside of Washington, DC;
  • Strategies for promoting transparency of external engagements; and
  • Other methods not currently utilized by the CFPB.

The comment deadline is May 29, 2018. One of frequent criticisms I have heard about the CFPB’s work is that it does not solicit enough input from the public, or it does not obtain input from the most knowledgeable sources. This RFI, in light of the CFPB’s change in leadership, represents a great opportunity to try and improve the CFPB’s engagement with the public.

vi. Consumer ComplaintsThis RFI was issued on March 1, 2018, and is expected to be published in the Federal Register on March 6, 2018. It requests information to assist the CFPB in, “assessing potential changes that can be implemented to the Bureau’s public reporting practices of consumer complaint information.” The CFPB requested comment on specific topics, including:

  • Reporting on State and local complaint trends;
  • “Whether it is net beneficial or net harmful to the transparent and efficient operation of markets for consumer financial products and services for the Bureau to publish the names of the most-complained-about companies;”
  • “Whether the Bureau should provide more, less, or the same data fields in the Consumer Complaint Database;” and
  • “Whether the Bureau should supplement observations from consumer complaints with observations of company responses to complaints.”

The comment deadline should be on or about June 4, 2018 (it will be 90 days after publication in the Federal Register). I frequently hear criticisms of the CFPB’s consumer complaint database, including its publishing of unverified consumer narratives and its public reporting (or shaming) on complaints, such as its monthly complaint “snapshots.” In fact, I wrote an article that addresses the potential consumer confusion from and the CFPB’s lack of research on the issue of its publishing of unverified consumer complaint narratives in the database, which is available here: http://journals.ama.org/doi/10.1509/jppm.17.037. This RFI represents an excellent opportunity to achieve change in the CFPB’s consumer complaint database and reporting.

Finally, the CFPB has published a website that compiles its series of RFIs, which is available at: https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/open-notices/call-for-evidence/. Please contact me if you would like assistance with commenting on any of these RFIs.

II.  Strategic Plan

On February 12, 2018, the CFPB issued its Strategic Plan for the next five years, i.e., fiscal years 2018-2022. The Strategic Plan replaces the one that the CFPB issued in February 2015 that covered fiscal years 2013-2017, and finalizes a draft Strategic Plan that the CFPB posted for comment in October 2017 under former Director Cordray. The new Strategic Plan signals a change in the CFPB’s view of its unfair, deceptive, or abusive acts or practices (“UDAAP”) authority and enforcement function, and indicates a new focus on regulatory reform.

A.  CFPB’s Move Away from UDAAP

One notable change is that Acting Director Mulvaney has revised the CFPB’s vision statement from its last Strategic Plan issued in 2015 to remove a reference to the agency’s authority to enforce against UDAAP. The old vision statement included a specific reference to a market “in which no one can build a business model around unfair, deceptive, or abusive practices.” But the CFPB’s new vision statement does not contain any reference to UDAAP. Instead, it contains a statement referencing only consumer choice and transparency in the market, and protecting the rights of all parties. Specifically, the CFPB’s new Vision is, “Free, innovative, competitive, and transparent consumer finance markets where the rights of all parties are protected by the rule of law and where consumers are free to choose the products and services that best fit their individual needs.”

I believe this is a signal that the days of the CFPB’s aggressive use of its UDAAP authority are over. Remember that most of the CFPB’s enforcement actions cited at least one UDAAP violation, and some enforcement actions were based exclusively on UDAAP. This UDAAP authority was the CFPB’s “go to” tool to address issues it identified in investigations or examinations that were not necessarily violations of specific requirements. In addition, some rulemakings were based substantially on UDAAP authority. For example, the CFPB’s new payday loan rule relies almost exclusively on its UDAAP authority, as there was no statutory mandate for the rule. While the reference to “transparency” in the new vision statement could mean that deception will still be a focus under UDAAP, to ensure cost information is transparent, the removal of a specific reference to UDAAP from the CFPB’s vision statement signals a change in the CFPB’s focus on UDAAP in its enforcement and regulatory activities.

B.  CFPB’s Move Away From Focusing on Enforcement

It also looks like the CFPB will have a different view of its enforcement function, from being one of its primary functions to a last and final resort. The CFPB changed its first goal in the Strategic Plan from referencing enforcement to referencing access to credit. Specifically, the first goal previously was to, “prevent financial harm to consumers while promoting good practices that benefit them.” The new Strategic Plan’s first goal is to, “ensure that all consumers have access to markets for consumer financial products and services.” This focus on access to credit is significant, considering the Strategic Plan also appears to be signaling a period of regulatory reform, as described further below.

To be fair, the new Strategic Plan does reference enforcement in its second goal, but that goal also describes supervisory activities and ensuring consistent enforcement with respect to depository and non-depository institutions. But in a January 23, 2018 memorandum to staff, Acting Director Mulvaney describes enforcement as “the most final of last resorts,” to be used “only when all other attempts at resolution have failed.”   It does appear that the agency will be focusing less on enforcement under Acting Director Mulvaney’s leadership.

C.  CFPB’s Move Towards Focusing on the Limits of its Statutory Authorities

The Strategic Plan also appears to signal a focus on the limits of the CFPB’s statutory authority. Acting Director Mulvaney’s message accompanying the new Strategic Plan states that after reading the previous draft plan, “it became clear to me that the Bureau needed a more coherent strategic direction,” and describes the change he has made to the CFPB’s strategic direction as having “committed to fulfill the Bureau’s statutory responsibilities, but go no further.” In an apparent reference to a reported statement from a CFPB official about Director Cordray’s past leadership that Director Cordray was “pushing the envelope” during his time at the CFPB, Acting Director Mulvaney stated in his message that pushing the envelope “ignores the will of the American people, as established in law…,” and “risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.” Along this line, the Strategic Plan states that the CFPB will work, “[a]cting with humility and moderation.” This is a clear signal that the CFPB’s focus has changed towards focusing on the limits of its statutory authorities, rather than testing them as former Director Cordray admitted to doing.

D.  Regulatory Reform

This new Strategic Plan also signals that the CFPB is going to enter into a period of regulatory reform. The Strategic Plan states that the CFPB will take steps to ensure it meets its goals, which include conducting reviews of the CFPB’s existing rules and reducing regulatory burden. Specifically, these steps include:

  • Launching a program to review existing regulations or subparts of major regulations to assess opportunities for clarification, updating, and streamlining;
  • Forming a cross-Bureau Regulatory Burden Task Force to identify opportunities to reduce regulatory burden; and
  • Develop databases that will allow the Bureau to appropriately monitor markets and conduct research to surface trends, opportunities, and risks relevant to consumers.

As you know, the CFPB has already signaled that it plans to conduct a rulemaking this year to revisit aspects of the HMDA rule, including its scope and discretionary data points, and that it plans to revisit the payday loan rule. It looks like other rules could be next. And this is in addition to the Dodd-Frank Act’s five-year lookbacks.

This represents a major opportunity for the industry to affect change in the CFPB’s rules, especially considering that this period of regulatory reform could come as the CFPB is more focused on access to credit and consumer choice, as described above. The industry should begin considering how it might respond to requests for information under such a program, such as identifying issues or concerns with particular rules and guidance, both new and old. In addition, considering the CFPB’s interest in the topic, the industry could begin submitting information regarding opportunities to streamline rules, provide clarification, or reduce regulatory burden, before such a formal process begins. Such information could be helpful to the CFPB in determining the scope and issues in future RFIs or proposed rules. Please let me know if you’d like any assistance in thinking about or submitting information to the CFPB.

E.  Compliance Should Continue to be a Concern

While the CFPB’s focus has changed under its new leadership, compliance should still be a concern for the industry. At some point in the future there will be a new Director of the CFPB, and Acting Director Mulvaney’s changes to the CFPB could be changed. While changes in statutes and regulations are difficult to accomplish, changes in allocation of resources or the focus of the agency’s efforts would be relatively easy for a new Director to accomplish.

In addition, supervision and enforcement is backward looking. Violations that occur while an Acting Director Mulvaney heads the agency could be reviewed later when the CFPB has a new Director who is more inclined to use the agency’s enforcement authority. Further, state regulatory agencies will likely, and some have already signaled their intentions to, pick up the slack and increase their focus on enforcement of both technical requirements and their sources of UDAAP authority. And there is always the risk of consumer lawsuits. Many consumer protection laws provide consumers with a private right of action, meaning that civil lawsuits under both federal and state law are still possible, even if the CFPB’s priorities have changed.

III. Conclusion

This new Strategic Plan and the CFPB’s series of RFIs are positive news for the industry. The Strategic Plan signals a change to a CFPB that is less apt to test the boundaries of its enforcement authority or engage in regulation by enforcement. In addition, this signals a change to a CFPB that is more focused on maintaining access to credit and consumer choice.

In addition, this appears to be a unique moment in which the industry can affect real change at the CFPB and the rules affecting the consumer financial services markets. These RFIs represent a fantastic opportunity for industry to provide their own unique insights and information on the CFPB’s processes, which will be heard by a more sympathetic and receptive leadership. The Strategic Plan’s signal of a period of regulatory reform also represents an opportunity to inform the CFPB about issues and concerns with particular rules and guidance. I hope that many of you plan to comment on these RFIs (and responding to any future regulatory reform efforts), as having more information directly from the institutions under its jurisdiction will help the CFPB improve its processes. Please contact me if you would like assistance with commenting on any of these RFIs.

PHH Corp. v. CFPB: Are Captive Arrangements and Marketing Services Agreements (MSAs) Back in Business?

As many of you have been asking me for my thoughts on the recent decision in the PHH Corp. v. CFPB case by the U.S. Court of Appeals for the D.C. Circuit, I decided to write a brief update to summarize the decision and provide some of my thoughts on what the decision means for the industry, including whether this means captive arrangements and marketing services agreements are back in business.

I. Background

You likely know by now that on January 31, 2018, the U.S. Court of Appeals for the D.C. Circuit issued a decision in PHH Corp. v. CFPB. As you may recall, this case arose because PHH appealed an administrative enforcement action by the CFPB. That enforcement action, which the CFPB initiated against the company in January 2014, alleged violations of RESPA section 8 stemming from a captive reinsurance arrangement that continued through 2013. In June 2015, former CFPB Director Cordray issued a decision in the enforcement action imposing a $109 million judgment. PHH then appealed, asking the court to vacate the CFPB’s decision on the grounds that the CFPB misinterpreted RESPA section 8 and violated due process in applying a new interpretation retroactively, and that the CFPB’s structure is unconstitutional because it has a single Director who is removable only for cause (the Dodd-Frank Act uses the typical causes of “inefficiency, neglect of duty, or malfeasance in office”).

In October 2016, the Court of Appeals issued its opinion by a three-judge panel, finding the CFPB’s structure unconstitutional and the CFPB’s interpretation of RESPA invalid. But in November 2016, the CFPB petitioned the court for a rehearing of the case en banc (i.e., by the full court), which the court granted in February 2017. I wrote about the three-judge panel’s opinion in a previous Client Update on the PHH case, which you can access here: http://richhornlegal.com/blog/dc-circuit-phh-decision/.

II. The En Banc Court’s Opinion

The en banc court issued an opinion on both the constitutionality and RESPA issues, both of which could have significant effects on the industry. Regarding the constitutionality issue, the court held in a 7-3 decision that the CFPB’s structure is constitutional, reversing the three-judge panel’s opinion on the issue. Regarding the RESPA issues, the court reinstated the three-judge panel’s opinion, and did not otherwise address these issues in its opinion. Specifically, the court stated that, “[t]he panel opinion, insofar as it related to the interpretation of RESPA and its application to PHH and Atrium in this case, is accordingly reinstated as the decision of the three-judge panel on those questions.” Note that this was essentially a 7-3 decision as well, as three judges issued a concurring opinion that disagreed on the RESPA issue, finding the CFPB’s interpretation of RESPA section 8(c)(2) reasonable.

As described further below (and in my previous Client Update on the case), the D.C. Circuit’s panel opinion held that the CFPB’s interpretation of RESPA section 8 was invalid, finding that captive reinsurance arrangements are permissible under RESPA section 8(c)(2), as long as the reinsurance payments were not in excess of the reasonable market value of the reinsurance. Another important aspect of the panel’s RESPA opinion is the holding that the applicable statute of limitations for the CFPB’s administration actions under RESPA is three years. The panel opinion would have, and now the en banc decision does send the case back to the CFPB to determine whether, in fact, the payments in the arrangement were for the reasonable market value of the reinsurance, satisfying the exemption under section 8(c)(2).

I discuss below the en banc opinion and the panel’s RESPA opinion it reinstates in more detail, and provide some thoughts on its impact on the industry.

III. The Constitutionality Issue

A. CFPB’s Structure is Constitutional

Without getting into the details of constitutional law (please let me know if you’d like to discuss them, as I’d be happy to), the en banc court decided that the CFPB’s structure was constitutional. The decision on the CFPB’s constitutionality means that the CFPB can continue operating as it is currently structured, with a single Director at the helm who is removable only for cause.

This was not a certain outcome. The three-judge panel’s opinion held that the CFPB’s structure was unconstitutional, because the President could only remove the Director “for cause,” which inhibited the President’s ability to exercise executive authority over the single Director of the CFPB. Much of the opinion focused on the threat to individual liberty of a single CFPB Director who is removable only for cause and wields significant power. The panel’s opinion raised concerns that the authorities vested in the CFPB’s single Director, such as the authority to issue subpoenas and impose civil money penalties, could be abused or otherwise harm individuals. The panel also discussed historical precedent, describing the CFPB’s structure as an independent agency with a single Director as a “gross departure from settled historical practice.” In addition, the panel discussed the benefits of a multi-member commission structure over a single agency head for an independent agency. Finding the structure unconstitutional, the panel held that the proper remedy was to “sever” the “for cause” removal provision, which would have allowed the CFPB to continue operating with a Director who is removable without cause (at will) and would not have invalidated the enforcement action against PHH.

But in spite of these significant concerns, the en banc court did not agree with the panel’s opinion, finding the CFPB’s structure constitutional. The court reasoned, in part, that financial regulatory agencies have typically been structured as independent agencies with heads removable only for cause. The court also noted that the Office of the Comptroller of the Currency, a financial regulatory agency, has a single head. However, it is notable that there were multiple dissenting opinions on the constitutionality issue by the en banc court. And notably, one of the dissenting opinions would have invalidated Title X of the Dodd-Frank Act (the statute that created the CFPB), putting the CFPB out of existence, in its entirety and set aside the CFPB’s PHH decisionIt appears that there is some level of disagreement on this issue, and PHH could potentially appeal the decision on the CFPB’s constitutionality, if they are so inclined.

B. What the Decision Means for the Industry

This decision’s immediate effect on the CFPB’s operations and the industry will be minimal. The CFPB is currently headed by Acting Director Mick Mulvaney, who President Trump designated under the Federal Vacancies Reform Act to act as Director after Cordray resigned in November 2017. That statute allows an acting official designated by the President to serve for a limited time period and is not subject to a “for cause” removal provision, and thus, this decision does not appear to have an immediate effect on Acting Director Mulvaney’s ability to serve or protect against his removal.

That being said, this decision could cause the Trump administration to be more careful about who it nominates to be the permanent Director of the CFPB. Based on this decision, whoever becomes the appointed and Senate-confirmed Director will be removable only for “inefficiency, neglect of duty, or malfeasance in office.” Although one of the concurring opinions in the case argued that this “for cause” removal provision under the Dodd-Frank Act allowed removal for “ineffective policy choices,” and as a result only provides a “minimal restriction” on the President’s removal power, an attempt to remove a Director under this provision solely for policy reasons could result in a prolonged legal battle that may be unappealing politically. For this reason, I think that in light of this decision, the Trump administration will strongly weigh whether its choice for Director will adhere to their policy views throughout the five-year term.

In addition, I personally hope that this decision spurs Congress to act on legislation to change the CFPB’s structure to a multi-member board or commission. The panel opinion and en banc court’s dissenting opinions demonstrate that some well-respected judges, as well as others outside of the courts, have found legitimate legal and policy concerns with placing control over decision-making and enforcement for the country’s consumer financial protection laws in a single Director who is removable only “for cause.” In addition to providing for more thoughtful and deliberate decision-making in the agency, placing a commission at the top of the CFPB will also prevent the regulatory pendulum from swinging too wildly when the political party in power changes. The benefits of regulatory stability and certainty to industry cannot be overstated.

IV. The RESPA Issues

Because the en banc court reinstated the panel opinion with respect to the RESPA issues, I briefly summarize below the panel opinion and provide my thoughts on the impact of decision on the industry.

A. Whether RESPA Section 8(c)(2) is an Exemption

As you may recall, Director Cordray’s decision in the CFPB’s enforcement action found that RESPA section 8(c)(2) was not an exemption and thus, PHH violated RESPA section 8(a), even if the payments for reinsurance in the arrangement were reasonably related to the market value. Specifically, Director Cordray stated that, “section 8(c) clarifies section 8(a), providing direction as to how that section should be interpreted, but does not provide a substantive exemption from section 8(a).” He reasoned, in part, that, “reading section 8(c)(2) as an exemption would substantially undermine the protections of section 8,” and that “[i]f section 8(c)(2) permitted compensated referrals, it would “distort the market in ways that the statute as a whole plainly sought to prevent.” Director Cordray reasoned that for section 8(c)(2) to apply, the payment must be “bona fide” and “for services actually performed,” and that “bona fide” in this provision means that the “payment must be solely for the service actually being provided on its own merits, but cannot be a payment that is tied in any way to a referral of business.” Director Cordray essentially found that the term “bona fide” applies to “the purpose of the payment, not to its amount.” The CFPB, defending the enforcement action, argued before the D.C. Circuit that “bona fide” in section 8(c)(2) means that the payment is in “good faith,” i.e., not as a quid pro quo for referrals.

PHH argued that Regulation X, which implements RESPA section 8, treats section 8(c)(2) as an exemption, as it expressly permits payments for services, as long as they are for services actually performed and are reasonably related to the market value of the services.

The panel opinion in the PHH case strongly disagreed with the CFPB’s interpretation of REPSA section 8, describing the issue as “not a close call” and the CFPB’s interpretation as “strained.” The panel opinion held that section 8(c)(2) is an exemption from section 8(a)’s prohibition, rather than an interpretative aid as the CFPB argued, and that section 8(c)(2) permits the captive reinsurance arrangements to the extent the payment does not exceed the reasonable market value. Specifically, the panel opinion stated, “[w]e agree with PHH that Section 8 of the Act allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance.”

B. Due Process and HUD’s 1997 Letter

In addition to arguments based on the statutory language, PHH argued that it relied on a prior letter that HUD issued in 1997 specifically addressing captive reinsurance arrangements, in which it stated that such arrangements were permissible under RESPA section 8, as long as the payments were for reinsurance that was actually provided, and were bona fide and not in excess of the value of the reinsurance. Director Cordray had addressed HUD 1997 letter in his decision, finding that the letter “is not in such a form as to be binding on any adjudicator” because it was never published in the Federal Register, and that the letter was “internally inconsistent.”

The panel opinion found that the CFPB’s retroactive application of a change from HUD’s interpretation of section 8(c)(2) to its own interpretation would be a violation of “Rule of Law 101.” Specifically, the panel opinion held that, “even if the CFPB’s new interpretation were consistent with the statute (which it is not), the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.” The panel stated that the CFPB’s argument that the HUD letter was not binding confused the due process issue of whether the public could rely on an agency pronouncement with the administrative law issue of deference by courts to agency interpretations. The panel opinion stated that to trigger due process protection, “an agency pronouncement about the legality of proposed private conduct need not have been set forth in a rule preceded by notice and comment rulemaking, or the like.”

The panel found that the fact that HUD’s guidance was provided by “top HUD officials” and was given “repeatedly,” was “sufficient” to justify reliance on the guidance for purposes of due process. Notably, the panel stated that it, “do[es] not imply that those two conditions are necessary to justify citizens’ reliance for purposes of the Due Process Clause.”

C. Statute of Limitations

On the issue of the statute of limitations that applies to the CFPB’s administrative enforcement actions under RESPA, the CFPB had originally argued to the three-judge panel that it was not subject to any statute of limitations in its administrative proceedings. In addition, the CFPB argued that RESPA only provides a statute of limitations for court proceedings.

The panel opinion found that the CFPB’s interpretation was “absurd” and “especially alarming,” and held that the CFPB’s administrative actions are subject to the statutes of limitations of the statutes it is enforcing. The panel based this decision on language in the Dodd-Frank Act that states that the CFPB can conduct administrative actions under federal consumer finance laws, “unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.” The panel held that this provision incorporates the “limits” under specific consumer laws, like RESPA, and that RESPA’s three-year statute of limitations applies to CFPB actions, both administrative and in court, resulting in the CFPB being subject to a three-year statute of limitations for its administrative actions under RESPA.

Notably, the CFPB did not argue that it was not subject to a statute of limitations to the en banc court. The CFPB relented in the oral arguments in the en banc rehearing of the case that it was generally subject a five-year statute of limitations under 28 U.S.C. § 2462.

One issue that was not resolved in the panel or en banc court opinions was whether each reinsurance payment or only the loan closing was a violation of RESPA. Director Cordray’s decision in the CFPB’s administrative enforcement action found, and the CFPB argued in court, that PHH had violated RESPA section 8(a) every time it accepted a reinsurance payment, even if the loan had closed earlier than the date of the payment. But PHH argued that if a violation occurred under section 8(a), it occurred at the time the loan closed.

The panel opinion stated in a footnote that, “we do not here decide whether each alleged above-reasonable-market value payment from the mortgage insurer to the reinsurer triggers a new three-year statute of limitations for that payment. We leave that question for the CFPB on remand and any future court proceedings.” The en banc court did not further address this issue. It remains to be seen if this issue is further litigated if the CFPB decides each payment was a separate violation on remand.

D. What the Decision Means for the Industry

Are Captive Arrangements and MSAs Back in Business?  

The en banc court’s decision on the RESPA issues could have a profound impact on the real estate industry. The decision essentially finds that captive arrangements, marketing services agreements (MSAs), and other arrangements that are designed to fall under the RESPA section 8(c)(2) exemption are permissible, even if they are designed as a quid pro quo for referrals, as long as the payment bears a reasonable relationship to the market value of the services or products that are the subject of the arrangement. As the CFPB offered as an example in oral arguments, under this decision a company purchase paper at wholesale and then require other companies to purchase the paper from it at retail prices to receive referrals. You could say that these captive arrangements and MSAs are back in business, after industry began pulling back on their use when the CFPB began aggressively enforcing against such agreements and issued a compliance bulletin strongly discouraging their use. Many companies have already pulled back on MSAs or other similar arrangement in response to the CFPB, and this decision could represent a significant effect on their business.

Compliance with RESPA section 8 should still be a concern, even though the D.C. Circuit has found such practices permissible under RESPA. First of all, section 8(c)(2) still requires that the services in the arrangement are actually performed, and that the payment is reasonably related to the market value of the services. The court’s opinion sends the case back to the CFPB for a factual determination of whether the reinsurance payments meet this standard. This means that for companies engaging in MSAs or other similar arrangements, obtaining a proper valuation of the services being performed and ensuring those services are actually provided is still a critical step for compliance purposes.

In addition, courts in other circuits could come to a different conclusion. Note that there was a concurring opinion by three judges in the en banc decision that was actually essentially a dissent on the RESPA issue, finding that the CFPB’s interpretation of RESPA, specifically its interpretation of the term “bona fide” in RESPA section 8(c)(2), was reasonable. The CFPB’s interpretation, including its argument regarding the purpose of RESPA being to prevent the type of referral arrangements that the court’s opinion now says are permissible, could be persuasive to courts in other circuits in future litigation. Finally, it would be prudent to review the applicable state laws, as some states have similar prohibitions as RESPA section 8(a) and those states may interpret their laws similarly to the CFPB’s interpretation in the PHH case.

New RESPA Guidance on the Horizon?

In addition, it will be interesting to see if the CFPB revises its October 2015 compliance bulletin regarding marketing services agreements based on this decision, or engages in rulemaking under RESPA to provide more formal guidance regarding section 8(c)(2). Some of the substance of that compliance bulletin conflicts with the court’s opinion.   In addition, as part of its focus on regulatory reform that is signaled in its recently issued Strategic Plan, the CFPB could take revisiting guidance under RESPA section 8 more generally, including updating the policy statements issued by HUD in the 1990s and early 2000s.

Due Process Protections for CFPB Informal Guidance?

With respect to the due process issue, the panel opinion’s discussion regarding due process protections from reliance HUD’s informal guidance may be viewed by some as supporting the industry’s ability to rely on the CFPB’s informal guidance. Most of the CFPB’s new rules have required substantial amounts of informal guidance to clarify significant issues under the rules. While the CFPB has issued very little formal guidance or amendments based on industry requests for clarification, the agency has issued some informal guidance to address industry concerns. In addition, some of that informal guidance has been issued publicly, such as its webinars and compliance guides.

The two factors cited by the court in applying due process protections to the HUD informal guidance were the fact that the guidance was provided by top officials at the agency and that it was repeatedly provided. Much of the CFPB’s informal guidance is issued by CFPB staff and subject to extensive disclaimers warning against reliance. In addition, much of the informal guidance industry relies on is provided in the context of one-on-one telephone calls or presentations at industry events. Further complicating the ability to rely on the CFPB’s informal guidance is the fact that some of the CFPB’s publicly issued informal guidance has had questionable technical accuracy. These facts distinguish much of the CFPB’s informal guidance from the types of guidance the court stated provided due process protections. Another important point is that the panel’s discussion of the due process issues might not be considered by other courts to carry the same weight as the panel’s holding regarding RESPA section 8(c)(2). To the extent that the industry looks to the panel opinion as supporting due process protections for reliance on the CFPB’s informal guidance, caution is warranted.

Statute of Limitations?

Finally, on the issue of the CFPB’s statute of limitations, the decision that the CFPB’s administrative actions are subject to the statute of limitations of the law the agency is enforcing, and the CFPB’s admission that is at least subject to a general five-year statute of limitations will have a significant impact on the CFPB’s future administrative enforcement actions. This includes its enforcement actions under its UDAAP authority, which did not have an explicit statute of limitations. Therefore, the CFPB’s admission of a general five-year statute of limitations is a significant curtailing of its view of its UDAAP authority. In addition, to the extent any pending enforcement actions or investigations look past this five-year mark or the applicable statute of limitations under the law being enforced, this should be an issue raised in those actions.

V. Conclusion

The impact of the PHH case is significant, both with respect to the CFPB’s existence and current structure, and the relationships and potential for referral arrangements between companies in the real estate market. The court’s decision essentially blesses marketing services agreements and other arrangements designed to fall under RESPA section 8(c)(2), even if they are entered into with the understanding that business will be referred between the parties. We may see an increase in the use of these types of agreements based on the court’s decision. But compliance should still be a concern, because the factors under RESPA section 8(c)(2) must still be followed, and state regulators and other courts may come to different conclusions.