CFPB’s Summer Edition of Supervisory Highlights Discloses Issues across Various Financial Markets

On June 30, the CFPB released its twelfth edition of Supervisory Highlights providing supervisory observations from its examiners in the areas of auto origination, debt collection, mortgage origination, small-dollar lending, and fair lending. In the area of auto origination, examiners determined that one or more institutions engaged in deceptive advertising practices related to the benefits of gap coverage products and the effects of payment deferrals, and failed to implement adequate compliance management systems. In the area of debt collection, examiners found that debt sellers sold thousands of debts that were unsuitable for sale because: (i) the accounts were in bankruptcy; (ii) the debts were the product of fraud; or (iii) the accounts had been paid in full. CFPB examiners further observed violations of the Fair Debt Collection Practices Act (FDCPA), determining that at least one collector falsely represented to consumers that a down payment was necessary in order to establish a repayment arrangement, when no such down payment was required by the collectors’ policies and procedures. For mortgage origination, CFPB examiners focused on compliance with provisions of CFPB’s Title XIV rules, the Truth in Lending Act (TILA), as implemented by Regulation Z, and the Real Estate Settlement Procedures Act (RESPA), as implemented by Regulation X, disclosure provisions, and other applicable consumer financial laws. Read more…

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CFPB Takes Action Against Former Loan Officer for “Fee-Shifting” Practices, Alleges RESPA Violations

On May 26, the CFPB announced a consent order against a former mortgage loan originator of a San Francisco-based bank for allegedly violating Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The CFPB alleges that, from at least November 2013 through February 2015, the loan officer and an escrow company in California “engaged in a scheme in which they manipulated escrow fees, at [the loan officer’s] direction, by shifting them among loans in order to structure no-cost mortgage transactions.” The CFPB further contends that the loan officer referred settlement-services business for federally related mortgages to the escrow company in exchange for allowing him to dictate the escrow fees. According to the CFPB, the arrangement between the loan officer and the escrow company constituted providing a “thing of value” – prohibited under RESPA – because it allowed the officer to consistently deliver “no closing cost” loans to his clients, which “ultimately increased the number of loans he was able to close and, as a result, the commissions he earned.” The CFPB’s consent order imposes an $85,000 civil penalty and prohibits the loan officer from participating in the mortgage industry for one year.

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POSTED IN: Federal Issues, Mortgages

CSBS and Multi-State Mortgage Committee Report on 2015 Supervisory Efforts

The Conference of State Bank Supervisors (CSBS) and the Multi-State Mortgage Committee (MMC) issued a report to state regulators regarding its 2015 review of the supervisory structure around examination and risk assessment of non-bank mortgage loan servicers. Notable servicing examination findings outlined in the report include: (i) violations and deficiencies related to loan transfer activity, noting that a “significant portion of servicing examination findings are tied to the mortgage servicing requirements implemented into the [RESPA] and [TILA] in January of 2014”; (ii) ineffective oversight of sub-servicer activity and insufficient third party vendor management; and (iii) ineffective examination management procedures on the part of mortgage servicers, leading to delayed examination processes, as well as impeded regulatory oversight. The report further outlines origination examination findings, emphasizing RESPA violations related to Mortgage Servicing Agreements (MSAs) which typically include payments for promotional advertising services performed on behalf of the mortgage company. Read more…

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U.S. Court of Appeals for the D.C. Circuit Hears Oral Arguments Regarding CFPB’s Interpretation of RESPA

On April 12, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case PHH Corporation v. CFPB. The primary issue in the case is whether the CFPB is constitutionally and statutorily authorized to assess a $109 million penalty against the petitioner, a nonbank mortgage lender (Lender), for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by referring customers to certain mortgage insurance companies that purchased mortgage reinsurance at fair market value from an affiliate of the Lender. According to CFPB Director Richard Cordray, this practice was a violation of Section 8’s prohibition on kickbacks for referrals, because the mortgage insurers allegedly only purchased mortgage reinsurance in order to receive customer referrals from the Lender.

In appealing the CFPB’s action, counsel for the Lender argued that the CFPB is attempting to effectively rewrite Section 8 to prohibit activities expressly permitted by the statute’s implementing regulation, Regulation X, as well as prior agency guidance and the plain language of the statute itself. According to the Lender, its mortgage reinsurance practices had long been understood to be legal, were widespread throughout the country, and aligned with existing HUD guidance. The Lender further argued that Section 8(c)(2) permits entities to refer business so long as the referrals are not compensated, and any payments are equal to the market value cost of services actually provided. In the Lender’s case, counsel argued that the mortgage reinsurance premiums could not have been compensation for referrals, because mortgage reinsurance premiums received by the Lender’s affiliate were equal to the fair market value of mortgage reinsurance services actually rendered. The Lender further argued that the CFPB improperly ignored RESPA’s statutorily-prescribed statute of limitations (SOL) of three years when, under Section 15, RESPA clearly applies the SOL to “any action” – which, in the Lender’s view, would include an administrative action. Finally, the Lender argued that the CFPB’s structure and funding under the Dodd-Frank Act was unconstitutional in that it violated the requirement for separation of powers by, among other things, (i) restricting the President’s removal power to “for cause” removal; (ii) concentrating power in one individual; and (iii) funding the CFPB outside of the Congressional appropriations process.     Read more…

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Third Circuit Finds RESPA Claims in Captive Mortgage Reinsurance Case Untimely and Not Subject to Equitable Tolling

Last week, the U.S. Court of Appeals for the Third Circuit affirmed the district court’s ruling that the class action plaintiffs had not satisfied the elements of equitable tolling where they filed their lawsuit several years after the applicable statute of limitations had expired. Cunningham v. M&T Bank Corp., No. 15-1412 (3d Cir. Feb. 19, 2016). The Court noted that claims under RESPA have a one-year statute of limitations, running from the date of the occurrence of the violation, which begin “at the closing of the loan,” citing In re Cmty. Bank of N. Virginia, 622 F.3d 275, 301–02 (3d Cir. 2010). The Court outlined three elements to establish equitable tolling, “(1) that the defendant actively misled the plaintiff; (2) which prevented the plaintiff from recognizing the validity of her claim within the limitations period; and (3) where the plaintiff’s ignorance is not attributable to her lack of reasonable due diligence in attempting to uncover the relevant facts;” and emphasized that each of the plaintiffs were provided a disclosure before closing about the captive reinsurance arrangement, and that after closing the plaintiffs took no steps to investigate whether the bank’s captive reinsurance program might violate state or federal law.

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POSTED IN: Consumer Finance, Courts, Mortgages