Based on a Reuters article quoting counsel for Noel Canning, Gary Lofland, I had previously indicated that the Respondent would not oppose certiorari in the case. I have now confirmed that report by telephone conversation with Mr. Lofland, who indicates that he plans later this week to make a filing advising the Supreme Court that Respondent does not oppose the granting of certiorari. At that point, presumably, the case will be ready to go to conference.
The CFPB announced earlier this week that it has established a “framework” with the Conference of State Bank Supervisors (CSBS) for coordination among the CFPB and state regulators on supervision and enforcement matters. The framework states that it is “intended to establish a process for coordinated federal/state consumer protection supervision and enforcement of entities providing consumer products or services that are subject to concurrent jurisdiction of the CFPB and one or more [state financial regulatory authorities].” It further states that it is “not a binding agreement” and instead is “a guide for effective and efficient coordination and collaboration of supervisory and enforcement activities.”
The framework implements a provision of the 2011 memorandum of understanding (MOU) between the CFPB and CSBS regarding information sharing in which the parties agreed to work together to efficiently use federal and state resources, “including through the development of a framework for coordinating supervisory activities.” The MOU was supplemented by a 2012 Statement of Intent detailing the types of information the CFPB planned to share with state regulators and the cooperative actions the CFPB planned to take. According to the CFPB’s press release, in agreeing to the framework, the CSBS was “acting on behalf of state financial regulatory authorities.” However, as the CSBS notes in its press release on the framework, the CFPB’s non-bank jurisdiction “spans an array of industries that fall outside of the jurisdiction of CSBS members.” It is presumably for that reason that the framework contemplates that it, in addition to the CSBS, it will be signed by “State Banking Commissioners or Other Appropriate State Officials.”
The framework includes the following:
- State regulators are to form a “State Coordinating Committee” that is responsible for state coordination with the CFPB with regard to supervision of non-bank entities.
- The process for examinations of depository institutions (meaning insured state-chartered depository institutions or credit unions with more than $10 billion in assets or their affiliates) and non-banks includes provisions dealing with coordination of examination scheduling and development of a comprehensive supervisory plan for coordinated supervision that includes an examination plan. Examination plans are to include a “single entry or information request letter, where appropriate.”
- The CFPB and state regulators are to “share information and consult one another” regarding corrective action “in all cases where permitted by applicable law,” with such sharing or consultation to occur when possible “in a reasonable time” before corrective action is taken. However, the framework expressly provides that the CFPB and a state regulator do not need to have the other’s approval before initiating an enforcement action.
Despite the CFPB’s statements in its press release about its “strong partnership” with state regulators and the framework representing an expansion of its efforts to coordinate with state regulators, Bloomberg reports that the uncertainty surrounding Director Cordray’s recess appointment may be slowing the CFPB’s interactions with state regulators. The report discusses comments by Greg Zoeller, the Indiana Attorney General, that the CFPB’s plans to coordinate enforcement with state AGs have stalled as a result of the uncertainty. Mr. Zoeller is also reported to have said that such uncertainty is deterring state AGs from exercising their authority under the Dodd-Frank Act to enforce federal consumer financial laws.
Despite expectations fueled by statements from Senate Majority Leader Harry Reid’s office that he planned to hold a procedural vote on Richard Cordray’s nomination this week, it now appears the Senate will not vote on the nomination before the Memorial Day recess. According to a report in Politico, Senator Reid would not specify when the vote would occur when he spoke to a group of reporters yesterday. Senator Reid is reported to have said only that he was “going to make sure” there will be a vote on Mr. Cordray and was unwilling to answer questions about reports that he will seek to change the Senate’s filibuster rules.
Among the possible reasons for the delay is the possibility that the Third Circuit’s New Vista decision last week casting further doubt on the constitutionality of Mr. Cordray’s recess appointment is causing the Obama Administration to reconsider whether its apparent refusal to negotiate a deal with Republicans is the right strategy.
Last week, the Solicitor General finally filed his brief expressing the views of the United States on whether the U.S. Supreme Court should grant the petition for certiorari pending in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. (The Supreme Court invited the Solicitor General to file the brief in October 2012.) The case challenges the validity of HUD’s interpretation that disparate impact can be used to establish liability under the Fair Housing Act (FHA), even if there is no discriminatory intent. We have been closely following the developments in the case because of its potential implications for the validity of the CFPB’s position that disparate impact can be used to establish ECOA liability.
Predictably, the Solicitor General’s brief opposes the petition for certiorari. The brief argues that the question of whether disparate impact claims are available under the FHA does not warrant review because there is no conflict in the courts of appeals (11 of which, according to the Solicitor General, have held such claims are available) and HUD’s rule interpreting the FHA to allow disparate impact claims is entitled to deference and is reasonable. It also argues that the Supreme Court does not need to grant certiorari to settle a disagreement among the courts of appeal about how disparate impact claims should be analyzed because HUD’s rule establishes a uniform framework. Finally, the brief argues that the case is not the right vehicle for deciding the FHA issue because of its interlocutory posture and the petitioners’ failure to raise the questions presented by the certiorari petition in the district court or Third Circuit.
It is commonplace for the party that is opposed to the Solicitor General’s position to file a supplemental brief in response and we understand that the Township of Mount Holly plans to file a supplemental brief this week. We do not expect the respondent/plaintiff to file a supplemental brief. Once the Township files its supplemental brief, the court will be positioned to consider the petition for certiorari in conference.
The Mt. Holly case is currently back in the district court, having been remanded by the Third Circuit for further factual development after the Third Circuit reversed the district court’s grant of summary judgment. The Magistrate Judge has scheduled settlement conferences for early next month in which the Solicitor General will not be involved.
Even if the petition for certiorari is granted, it is possible Mt. Holly will settle before the Supreme Court has a chance to rule on the merits, like City of St. Paul v. Magner did last year. The Supreme Court had granted certiorari in City of St. Paul, which raised the same issue under the FHA, but the case settled under murky circumstances on the eve of oral argument.
The CFPB has issued final “clarifying and technical” amendments to its final mortgage escrow account rule dealing with the establishment of mandatory escrow accounts on higher-priced mortgage loans (HPML).
The final escrow rule contains exemptions for certain creditors operating primarily in “rural” or “underserved” areas. Such creditors are also the subject of (1) a provision allowing balloon payment mortgages in the final ability-to-repay rule, (2) an exemption from the balloon payment prohibition on high-cost mortgages in the 2013 final HOEPA rule, and (3) an exemption from a requirement to obtain a second appraisal for certain HPMLs in the 2013 interagency final appraisals rule. These rules rely on the criteria for “rural” and “underserved” areas in the final escrow rule.
The final amendments clarify how to determine whether a county is considered “rural” or “underserved” for purposes of the escrow rule and three other rules. Concurrently with the amendments, the CFPB released a final list of “rural” or “underserved” counties which, according to the CFPB, is identical to the preliminary list it issued in March 2013. For purposes of the escrow rule and other relevant rules, the CFPB has indicated that creditors may rely on this list as a safe harbor to determine whether a county is “rural” or “underserved” for loans made from
June 1, 2013, through December 31, 2013. The CFPB plans to issue an official list for 2014 when the necessary data becomes available.
The final amendments also include a temporary provision to keep in place existing requirements concerning the assessment of a consumer’s ability to repay an HPML and limitations on prepayment penalties for HPMLs. The final escrow rule had removed the regulatory text containing these provisions for HPMLs. The Title XIV rules which become effective on
January 10, 2014 expanded these requirements and limitations to cover most mortgage loans. The final amendments keep the existing requirements and limitations in place for HPMLs until January 10, 2014.
The CFPB describes the escrow rule amendments as “the first final rule in connection with our planned issuances to clarify and provide additional guidance about the mortgage rules we issued in January.” The CFPB has also issued proposed clarifications to its ability to repay/qualified mortgage and servicing rules. Because the final escrow rule is effective June 1, 2013, the CFPB gave priority to finalizing the escrow rule amendments.
In another mortgage-related development, on May 15, 2013, the CFPB posted videos on the mortgage rules it finalized in January 2013. In March 2013, the CFPB said that it planned to publish plain-language guides to the regulations in both written and video form to assist smaller businesses with limited compliance staff.
The CFPB has announced the settlement of an enforcement action in which it was alleged that two affiliated business arrangements (ABAs) violated Section 8 of the Real Estate Settlement Procedures Act.
The arrangements involved two mortgage origination companies created by a Texas homebuilder who owned one company together with a bank and the other company together with a mortgage company. The CFPB charged that, through the ABAs, the homebuilder received unlawful referral fees for mortgage loans that he or his homebuilding company referred to the bank or mortgage company.
According to the consent order, the referral fees in the ABA with the bank were passed back to the homebuilder through profit distributions and such distributions were not entitled to the ABA “safe harbor” because the ABA was a sham as described in HUD’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements. The consent order stated that the referral fees in the ABA with the mortgage company were in the form of payments made to the homebuilding company by the mortgage company pursuant to a service agreement.
The consent order prevents the homebuilder, his homebuilding company and another affiliated company from engaging in any real estate settlement service business other than the sale of homes or owning an interest in any entity providing such services for five years. It also requires the homebuilder to pay disgorgement in the amount of $118,194.20, which according to the CFPB, represents the full amount of money he received since early 2010 from the allegedly unlawful arrangements.
We find it interesting that, in seeking disgorgement, the CFPB appears to have relied on the remedies available under Dodd-Frank Section 1055 rather than RESPA. (The consent order cites to Section 1055 rather than to RESPA.) Disgorgement is one of the forms of relief the CFPB is specifically authorized to seek in enforcement actions it brings under a federal consumer financial law.
The HUD 1996 Statement of Policy referenced in the consent order was issued as guidance on RESPA’s application to ABAs and discusses the factors HUD would consider when assessing whether an ABA is a bona fide provider of settlement services or a sham arrangement. Unless and until the CFPB acts to change it (and there has been no indication the CFPB intends to do so), the Statement of Policy remains in effect. The CFPB’s enforcement action, while alleging facts that if true did not come close to satisfying the Statement of Policy, should nevertheless serve as a reminder to companies involved in ABAs to periodically review their arrangements with counsel for Section 8 compliance. While it is important for the documentation for ABAs to satisfy the Statement of Policy, it is equally important that ABAs actually be operating in accordance with the Statement of Policy.
The CFPB’s enforcement action resulted from a referral from the FDIC, which separately fined the bank involved in one of the ABAs. Given that the facts alleged by the CFPB indicated a clear RESPA violation, we find it interesting that the CFPB did not impose any penalty in addition to ordering disgorgement. Last month, the CFPB announced the settlement of enforcement actions against four national mortgage insurers involving allegations that the insurers paid kickbacks to mortgage lenders through captive reinsurance arrangements in violation of RESPA Section 8. In those settlements, the CFPB imposed substantial penalties on the insurers.
We have been critical of the failure of the CFPB’s white paper on payday and deposit advance loans to address the very real benefits of payday loans or the question whether (and when) such benefits outweigh the costs. Similar criticism was also voiced by the Community Financial Services Association of America (CFSA), a national trade organization for payday lenders, in a letter to the CFPB. In its letter, the CFSA commented on the absence of “real world context” from the report and called upon the CFPB to develop an “understanding [of] the choices and consequences faced by those in need of short-term credit and the risks of driving people to higher-cost products, expensive penalties or less-regulated providers.”
Last week, during the public session of the meeting of the CFPB’s Consumer Advisory Board (CAB), it appears Director Cordray and the CAB heard a similar message from actual payday loan customers and other industry supporters. According to a report in the May 17, 2013 American Banker, dozens of payday loan supporters wearing stickers that read “My Credit … My Decision” attended the public session. Among the comments made by supporters was that payday loans are often a cheaper option than overdraft fees. The CFPB was urged by a supporter not to “demonize” payday loans and a payday loan customer expressed gratitude for being able to obtain such loans.
The CAB was scheduled to hold a separate session devoted to payday loans during its meeting which was not open to the public. Upon learning that the public would be excluded from that session, an attorney for the CFSA sent a letter to the CFPB asserting that the CFPB’s action violated the Federal Advisory Committee Act.
The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit has scheduled a hearing for tomorrow, May 21, on “Qualified Mortgages: Examining the Impact of the Ability to Repay Rule.”
There will be one panel consisting of two witnesses from the CFPB. The CFPB officials scheduled to appear are Peter Carroll, Assistant Director for Mortgage Markets, and Kelly Cochran, Assistant Director for Regulations.
As we reported last week, the National Treasury Employees Union (NTU) won an election to represent over 800 of the CFPB’s 1,200 employees. The vote was 378 in favor and 86 against.
I asked Shannon Farmer, a colleague who is a labor lawyer, whether this move would make it harder for the CFPB to fire incompetent employees and increase the agency’s human resource expenses. She said that it would if the CFPB’s employees are not protected by civil service rules. She also noted that it would make it more difficult for the CFPB to manage its employees. Union arrangements often deter managers from being forthright with employees about their performance for fear of getting flak from the union. Shannon thinks that this effect imposes the most significant costs on a company or agency whose employees unionize.
As someone with no labor law background, I am struck by how 378 employees can obligate over 422 other employees to be part of a union shop.
It is hard to say how this move might affect how the CFPB operates. But many of those it supervises already have experience with NTU members, as the NTU represents employees of the IRS, SEC, FDIC and OCC.
According to a report from Politico, CFPB employees voted last week to join the National Treasury Employees Union, a federal union that also represents employees at other financial regulators, including the FDIC, OCC and SEC.
The report states that “according to several people familiar with the situation,” the move to unionize “was driven in large part by news that many employees in Washington would be forced to give up their private offices while the bureau renovates its headquarters.” It indicates that “sources” have described CFPB Washington staffers as angry about their current office space, which often involves groups of four or five people sharing single offices. According to these sources, the CFPB’s plans to move employees from offices to open spaces when the CFPB temporarily relocates during the renovations sparked a backlash and raised concerns about keeping a similar layout in the permanent building once it is renovated. The report quotes “one person familiar with the situation” as having said that CFPB “lawyers and economists and senior folks” who are “used to having their own offices” are concerned about the noise level in an open space layout.
The union’s president is reported as having said that, in addition to workspace concerns, CFPB employees are concerned about travel policies and benefits, work schedules, reviews, promotions and alternative work schedules. The report describes CFPB staffers as having “grown frustrated in recent months after putting in grueling hours as they raced to meet statutory deadlines” under Dodd-Frank.
As the report notes, the CFPB’s leaders will now have to navigate union politics while trying to fill the vacancies that have resulted from a slew of recent departures.