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.
The CFPB has announced the launch of its Spanish language website. According to the CFPB, in response to research showing that two-thirds of Latinos who are online tend to access the Internet from a mobile device, the website is designed so that “it works beautifully on mobile devices as well as on desktops.”
The website allows users to access Spanish language versions of the CFPB’s online consumer complaint system and answers to consumers’ frequently asked questions. (In its announcement, the CFPB noted that it also takes complaints over the telephone in Spanish, as well as in more than 180 other languages.)
The CFPB plans to continue to build its Spanish language website in the coming months.
The Truth in Lending Act ban on mandatory arbitration provisions in certain mortgage loans becomes effective on June 1, 2013. Lenders now using mortgage loan documentation containing such provisions should take steps to ensure that they (and references to them) are removed from documentation to be used for loans that will be subject to the ban.
The prohibition was one of the Regulation Z amendments made by the CFPB’s final rule on loan originator compensation issued in January 2013. It bans “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction” in any agreement for a closed-end loan secured by a dwelling or an open-end loan secured by the consumer’s principal dwelling. “Dwellings” include mobile homes and trailers used as residences.
The prohibition applies to loans for which an application is received on or after June 1, 2013. It does not apply to loans for which the application was received before then, even if the loan is consummated on or after June 1. Arbitration provisions in existing documents for closed loans are unaffected by the prohibition. (The prohibition, which was part of the Dodd-Frank Act, was not of great importance since very few mortgage lenders were using arbitration provisions. This is because Fannie Mae and Freddie Mac would not allow the inclusion of such provisions in loans they purchased.)
While arbitration provisions in documents used for non-mortgage consumer financial products and services are also unaffected by the prohibition, Dodd-Frank left open the possibility of broader regulation of mandatory arbitration agreements. Under Dodd-Frank Section 1028, the CFPB is required to conduct a study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services generally.
Section 1028 also authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” such agreements based on the study results. In April 2012, the CFPB took what it described as “a preliminary step in undertaking the study” by publishing a request for information about the scope, methodology and data sources for the study. The CFPB’s study is now proceeding and Director Cordray has said at least some of the results will be publicly released this year.
For more on the arbitration ban, see our legal alert.
The dark cloud that has been hanging over CFPB Director Richard Cordray’s recess appointment just got darker. In a 2-1 decision in NLRB v. New Vista Nursing and Rehabilitation, the U.S. Court of Appeals for the Third Circuit ruled today that, under the U.S. Constitution’s Recess Appointments Clause (RAC), the President may only make recess appointments during an intersession recess. In addition, the Third Circuit rejected the NLRB’s argument that pro forma sessions should be deemed a “recess” (on the theory that “recess” for purposes of the RAC should be read to mean any time the Senate is not open for business and unavailable to provide its advice and consent). While the recess appointment invalidated in New Vista was a 2010 appointment and not the 2012 appointments at issue in Noel Canning, the Third Circuit’s views fully accord with the D.C. Circuit’s determination in Noel Canning v. NLRB.
In its January 2013 Noel Canning decision, the D.C. Circuit ruled that, because the most recent session began on January 3, 2012 and President Obama’s three NLRB appointments were made on January 4 (while the Senate was conducting pro forma sessions), the appointments were not made during a “recess” within the meaning of the RAC. Since the President’s recess appointment of Richard Cordray as CFPB Director was also made on January 4, the D.C. Circuit’s opinion cast serious doubt on the validity of Mr. Cordray’s appointment. By agreeing that recess appointments must be made during an intersession recess to be valid, the Third Circuit has added to that doubt.
On April 25, the NLRB filed a petition for certiorari, asking the Supreme Court to review Noel Canning. The respondent has advised the Court it does not intend to oppose the petition.
We thought the petition for certiorari in Noel Canning had a high probability of success before today’s decision. The panel split in New Vista further increases the likelihood that certiorari will be granted.