Cases and Regulations: 2016 Predictions

I have noticed that there has been a spate of articles in the last few months about the regulatory events of 2015. Indeed, the highest profile event was the implementation of the rules governing TILA-RESPA Integration Disclosure (“TRID”). Looking back at history is important; after all, “what’s past is prologue,”[i] as Shakespeare’s insight offers in The Tempest. Or is it? Can our vision be so blurred by the emoluments of the past that we lose sight of the recompense awaiting us in the future?

Enjoy'd no sooner but despised straight,

Past reason hunted, and no sooner had

Past reason hated, as a swallow'd bait

On purpose laid to make the taker mad;

Mad in pursuit and in possession so;

Had, having, and in quest to have, extreme.

Thus said Shakespeare in Sonnet 129, pouting how past sentiments can beguile future attractions in inscrutable ways, focused on consuming demands, whipped from one extreme to another, passionately meeting the madness of a gripping mission. Having gone through 2015’s glut of objections, tests, threats, claims, confrontations, defiances, demurs, provocations, remonstrances, ultimatums, impositions, exigencies, and importunities, perhaps now we should set our zealous pursuit of adaptation and expediency to the dispatch that is likely awaiting us in 2016.

I propose to discuss two categories that, though separate in purpose and determinate qualities, are each intrinsic to the way residential mortgage lenders and originators, as well as other financial service entities involved in extending credit through consumer loan products, will be responsive to the regulatory compliance environment in the year ahead: cases and regulations. Each often is rooted in the past, though usually springs to a trajectory into the future. Instead of traveling down Memory Lane, let’s take a modest excursion through the imminent happenings soon to come. In briefly discussing these cases and regulations, I hope to further stimulate public policy debates.

Cases

Both the U.S. Supreme Court and the Second Circuit will be prominent in deciding cases affecting the origination of mortgages in 2016. Also, the D.C. Circuit and the D.C. district court will adjudicate pertinent cases. The range of consequences is considerable, from cases that could make it more difficult to consummate secondary market transactions to cases further limiting class actions. I believe the following five cases should be on a watch list.

PHH Corp. et al. v. Consumer Financial Protection Bureau[ii]

I have been following this case since its inception. In its recent iteration, on November 5, 2015 the Consumer Financial Protection Bureau (“Bureau”) stated in a brief filed with the D.C. Circuit that its $109 million disgorgement order against PHH Corp. in a mortgage reinsurance kickback case met all statutory requirements and should be allowed to stand in order to keep other companies from engaging in similar schemes.

The Bureau contends that PHH incorrectly interpreted the Real Estate Settlement Procedures Act (“RESPA”) in its appeal of the $109 million disgorgement order. The Bureau and its Director, Richard Cordray, contend that they were correct in levying the foregoing penalty, which, they claim, serves as a necessary deterrent to other firms that might consider engaging in kickback schemes.

To quote the Bureau itself:

“Eliminating kickbacks is a primary goal of RESPA. If PHH is permitted to keep the fruits of its kickback scheme merely because it claims it believed its scheme was legal, this will encourage others to take advantage of areas of statutory uncertainty.”

Further, the Bureau contests PHH’s claims that the agency’s ‘single-director structure,’ as opposed to ‘multimember-commission leadership,’ and funding through the Federal Reserve rather than the congressional appropriations process, violate the U.S. Constitution.

To refresh the history of this matter, the Bureau had filed administrative claims against PHH in January 2014, alleging that when PHH originated mortgages, the financial institution referred consumers to mortgage insurers with which it had relationships. In exchange for this referral, the agency claimed, these insurers purchased reinsurance from PHH’s subsidiaries, and PHH took the reinsurance fees as kickbacks.

The Bureau contended that PHH also charged more money for loans to consumers who did not buy mortgage insurance from one of its supposed kickback partners and, in general, charged consumers additional percentage points on their loans.

HMDA Highlights

HMDA Highlights

Last month I published an article on the changes coming in Regulation C,[1] the implementing regulation of the Home Mortgage Disclosure Act.[2] The article can be viewed here and downloaded here or here.

I would like to highlight a few of the salient features for you.

Essentially, HMDA serves three purposes: (1) it provides public and public officials with information to help determine whether financial institutions are serving the housing needs of the localities in which they are located and to assist public officials in their determination of where to distribute public sector investments to improve the private investment environment; (2) it requires the reporting of racial characteristics, gender, and income information on applicants; and (3) it identifies possible discriminatory lending patterns and enforcing anti-discrimination statutes. 

In 2010, the Dodd-Frank Act amended HMDA to expand the scope of information compiled, maintained and reported. In August 2014, the CFPB proposed amending Regulation C to implement the Dodd-Frank changes.

The CFPB chose not to adopt several data points specified in the Dodd-Frank Act and included a few on its own. Take the following summary listing of the changes made by the CFPB’s October 2015 Regulation C amendments (hereinafter, “Rule”) as a tool to be used along with my article and the CFPB’s own promulgated guides and issuances regarding the HMDA changes.

Institutional Coverage

Although it is not required by the Dodd-Frank Act, the CFPB nevertheless adopted uniform loan-volume thresholds for depository and non-depository institutions, which require an institution to report data if it originated in each of the two preceding calendar years at least 25 closed-end mortgage loans or at least 100 open-end lines of credit, assuming the institution meets the other criteria for coverage.

Institutions that meet only the closed-end threshold are not required to report open-end lending, and institutions that meet only the open-end threshold need not report closed-end lending.

The regulation retains the other coverage criteria for depository institutions, which require reporting by depository institutions that satisfy an asset-size threshold ($44 million in 2015), have a branch or home office in an MSA on the preceding December 31, originated at least one first-lien home purchase loan or refinancing secured by a one- to four-unit dwelling in the previous calendar year, and satisfy a “federally-related” test (i.e., the institution is federally insured or regulated or the loan previously mentioned was insured, guaranteed, or supplemented by a federal agency or intended for sale to FNMA or FHLMC).

For non-depository institutions, the above loan-volume threshold test replaces the current loan-volume or loan-amount test and Regulation C retains the criterion that the institution must have a branch or home office in an MSA on the preceding December 31.

Transactional Coverage

Also not required by the Dodd-Frank Act, the Rule adopts a dwelling-secured standard for reporting all loans or lines of credit for personal, family, or household purposes, whether the purpose of the loan is to finance the property serving as security or another property. Accordingly, the amendments discard the purpose test that previously required the reporting of home improvement loans, whether or not dwelling-secured. Among other things, this makes the reporting of dwelling-secured consumer open-end credit mandatory (no longer optional).

Most commercial-purpose transactions are subject to Regulation C reporting only if they are for the purpose of home purchase, home improvement, or refinancing (i.e., the Rule retains Regulation C’s traditional purpose test only for commercial-purpose transactions). The regulation does not apply to home improvement loans not secured by a dwelling, or agricultural-purpose loans/lines of credit. The regulation now uses the term “covered loans” as a shorthand term to refer to the universe of loans covered by HMDA.

·         The CFPB specifically noted that Regulation C does not require the reporting of loan modifications. There are two exceptions for which HMDA reporting is required because they represent new debt obligations in substance if not in form:[3] (1) assumptions, including successor-in-interest transactions (this differs from CFPB interpretations under TILA Regulation Z); and (2) New York consolidation, extension, and modification agreements (CEMAs) used in place of refinancings (this only refers to CEMAs made under § 255 of the New York Tax Law). The CFPB recognized that its determination that these New York CEMAs must be reported departs from past FRB guidance that they did not need to be reported. The CFPB noted that this Regulation C definition of the term “modification” differs from that of Regulation B, which defines it to include the granting of credit in any form, including the renewal of credit and the continuance of existing credit in some circumstances.

·         The amendments revise the definition of “dwelling.” Briefly put, the definition includes primary residences, second homes, investment properties (homes), multifamily properties, and manufactured home communities (whether or not any individual homes also secure the loan). The term excludes recreational vehicle parks, recreational vehicles, and pre-1976 mobile homes. The regulation retains the existing discretion for financial institutions to determine the primary use for multifamily properties (such as mixed-used properties with five or more individual dwelling units). Properties that provide long-term housing with related services such as a combined medical care component are reportable, while properties that provide medical care are not (consistent with the exclusion of hospitals).

Recess Appointment Gambit

By Jonathan Foxx

President & Managing Director

Some people just won’t take No for an answer!

The most recent fool’s errand is offered thanks to the irrepressible, litigious efforts of the State National Bank of Big Spring, Texas, and two advocacy groups, conservative think tank Competitive Enterprise Institute and the 60 Plus Association.

In State National Bank of Big Spring et al. v. Geithner et al. (U.S. District Court, DC, Case 1:12-cv-01032), the plaintiff seeks to disabuse the Consumer Financial Protection Bureau (“Bureau”) of its constitutionality.

Here is one of the lawsuits that started droning high and mighty soon after the Bureau received its enumerated authorities in the summer of 2011.

The bank sued in June 2012, arguing that the Bureau has an inordinate amount of power because (1) the Bureau’s director can't be removed at will, and (2) the agency's funding is routed around the congressional appropriations process.

A little over a year later, in August 2013, the case was booted, only to be resuscitated in July 2015 by the D.C. Circuit, since the appeals court found the bank has standing to challenge the Bureau’s constitutionality – based on the fact that the Bureau regulated the remittance market, which is the bank’s business. That said, there had been no enforcement action.

Lacking an enforcement action to protest, maybe the bank just wanted to get out in front of the problem before it started!

The bank went forward with a summary judgment challenge in November 2015.

In any event, about the 2012 suit’s allegation: the claim is that the law creating the Bureau, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is unconstitutional. The bank claimed the president's inability to remove the Bureau’s director without good cause violates the separation of powers doctrine, a claim, the Bureau argues, that ignores Supreme Court precedent.

This gambit has been pushed hither and yon for some time. For instance, right from the start there has been a challenge to the recess appointment of Richard Cordray to be the Bureau's first director. President Barack Obama used a recess appointment to put Mr. Cordray in charge of the Bureau, albeit only after mostly Republican senators refused to vote on his nomination. Their opposition was based on the structure and congressional oversight of the Bureau, not really at all based on Mr. Cordray’s credentials.

But Conservatives have long held that the recess appointment violated the Constitution, engendering the recess appointment itself by keeping the Congress technically open by holding a series of pro forma sessions, gaveling in sessions for minutes or seconds, in order to meet the lowest bar for being open for business.

So, we’re back in court!

Now, the Bureau has asked a Washington, D.C., federal court for summary judgment. Filing last Friday, the Bureau asserts that the bank’s challenge to the Bureau's constitutionality can't get around long-standing precedent supporting legislators' authority to create independent agencies.

Here’s two of the pivotal quotes:

“SNB’s arguments that Title X violates constitutional separation-of-powers principles rest on policy arguments with no support in the constitutional text or judicial precedent.” 

“The challenged provisions of Title X – considered either individually or collectively – are consistent with Articles I and II of the Constitution, as they have been interpreted and applied by the Supreme Court.”

The Bureau argues that the Supreme Court had ruled in 1935, in Humphrey’s Executor v. United States, that Congress has the authority to create independent agencies with overseers appointed by the president who can only be removed for good cause.

Thus, asserts the Bureau, the authority is grounded in the establishment of the Federal Communications Commission, which was at issue in that case, or any of several other federal agencies, including the Securities and Exchange Commission, that are considered to have been created under the same authority.

Given precedent, the Bureau’s view is that, whether or not the Bureau is headed by a single, appointed director or several commissioners (or multiple directors or a phalanx of overseers), is entirely irrelevant and nugatory. In defending the single appointee, the Bureau’s brief states: “If anything, it should be easier for the president to hold accountable a single officer than several.” 

Furthermore, the Bureau stated that the foregoing argument didn't appear in the bank's complaint and that it can't raise the claim now in its own motion for summary judgment filed in early November. Indeed, it is argued that the bank was not harmed by the rules approved by Director Cordray, and, in cases where the bank claims it was harmed, invalidating them would not serve to correct the injuries alleged by the bank.

From a regulatory perspective, the Bureau is correct with respect to the validity of rules approved by the Bureau’s director. Even if the court were to consider the validity of rules approved by Director Cordray during his recess appointment, the D.C. Circuit has upheld such rules when later ratified by an agency.

I think you can see how this Hatfields and McCoys battle can get very complicated.

I expect this species of litigation to find its way into the dustbin of history.

Still, as Alexander Pope said, "Hope springs eternal in the human breast."