Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

So, even though PHH is challenging Director Cordray’s interpretation of violations under RESPA that allowed him to distend a $6 million penalty handed down by an administrative law judge into an engorged, ballooned penalty of $109 million that the CFPB director handed down when PHH appealed, the fact is the instant arguments are really going quite far beyond that issue.

Here’s a pivot point: whether the Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. Short answer: Yes, it is constitutional if you go by the Supreme Court’s decision in 2010 in Free Enterprise Fund v. Public Company Accounting Oversight Board, which affirmed the DC Court’s ruling that such protections were constitutional.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*
 
These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

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IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

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SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

Part III (Frequently Asked Questions) consist of only a two-page set of questions and answers, most of them quite obvious, both in the asking and the answering. Perhaps the most interesting ‘question and answer’ set is this one:

Question: Will the CFPB coordinate and communicate supervisory activities with other regulatory agencies?

Answer: In accordance with the Dodd-Frank Act and its routine practice, the CFPB will coordinate with other regulators. Regulators will communicate examination plans and findings with each other. When appropriate, the regulators will coordinate examination efforts in order to reduce regulatory burden.

Although the CFPB gave a vaguely worded answer, let’s put it this way: the integration of information between the state banking departments and the CFPB and, where applicable, other state and federal agencies, has become (or is becoming) seamless.

Finally, Part IV (Tools) is a resource directly, commonly used on many websites to direct the reader to other website locations of interest. This section hosts many hyperlinks, seventeen in total, that cover most of the rules and regulations that the CFPB has promulgated relating to mortgage compliance.

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CFPB: Mortgage Originator Violations

Yesterday, I outlined for you the features of the CFPB's requisites of a Compliance Management System (CMS). My observations were based on the CFPB's newsletter, entitled Supervisory Highlights: Fall 2012, an issuance to the public and the financial services industry about its examination program, including the concerns that it finds during the course of its completed work, and the remedies that it has obtained for consumers who have suffered financial or other harm.

There are other important areas covered in the newsletter that I would now like to briefly discuss: 

Violations relating to Credit Reporting, and

Violations by Mortgage Originators

Fair Lending Compliance 

These subjects are very nuanced and complex, involving many aspects of regulatory compliance mandates. Necessarily, my remarks will be limited to the kinds of observations that the CFPB has indicated as principal concerns with respect to these matters.

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IN THIS ARTICLE

Violations relating to Credit Reporting

Violations by Mortgage Originators

Fair Lending Compliance

Library

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Violations relating to Credit Reporting

The Fair Credit Reporting Act (the FCRA) regulates the collection, use, and dissemination of consumer report information, and promotes the accuracy, fairness, and privacy of information held by the nation’s credit bureaus.

As you many know, the CFPB examines financial institutions for their compliance with the FCRA’s requirements for handling consumers’ credit information. Among other things, the FCRA and its implementing regulation, Regulation V, generally require entities that provide consumer information to credit bureaus to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the consumer information they furnish to these entities.

A party’s failure to comply with the FCRA may cause significant consumer harm.

According to the CFPB's most recent announcement on its examination findings, its examiners have discovered one or more instances in which a financial institution’s employees did not have sufficient training or familiarity with the requirements of the FCRA to implement it properly.

Such deficiencies resulted in a failure implement the following actions:

- Communicate appropriate and accurate account information to the credit bureaus.

- Indicate when account information had been disputed by consumers.

- Determine whether disputes had been fully investigated.

Findings by the CFPB noted that companies were unaware of the potential and actual violations of the FCRA, and, therefore, they repeatedly failed to respond to communications from consumers about their accounts.

The remedial actions mandated by the CFPB included (1) implementing procedures for properly reporting consumer credit disputes to all credit bureaus, (2) taking action on all disputes reported directly to the financial institution and correcting errors where appropriate, and (3) deleting information regarding customers, as appropriate, upon completion of their credit dispute investigations.

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Violations by Mortgage Originators

CFPB examiners have found significant violations of Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA).

Violations under RESPA have included failures to make proper and complete disclosures to consumers of costs and other terms of a transaction due to inadequate or improper completion of the Good Faith Estimate and the HUD-1 settlement statement.

Violations under TILA have included failures to provide accurate interest rate disclosures, and payment amounts and schedules, as well as disclosures regarding late payments, security interests, and assumption policies.

One aspect of the CFPB's examination, it should be mentioned, is to review a company's policies and procedures with respect to RESPA and TILA. Those financial institutions that do not maintain an accurate and current set of such policy statements should expect to receive an adverse finding.

Specifically, where financial institutions have violated RESPA and/or TILA, they have been directed to implement appropriate policies, procedures, and monitoring to prevent recurrence of the violations, and to ensure that any third-party vendors, including mortgage brokers, are identified and included in the company’s oversight program. The relevant policies and procedures should provide guidelines to ensure that proper Good Faith Estimate and HUD-1 disclosures are provided to consumers, and that consumers are not improperly charged. In fact, where appropriate, the CFPB has actually directed that consumers receive a corrected HUD-1, and, just as in state banking examinations, where customers are improperly charged, a financial institution will be directed to provide reimbursement to the consumer.

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Fair Lending Compliance

Another area of concern is compliance with the Home Mortgage Disclosure Act (HMDA), and its implementing regulation, Regulation C.

In our newsletter yesterday, I discussed deficiencies of fair lending compliance programs and some "common features" of well developed programs. The CFPB utilizes HMDA data in the course of its review of such programs, and it may seek corrective action or relief, as appropriate, in cases that demonstrate fair lending violations.