Blog – Kubik Law Firm, PLLC

Managing Partner, Vanessa Rosa-Kubik Honored in 2026 Texas Rising Stars List

Tue, 24 Mar 2026 18:46:11 GMT

Finding Time to Serve: A Commitment to Our Community

Fri, 14 Feb 2025 15:35:37 GMT

In a world that often feels so deeply divided beyond repair, where disputes seem to escalate faster than resolutions can be found, many of us might be feeling a bit powerless. We see conflict on the news, in our neighborhoods, even in our own homes (raise your hand if you have competitive children). But, in the midst of all the uncertainty, confusion, and general horrifying moments ($5 for 12 eggs?!!), one thing remains entirely within our control: the good we choose to bring into the world.

Service to others is not just a noble paragon—it is a tangible, impactful way to create positive change, one act at a time. Whether it is through volunteer work, mentorship, or a kind offer to listen to someone who just needs to talk, every act of kindness shifts the balance in favor of peace and acceptance. When I was a young lawyer, I always intended to volunteer, but the stress of billable hours and piling caseload distracted me long enough that I never prioritized it. Maturity and life experiences (hello motherhood!) have made me realize that service to others is the rent you pay for your room here on this earth .

I think this is why I enjoy mediation—it is not just about paddling our way to middle ground—it is about giving people the tools to craft their own resolutions, to restore relationships, and to move forward with dignity. It is about empowering individuals, families, and businesses to reclaim control over their own conflicts, rather than chancing fate with an overburdened and unpredictable court system. It is about creating lasting peace, not just slapping a band aid on a wound that probably needed stitches.

This week, I had the privilege of conducting a pro bono mediation at the Dallas County Dispute Resolution Center, a place where people from all walks of life come to find solutions that courts are not guaranteed to provide. Here, we work to bring clarity to confusion, calm to contention, and resolution to seemingly impossible disputes. The pro bono work done within those walls is a testament to what is possible when people—the parties, their attorneys, and the volunteers come together in good faith, seeking solutions rather than victories.

I share this not as a call for recognition, but as an invitation to you. Each of us has a role to play in making our community stronger. Whether through volunteering, mentorship, advocacy for the less fortunate, or simple acts of kindness, we can all be a force for good. We cannot control the world’s chaos, but we can control the impact we make in our own little corner.

So, I encourage you: find your way to serve. If not today, then when? Do not wait like I did. Pay that earthly rent. Find a way to bring peace where there is discord, to offer guidance where there is confusion, to shine a light on the darkness, to give hope where there is despair, and to listen when someone just needs to talk to a friendly face.

The world needs more peacemakers. Challenge Accepted. Are you in?

Mediate Your Thoughts! Overcome That Imposter Syndrome

Tue, 03 Dec 2024 17:32:20 GMT

That silent shadow that we all carry. The hushed voices in our heads that despite our impressive credentials, expertise, and long list of accomplishments whisper into our minds, “You are not good enough. You are not smart enough. You will make mistakes and be exposed as the fraud we all know you are.” That inner demon has a name: Imposter Syndrome (“IS”). I would bet my left kidney that at that last happy hour you attended—or even at your work Christmas party—almost every individual in that room is plagued by IS—yes, even that high-power, effortlessly charismatic co-worker flanked by doting peers. Don’t believe me? Tom Hanks, Serena Williams, and Sonia Sotomayor have all discussed to struggling with IS, and let’s be honest—there is no arguing with America’s dad, the tennis GOAT, and a Supreme Court Justice.

Embracing Imposter Syndrome as a Mediator

I would lose all credibility if I did not admit that I suffer from IS in both personal (“You are failing as a mother! You are not Instagram worthy!”) and professional settings (“Am I really good enough?”). If you’re reading this, I am sure you can relate. As an attorney-mediator, I am often in rooms with highly intelligent and intimidating attorneys. When my IS whispers too loudly, my self-doubts are amplified when my past as a litigator—a domain where confidence and certainty govern—is confronted by my role as a mediator—where flexibility and neutrality reign supreme.

How do I weave these opposing ideologies to silence my inner critic and sleep 7 hours (+ or – because toddlers be toddling)? I found the answer through mediation training and mediation experience. The key is to reframe these feelings entirely.

Step One: Listening Without Passing Judgment.

One of the first skills taught in mediation training is listening without passing judgment. As a mediator, I have heard some atrocious allegations—especially in CPS cases. My role is not to pass judgment; it is to listen and HEAR everyone without injecting my own thoughts and beliefs. Through my time serving as a mediator, I began to extend this same courtesy to my own brain. Instead of harshly critiquing and passing judgment on my own actions, I now ask myself, “What really happened, what can I learn, and what did I do well.” Reframing my self-doubt to constructive/positive perspective has allowed me to see IS for exactly what it is—an emotion. Not reality. Not fact. Not truth.

2. Step 2: Focus on Resolution and Neutrality, Not Perfection.

Successful mediation does not mean perfectly resolving the issues. No, it is about showing up and participating in a process where the parties can resolve the issues on their own. The shift—from being expert in the law—to facilitating peaceful solutions is how I approach my own issues.

Before, my life revolved around flawless execution and confidence. Now, I seek growth, empathy, and understanding. Just like in mediation, the first step toward peace is showing up. I think we forget sometimes how much effort it takes just to show up somewhere (even if it court ordered). Once we are present, we can adapt/learn from any challenges and brainstorm our solution. Something else I have learned? It is 100% acceptable to not know all of the answers. As my five year old would say, “That is called LEARNING.” Illusory notions of perfection have no place in mediation, or in our brains for that matter.

Recently, I mediated a legally complex case with highly emotional parties, and after several hours, it felt as though everyone had hit a wall. One of the attorneys began packing up her things to leave and told her client, “Let’s go, we’re walking.” The IS shadows began to invade my mental clarity, but I took a minute to mediate my own thoughts. I treated my own thoughts and feelings as “disputants,” at the mediation table—listening and acknowledging their existence without letting them determine my self-worth. I acknowledged the IS as a feeling, not reality, and I circled back to the process and what the parties’ were really telling me. Within minutes, I thought of a way to make a breakthrough with one of the parties. A few hours later, we were executing a mediated settlement agreement.

Applying These Lessons Beyond Mediation

Some of you may be wondering, “Great, but how does this rationale apply to me?” Whether it is navigating those inevitable days where one feels so deflated from parenting challenges, managing family dynamics, or talking to your neighbor who voted for that other person, I have found that following have universal application: (1) Reframing the narrative; (2) Active listening without judgment, (3) Valuing process over perfection.

Self-doubt will always exist; those whispers will always be there. Armed with the right strategies, however, we can learn to tune out those whispers and LISTEN to the voice truly deserving of our attention—our own potential.

**** Disclaimer: The information provided here is for general informational purposes only and does not constitute legal, medical, or professional advice. It is not intended to be a substitute for professional guidance, diagnosis, or treatment. For specific legal or medical advice, please consult with a qualified attorney or healthcare provider.

Meet Your Mediator—Vanessa Rosa-Kubik

Tue, 22 Oct 2024 19:34:45 GMT

Well, I did it. I became a mediator. Was this on my bingo card? Nope, but I will tell you how we got here.

As many of you are aware, I started as a baby lawyer at a reputable, downtown Dallas firm with a magnificent view of Reunion Tower. My mentor/supervising partner was the gold standard of mentors—he was patient, kind, and ALWAYS ensured I had every opportunity to succeed. I took countless depositions, argued several hearings, and drumroll … attended more mediations than I thought possible.

Some mediators were great, but most seemed apathetic toward my clients’ plight or otherwise put forth minimal effort toward earning that hefty mediation fee. Some—many of whom were highly sought mediators—were unprepared and did not bother to read my pre-mediation statement or otherwise attempt to research the complex legal arguments in advance of mediation. As I moved on to a different firm to transition into more complex commercial litigation matters, my experience with several top Dallas mediators did not improve my perceptions.

I, along with my best friend from law school, eventually joined my husband’s law firm. (This is a wild story for another time, and perhaps another blog post). As the firm’s sole litigation attorney, I still could not find a mediator with the following qualities: (1) reasonably priced*, (2) attorney-mediator, (3) prepared prior to mediation, (4) puts forth at least 80% effort (yes, this should be 100%, but desperation lowered my standards), (5) great listener and room reader, and (6) problem solver. Shockingly, one Austin mediator impassed our case quickly so that he could attend a happy hour with his girlfriend. Not a good look, and no, we were not invited to happy hour.

Eleven years into my legal career, my frustrations with mediators culminated after one night that involved a punk rock cover band, a few margaritas, and top-notch Mexican food (the winning recipe for epiphanies) in which I, in a conversation that had nothing to do with mediation, blurted the words out loud to my husband: “WHY NOT ME?” Six months later, I obtained my Basic, Family Law, and CPS mediation certificates.

Since obtaining my mediation certificates, I have volunteered with different dispute resolution programs in four different counties and am a Full Member of the Texas Association of Mediators (at least 100 hours of mediation time as a mediator is required). I have mediated everything from personal injury matters, employment law issues, professional liability claims, commercial real estate disputes, insurance law matters, complex commercial matters, landlord/tenant issues, small claims disputes, debt collection cases, divorces with children, divorces without children, SAPCRs, child support modifications, and CPS cases.

Have I made mistakes as a mediator? Absolutely. Have I learned from them? Definitely. But, am I better than those whose names I scratched off on my long list of mediators? Without question.

As many of my colleagues will tell you, I am HONEST, and I LISTEN. I will tell you if your argument isn’t passing my smell test; I will tell you if I think a certain judge might take issue with your position; I will tell you if I think the client in the other room appears to be credible; and I am pretty darn great at reading a room. These skills came from a successful career as an attorney trained by some of the best attorneys and best humans I know. And listening skills and problem solving—those are just inherent as a working Mom.

I suspect I am not the only attorney who became bored with the practice of law. Mediating cases has done the impossible: It has reinvigorated my interest in the law, all while trying to balance life as mother with young children. I enjoy preparing for mediations and conducting my own legal research into the claims/issues, and I see glimmers of the young, inquisitive little Vanessa who wanted to learn, understand people, and connect with the world.

I am exactly where I am supposed to be. My law career has given me every tool I need to be one of your go-to mediators. If you are looking for someone to put forth every effort into your mediation, let’s work together. If not, perhaps we need a night involving a pop punk cover band, margaritas, and Mexican food to convince you of my skills—the perfect recipe for epiphanies.

Thanks for reading,

Vanessa

*There are excellent attorney-mediators in DFW area, however, the ones I have encountered are often too overpriced for my small business clients or are booked for months in advance.

***Disclaimer: This blog post does not and is not intended to constitute legal advice.

CFPB (Finally) Issues Guidance on Juneteenth Timing Issues

Thu, 12 Aug 2021 05:58:37 GMT

On August 5, 2021, the CFPB finally published guidance addressing the rescission and TRID closing timeline issues resulting from the recently created Juneteenth National Independence Day. In sum, the CFPB clarified that it will not penalize mortgage lenders that did not adjust some time-sensitive borrower protections for Juneteenth, noting that the new holiday left the industry “unsure of how to treat the day for purposes of regulatory compliance.”

Background . On June 17, 2021, President Biden signed a bill to create a new federal holiday to be celebrated annually on June 19th: Juneteenth National Independence Day. The last-minute creation of this new federal holiday created compliance concerns under Regulation Z, affecting rescission periods and TRID closing timelines.

Regulation Z has a specific definition of “business day” that excludes federal holidays for the calculation of certain time periods. These time periods include the required rescission periods and TRID waiting periods between receipt of a Closing Disclosure and closing. Regulation Z defines business days for these time periods as “all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. § 6103(a).” Because Saturday, June 19, 2021, became a federal holiday on such short notice, it became unclear how to treat this day with respect to recission periods and TRID timelines that had already begun on the date Juneteenth was signed into law.

The CFPB Interpretive Rule . In its Interpretive Rule , the CFPB states that it interprets the definition of “specific business day” to mean the “the version of the definition in effect when the relevant time period begins.” Accordingly, for the 2021 Juneteenth holiday, if the relevant time period began:

On or before June 17, 2021, then June 19 was a business day.
After June 17, 2021, then June 19 was a federal holiday.

Of course, the Interpretative Rule also explains that creditors are not prohibited from providing longer time periods than legally necessary.

The full text of the Interpretive Rule can be found at the following link: https://files.consumerfinance.gov/f/documents/cfpb_juneteenth-holiday_interpretive-rule_2021-08.pdf

US Court of Appeals Certifies an Important Question for the Texas Supreme Court Involving Home Equity Loans

Thu, 12 Sep 2019 15:53:00 GMT

On August 15, 2019, the United States Court of Appeals for the Fifth Circuit issued an opinion and certified a question to the Texas Supreme Court that could significantly impact lenders’ rights in the face of an uncured, defective Texas home equity loan. In Zepeda v. Federal Home Loan Mortgage Corporation ,[1] the Court examined whether a lender is entitled to either contractual or equitable subrogation where it failed to correct a curable constitutional defect to a home equity loan under Tex. Const. art XVI, § 50(a)(6).

What is Subrogation?

Subrogation is a legal doctrine that permits lenders to succeed to the rights of prior lenders in certain circumstances, and become entitled to the rights of the prior lender in relation to the debt. In general, subrogation works as follows: a homeowner receives a loan using the homestead as collateral. Thereafter, the homeowner takes out a second loan that pays off the balance of the first loan. The second lender is subrogated to the first lender’s rights under the original lien. In other words, “whatever the terms of the original loan agreement, at a minimum the second lender stands in the shoes of the first lender.”[2]

Texas law provides for both contractual and equitable subrogation. Contractual subrogation arises when “a person advances money to take up and extend indebtedness secured by a vendor’s lien on land under an agreement that such person shall stand in the place of the original holder of the indebtedness.”[3] Equitable subrogation is governed by the principals of equity and occurs whenever a subsequent lender pays off an existing debt.

The doctrine of equitable subrogation is vital for both homeowners and lenders: “Without equitable subrogation, lenders would be hesitant to refinance homestead property due to increased risk that they might be forced to forfeit their liens. The ability to refinance provides homeowners the flexibility to rearrange debt and avoid foreclosure.”[4]

The Facts in Zepeda

In Zepeda , the borrower obtained a home-equity loan under Section 50(a)(6) of the Texas Constitution. Per the agreement, the lender paid off the borrower’s existing purchase money loan secured by her homestead and released the remainder of the funds to her. The agreement also contained an express subrogation provision, which provided that the lender would be subrogated to all rights of any other holder of liens or debts outstanding before the agreement was executed.

Years after receiving the loan proceeds, the borrower notified the lender that the loan documents were constitutionally deficient because the lender’s signature did not appear on the acknowledgement of fair market value in violation of Section 50(a)(6)(Q)(ix). The lender did not sign the acknowledgment, and instead sent the borrower a new copy of the document with no explanation for the lack of signature. Freddie Mac thereafter acquired ownership of the loan and although received the notice to cure, did not attempt to cure it.

The borrower thereafter sued Freddie Mac to quiet title, claiming Freddie Mac did not possess a valid lien on her property due to its failure to cure the violation. In defense, Freddie Mac asserted that it was contractually and equitably subrogated to the original purchase-money lien that was paid off by the home equity loan. The district court ruled against Freddie Mac’s contractual subrogation defense because it did not have a valid contract, and denied its equitable subrogation defense because it found Freddie Mac negligent and unable to claim an equitable remedy.

Freddie Mac appealed the district Court’s decision to the Fifth Circuit.

The Zepeda Opinion and Certified Question

Unsurprisingly, the Fifth Circuit made quick work of Freddie Mac’s contractual subrogation argument. The Court cited longstanding Texas law that contractual subrogation requires a valid deed of trust. Because Freddie Mac failed to cure the constitutional deficiency, the deed of trust was invalid and precluded any contractual subrogation. As a result, the Court affirmed the district court’s ruling against Freddie Mac’s contractual subrogation defense.

Turning to the issue of equitable subrogation, the court noted that “[s]ince at least 1890, the Texas Supreme Court has applied equitable subrogation in the face of a constitutionally-invalid home-equity loan.”[5] The Court distinguished these cases, however, noting that none of them “involve a constitutional defect that is exclusively the fault of the lender, as is the case here.”[6] Accordingly, the Fifth Circuit certified the following question of law to the Supreme Court of Texas:

Is a lender entitled to equitable subrogation, where it failed to correct a curable constitutional defect in the loan documents under § 50 of the Texas Constitution?

Take-aways for Mortgage Lenders:

The answer to this question could affect lenders’ ability to rely on the equitable subrogation doctrine in the face of a constitutionally defective home equity loan. Nonetheless, prudent lenders should take affirmative steps to ensure that reliance on this doctrine is not necessary.

To avoid the constitutional defect at issue in Zepeda , lenders should implement procedures that ensure the fair-market value acknowledgement is signed by the lender with all home equity loans on the date of closing. We will continue to monitor this case and provide updates when the Supreme Court answers the question certified.

[1] 2019 WL 3820019 (5th Cir. August 15, 2019).

[2] Id . at 3 (citations omitted).

[3] Glasscock v. Travelers Ins. Co ., 113 S.W.2d 1005, 1009 (Tex. Civ. App. –Austin 1938, writ ref’d) (emphasis added). A valid deed of trust executed by both the borrower and lender establishes contractual subrogation. V ogel v. Veneman , 276 F.3d 729, 735 (5th Cir. 2002); Benchmark Bank v. Crowder , 919 S.W.2d 657, 662 (Tex. 1996) (holding a bank that advances money to pay taxes owing is contractually subrogated to the government’s tax lien).

[4] LaSalle Bank Nat’l Ass’n v. White , 246 S.W.3d 616, 620 (Tex. 2007) (citations omitted).

[5] Id . at 6 (citing Texas Land & Loan Co. v. Blalock , 76 Tex. 85, 13 S.W. 12, 13–14 (1890). See also, e.g., LaSalle Bank , 246 S.W.3d at 618 (applying equitable subrogation for a loan impermissibly secured on homestead property designated for agricultural use); Benchmark Bank , 919 S.W.2d at 662 (upholding equitable subrogation for a loan to pay taxes unconstitutionally secured by a lien on the homestead); Farm & Home Sav. & Loan Ass’n v. Martin , 126 Tex. 417, 88 S.W.2d 459, 469–70 (1935) (upholding equitable subrogation for a valid mechanic’s lien when the second loan was unconstitutional)).

[6] Id . at 6.

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Revived Putative Class Action Against Zillow Brings the Legality of its Co-Marketing Program Center Stage Again

Fri, 02 Aug 2019 18:43:00 GMT

By: Steven J. Kubik

A class action lawsuit against Zillow Group, Inc. (“Zillow”), its CEO, and CFO was recently revived despite the Court granting Zillow’s motion to dismiss a prior version of Plaintiffs’ complaint last year. After considering the second amended complaint, the Court denied Zillow’s most recent motion to dismiss. [1] Most notably, the Court ruled that based on the Plaintiffs’ allegations, Zillow designed its co-marketing program [2] to violate RESPA, and such violations were occurring. Mortgage lenders that permit the use of Zillow’s co-marketing program should take note and consider the on-going risk of doing so.

Brief History

Zillow has been plagued with legal woes over its co-marketing program for the past several years. In May 2017, Zillow announced that the CFPB was investigating their co-marketing program for compliance with the Real Estate Settlement Procedures Act (RESPA). This investigation quickly prompted a civil suit in the Western District of Washington against Zillow, its CEO, and CFO, alleging securities fraud claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5. Among other things, the shareholder-Plaintiffs alleged misstatements by Zillow regarding its co-marketing program’s compliance with RESPA and the CFPB’s investigation of the same.

In June 2018, Zillow announced that the CFPB “had completed its investigation [and] that it did not intend to take enforcement action.” [3] Thereafter, in October 2018, the Court in the civil suit granted Zillow’s motion to dismiss. The Court dismissed the action because Plaintiffs failed to satisfy the heightened pleading standards for securities fraud claims, but granted Plaintiffs leave to amend and file a second amended complaint. Naturally, Plaintiffs’ filed a second amended complaint attempting to cure its prior pleading defects, and Zillow filed another motion to dismiss. After considering Plaintiffs’ second amended complaint, the Court denied Zillow’s motion to dismiss and ruled that plaintiffs had largely cured the defects of the prior complaint.

The Court: Based on the Allegations, Zillow’s Designed its Co-Marketing Program to Violate RESPA

Plaintiffs’ claims primarily allege that Zillow’s co-marketing program was designed to allow participating real estate agents to refer mortgage business to participating lenders in violation of Section 8(a) of RESPA, 12 U.S.C. §§ 2601, 2607. [4] Plaintiffs further assert that Zillow made a series of misleading statements regarding Zillow’s legal compliance by failing to disclose the co-marketing program’s illegality, which caused Plaintiffs to purchase Zillow stock at artificially inflated prices.

Naturally, whether Zillow’s co-marketing program violates RESPA has taken center stage as crucial to determine whether Zillow made any misstatement/omission to Plaintiffs. Much to the chagrin of mortgage lenders, the Court ruled that the co-marketing agreement violates RESPA based on Plaintiffs’ allegations:

“Based on the [the second amended complaint], the Court can draw a reasonable inference that Zillow designed the co-marketing program to allow agents to provide referrals to lenders in violation of RESPA, and that such referrals were occurring.” [5]

The New Whistleblower Allegations .

Plaintiffs’ second amended complaint added factual allegations from two anonymous witnesses who worked at Zillow during the relevant time period. Below are some of the most noteworthy allegations from these witnesses’ affidavits:

These witnesses’ allegations were sufficient to support an “agreement or understanding for the referral of business” based on a “pattern or course of conduct” in violation of RESPA, the court said, with occurring violations based on the testimony of the anonymous witnesses regarding how participants were using the co-marketing program and the structure of the program itself. The court observed:

“The second amended complaint contains particularized facts alleging that there was an understanding between Zillow and the co-marketing participants, that in exchange for lenders paying a portion of agents’ advertising costs, lenders would receive mortgage referrals from their partnering agents. That arrangement – although not ostensibly based on an oral or written agreement – is evinced by participating agents allegedly providing, and Zillow allegedly tracking, referrals to participating lenders.” [7]

The Court Rejects Zillow’s Safe Harbor Defense.

The Court also concluded that Plaintiff’s allegations supported an inference that the co-marketing program did not fall within the RESPA “safe harbor” exception that would apply if the pricing was consistent with market value. In light of new allegations that the pricing structure of the co-marketing program was significantly more expensive than comparable product offerings, and statements from the anonymous witnesses describing advertisers’ excessive payments, the Court held that the second amended complaint included factual allegations sufficient to draw a “reasonable inference” that Zillow had designed the program in a way that fell outside RESPA’s safe harbor provision. [8]

Take-Away for Mortgage Lenders.

As a reminder, RESPA Section 8 grants borrowers a private cause of action for violations. Accordingly, it’s only a matter of time before borrowers lodge similar allegations involving Zillow’s co-marketing program against mortgage lenders in civil lawsuits. Lenders using Zillow’s co-marketing tools should consider abandoning the practice or finding alternatives unless Zillow implements additional safeguards. Zillow will continue to garner attention as this case is litigated, and with a current trial date set for January 11, 2021, a quick resolution is doubtful.

[1] I n re Zillow Group, Inc. Securities Litig. , No. C17-1387-JCC, 2019 WL 1755293 (W.D. Wash. Apr. 19, 2019), also available here (Docket No. 54, at 1).

[2] Zillow’s co-marketing program allows mortgage lenders to pay a percentage of real estate agents’ costs for placing a listing on Zillow, in exchange for the lender appearing in the listing.

[3] Zillow Group, Inc. Form 8-K dated June 22, 2018, available here .

[4] Section 8(a) of RESPA provides that “[n]o person shall give and no personal shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Id . § 2607(a). Simply put, Section 8(a) prohibits, in relevant part, paying for a referral (e.g., a mortgage lender paying/providing a thing of value to a real estate agent for the referral of a borrower).

[5] Docket No. 54, at 9-10.

[6] Id . at 6-7.

[7] Id . at 10.

[8] Id. at 14.

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CFPB Publishes FAQs on the TRID Rule

Thu, 07 Mar 2019 15:34:00 GMT

For the first time ever, the CFPB recently published four FAQs addressing the TILA-RESPA Integrated Disclosure rule or “TRID.” [1] These FAQs are welcomed by a mortgage industry that has urged the CFPB to issue written informal guidance for years. The FAQs bear resemblance to the FAQs that the Department of Housing and Urban Development previously issued to provide guidance on the 2010 Good Faith Estimate rule. This written informal guidance is perhaps a positive sign of the new leadership direction of the CFPB away from guidance in the form of webinars and oral statements. In any event, the FAQs provide useful information to dispel some confusion regarding the TRID rule.

FAQ 1—What Changes Require a Corrected CD and New Three-Day Waiting Period ?

Three of the four FAQs cover a source of frequent confusion for mortgage lenders: corrected Closing Disclosures and the three business-day waiting period before consummation. The first FAQ discusses the three types of changes that require a corrected Closing Disclosure to be received by a consumer at least three days before consummation. Specifically, a creditor must provide the consumer with a corrected Closing Disclosure at least 3 business days before consummation if any of the following occur after the initial Closing Disclosure is provided:

For other types of changes, the creditor may consummate the loan without waiting three business days after the consumer receives the corrected Closing Disclosure.

FAQ 2—If the APR Decreases, is a New Three-Day Waiting Period Triggered?

The second FAQ addresses whether a new 3-day waiting period is required when the APR decreases from the amount on the Initial Closing Disclosure. The FAQ states that the answer depends on whether the APR is considered accurate under Regulation Z (i.e., the difference between the disclosed APR and the actual APR for the loan is within an applicable tolerance in Regulation Z). [2] If accurate, the creditor must provide a corrected Closing Disclosure at or before consummation but a new three-business day waiting period is not required. An inaccurate APR, on the other hand, will trigger a new three-business day waiting period.

The FAQ also discusses a tolerance that might apply where there is an APR overstatement tied to an overstated finance charge, resulting in no additional 3-day waiting period. However, loan investors may not permit correspondent lenders to rely on this tolerance. Accordingly, prudent lenders should check with investors regarding their policy on this issue.

FAQ 3—Does the EGRRCPA affect the TRID timing requirements?

The third FAQ clarifies that Section 109(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “EGRRCPA” or “Act”) does not affect the timing requirements for providing a revised Closing Disclosure. Section 109(a) of the Act attempted to eliminate the need for another three-business day waiting period in cases where an APR becomes inaccurate due to a decrease in the APR after the initial Closing Disclosure is issued. However, the FAQ correctly notes that Section 109(a) did not create an exception to the TRID rule waiting period because Section 109(a) amends TILA Section 129(b), which only applies to high cost mortgage disclosures. The FAQ adds that TILA Section 128 sets forth a waiting period requirement for other credit transactions, and that such section was not amended by the Act.

It appears that Congress intended to modify the waiting period under the TRID rule, but made a technical error. Hopefully, the CFPB will act soon and propose a rule to reflect the intent of Congress by the Act. Such a rule should eliminate the need for a second three-business day waiting period when the APR becomes inaccurate because of a new offer of credit with a lower APR.

FAQ 4—Does using a model form create a safe harbor if the form does not reflect the recent TRID changes?

The last FAQ states that a creditor’s use of a model form will provide a safe harbor even if the model form does not reflect the changes to the regulatory text and commentary that were finalized in 2017. An appropriate model form must be properly completed with accurate content in order to meet the safe harbor for TRID Rule compliance.

[1] The TRID FAQs can be found here: https://www.consumerfinance.gov/policy-compliance/guidance/tila-respa-disclosure-rule/tila-respa-integrated-disclosure-faqs/ (last visited Mar. 6, 2019).

[2] In general, Section 226.22(a)(2) of Regulation Z states that if a disclosed APR for a regular loan transaction does not exceed the actual APR by more than 0.125 percentage point above or below, then the disclosed APR is considered accurate. For irregular transactions, such as loans with multiple advances, irregular payment periods, or irregular payment amounts, the disclosed APR is considered accurate under §226.22(a)(3) if it does not exceed the actual APR by more than 0.25 percentage point above or below. In addition to these tolerances, there are also tolerances in the rule for changes in APR due to over and under stated finance charges. For more information on the accuracy of APRs under Regulation Z, see https://www.consumercomplianceoutlook.org/2011/first-quarter/mortgage-disclosure-improvement-act/#footnotes (last visited March 6, 2019).

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Supreme Court Considers Whether FDCPA Applies to Nonjudicial Foreclosure

Thu, 10 Jan 2019 21:28:00 GMT

The U.S. Supreme Court is currently considering an important question affecting the mortgage industry: whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the Fair Debt Collection Practices Act (the “FDCPA”), 15 U.S.C. §§ 1692 et seq. [1] Whether entities conducting nonjudicial foreclosure proceedings are subject to the requirements of the FDCPA has divided U.S. Circuit Appellate Courts. The Supreme Court’s ruling on this issue could finally provide the mortgage industry and lower courts with guidance as to the proper steps to follow in nonjudicial foreclosure proceedings.

Background . The FDCPA applies to entities or persons that fall under its definition of “debt collector.” Under the FDCPA, a debt collector is any person engaged in any business “the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect … debts owed or due or asserted to be owed or due another.” [2] Thus, to qualify as a debt collector a person must be collecting a “debt.” The FDCPA generally defines debt as a consumer’s obligation to pay money. [3] These definitions of “debt” and “debt collector” are of paramount importance with respect to whether nonjudicial foreclosures fall within the purview of the FDCPA. Specifically, the courts have inconsistently determined whether nonjudicial foreclosures are attempts at collecting a debt.

Conflicting Circuit Court Decisions . The Supreme Court granted certiorari to review the decision of the Court of Appeals for the Tenth Circuit in Obduskey v. McCarthy . [4] In Obduskey , the Tenth Circuit ruled that entities engaged solely in nonjudicial foreclosure proceedings are not debt collectors under the FDCPA and, therefore, not subject to the requirements of the FDCPA. [5] The Tenth Circuit reasoned that the definition of debt in the FDCPA is synonymous with money. [6] It further reasoned that nonjudicial foreclosures are attempts to enforce security interests and not attempts to collect money from a debtor. [7] The Tenth Circuit reached this conclusion by noting that the general rule in nonjudicial foreclosures is that the sale does not preserve to the trustee a right to collect any deficiency in the loan amount against the debtor personally. [8] Therefore, according to the Tenth Circuit, because nonjudicial foreclosures allow the trustee to recover money or proceeds only from the sale of the property and not the debtor personally, it is not an attempt to collect a debt subject to the requirements of the FDCPA. [9] The Tenth Circuit aligned itself with the Ninth Circuit’s decision in Vien-Phuong Thi Ho v. ReconTrust Co., NA . [10] In Ho , the Ninth Circuit similarly reasoned and held that a trustee engaged in nonjudicial foreclosure proceedings under California law was not a debt collector subject to the requirements of the FDCPA. [11]

On the other hand, the Fourth and Sixth Circuit Courts of Appeals have ruled that nonjudicial foreclosure proceedings fall under the scope of the FDCPA as attempts to collect a debt. In Glazer v. Chase Home Finance LLC , [12] the Sixth Circuit found that mortgage foreclosure is an attempt to collect a debt because it reasoned that “every mortgage foreclosure, judicial or otherwise, is undertaken for the very purpose of obtaining payment on the underlying debt, either by persuasion … or compulsion …” [13] The Sixth Circuit aligned itself with the Fourth Circuit’s decision in Wilson v. Draper & Goldberg, P.L.L.C. [14] In Wilson , the Fourth Circuit reasoned that the enforcement of a security interest in foreclosure was just one method of collecting the underlying debt and, therefore, it fell under the scope of the FDCPA. [15] Neither the Sixth nor the Fourth Circuit, however, discussed the potential conflict between state law and the FDCPA arising from their interpretation that entities engaged in nonjudicial foreclosure actions are required to also comply with the FDCPA.

Why it Matters . The potential conflict between the FDCPA’s requirements and state nonjudicial foreclosure law creates significant tension between state and federal law. For example, the FDCPA generally prohibits debt collectors from communicating with third parties about the debt absent consent by the debtor. However, state nonjudicial foreclosure law may require the public filing of liens and trustee notices of sale. Further, under certain circumstances, the FDCPA prohibits communications with the debtor. However, many state nonjudicial foreclosure laws have strict requirements for notices that must be sent to the debtor before foreclosure may proceed and do not provide an exception to sending these notices if, for example, the debtor is represented by an attorney. These types of conflicts led the Ninth Circuit to observe that “a trustee could not comply with California law without violating the FDCPA.” [16]

The Supreme Court’s review of the Tenth Circuit’s decision in Obduskey is expected to provide lower courts with guidance as to the scope of the FDCPA in the area of mortgage foreclosure law. Importantly, the Supreme Court’s ruling could have a wide-ranging effect on the foreclosure actions that are instituted every day throughout states that have established systems for nonjudicial foreclosures.

[1] Obduskey v. McCarthy & Holthus LLP , 138 S. Ct. 2710 (Mem) (2018).

[2] 15 U.S.C. § 1692a(6).

[3] Id. at §1692a(5).

[4] 879 F.3d 1216 (10th Cir. 2018).

[5] Id. at 1221.

[6] Id .

[7] Id .

[8] Id .

[9] Id .

[10] 858 F.3d 568 (9th Cir. 2017).

[11] Id . at 571.

[12] 704 F.3d 453 (6th Cir. 2013).

[13] Id. at 461.

[14] 443 F.3d 373 (4th Cir. 2006).

[15] Id . at 376 (“We see no reason to make an exception to the [FDCPA] when the debt collector uses foreclosure instead of other methods.”).

[16] Ho , 858 F.3d at 575.

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CFPB Issues Final Policy on HMDA Data Addressing Privacy Concerns

Thu, 10 Jan 2019 21:23:00 GMT

On December 21, 2018, the CFPB issued final policy guidance concerning data collected under the HMDA rule that will be made publicly available in 2019. For background purposes, the CFPB comprehensively revised HMDA data collection/reporting requirements in 2015. These new data collection requirements became effective in 2018, with a reporting deadline of March 2019. The CFPB issued a proposed policy in September 2017 and, after reviewing public comments, the CFPB agreed to modify certain public data disclosures to address concerns regarding consumers’ privacy.

The following HMDA data collected in 2018 will be excluded from public disclosure under the final policy: (i) the Universal Loan Identifier or ULI; (ii) the application and action taken dates; (iii) the property address; (iv) the applicants’ credit scores; (v) the mortgage originator’s NMLS identifier; and (vi) the results generated by the automated underwriting system. The CFPB will also exclude free-form text fields which report data such as the applicant’s race or ethnicity. The Bureau further announced that it will publish data for (i) the applicants’ ages; (ii) the loan amount; and (iii) the number of units in the dwelling as ranges rather than specific values.

The CFPB stated that it intends to initiate in a separate notice-and-comment rulemaking in 2019 to incorporate any modifications of HMDA data into the text of Regulation C and will use the rulemaking to consider what HMDA data will be disclosed in future years. The CFPB’s announcement and the final policy are available here .

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Fannie and Freddie Issue Temporary Guidance on Government Shutdown

Thu, 10 Jan 2019 21:17:00 GMT

As you are probably aware, the US Government has been partially shutdown for over two weeks. On December 26, Fannie Mae issued temporary guidance related to loan origination and loan servicing during the government shut down in Lender Letter LL-2018-06, available here . On January 3, Freddie Mac also released guidance regarding loan origination and loan servicing during the government shutdown, available here .

Borrowers Employment Impacted by the Shutdown . According to the Fannie Mae, loans are not rendered ineligible for purchase solely because a borrower’s employment is directly impacted by the shutdown. Lenders must still, however, obtain a verbal verification of employment prior to the time of loan delivery in order for the loan to be eligible for sale to Fannie Mae. For military borrowers, the lender can use a Leave and Earnings Statement dated within 30 calendar days prior to the note date in lieu of a verbal verification. Additionally, among other things, if a borrower is furloughed on or after closing, the loan remains eligible for sale to Fannie so long as the lender has obtained all required documentation, including the verbal verification.

According to Freddie Mac, loans made to borrowers directly impacted by the government shutdown are still eligible for sale to Freddie Mac, even if the borrower is not receiving pay when the loan is delivered, so long as (i) all income and employment documentation requirements are met; (ii) the seller has no knowledge that the borrower will not return to work after the shutdown ends; and (iii) all other requirements of the “Seller’s Purchase Documents” are met.

Verifications of Information Impacted by the Shutdown . The letter also addresses government verifications of certain information. For IRS transcripts, Fannie Mae notes that Desktop Underwriter will continue to process tax transcript verification reports received prior to the shutdown, but will not able to access new verification reports for validation. As a result, requests for verification reports may remain in pending status until normal government operations resume. Further, Fannie Mae is temporarily allowing lenders to obtain verification of a borrower’s social security number, if needed, prior to the delivery of the loan. If the number cannot be verified prior to delivery, however, the loan will not be eligible for sale. Regarding flood insurance, Fannie Mae states that it will purchase loans secured by properties located in Special Flood Hazard Areas as long as the loans meet certain conditions, including proof the borrower has completed an application for the insurance and paid the initial premium. Lenders are obligated to have a process in place to identify any mortgaged properties that do not have proper evidence of active flood insurance, or where an increase in coverage or renewal of existing policies would have occurred during the shutdown, and to make sure coverage is obtained once the shutdown ends.

Freddie Mac also stated that Form 4506-T will continue to be signed by borrowers at closing, but these forms do not need to be processed by the IRS prior to closing. The Form 4506-T information should, however, be obtained as part of Sellers’ in-house control program. Freddie Mac flood insurance requirements will remain unchanged during the shutdown.

Loan Servicing . Finally, with respect to loan servicing, both Fannie and Freddie authorize servicers to offer forbearance plans to assist borrowers who cannot make their regular monthly payment as a result of the shutdown.

Lenders should look for additional guidance from Fannie and Freddie as the shutdown continues.

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MBA Members and Industry Groups Request Changes to Loan Originator Compensation Rule

Thu, 01 Nov 2018 10:09:00 GMT

Beginning the Conversation, but No Imminent Changes.

On October 17, 2018, nearly 250 member companies of the Mortgage Banker’s Association (MBA) submitted a letter (the “Letter”) [1] to the Bureau of Consumer Financial Protection (the “Bureau”) urging “the Bureau. . . to make changes to its Loan Originator Compensation (LO Comp) rule necessary to help consumers and reduce regulatory burden.” This Letter is the MBA’s latest correspondence with the Bureau on the LO Compensation issue. A very similar letter was sent on September 26, 2018, from the MBA and nearly a dozen industry trade groups.

The Letter requests three key changes to LO Comp rule to allow:

In its conclusion, the Letter also suggests that the Bureau should generally simplify the LO Comp rule by “specifying a clear ‘bright line’ list of impermissible compensation factors.” This would be a stark reversal from the current approach of providing a “short list of permissible factors” and a “complicated ‘proxy for a term’ analysis.”

Although the Letter begins the conversation, lenders considering aggressive approaches to their compensation plans should understand that any changes are not on the immediate horizon. The Bureau’s recently published Fall 2018 rulemaking agenda makes no note of any plans regarding the LO Comp rule. Indeed, when the Bureau’s Acting Director Mick Mulvaney addressed the MBA Annual Convention in Washington, D.C., on October 15, 2018, Mulvaney advised that the letter is being reviewed by staff, but that he had not actually seen the letter. Any changes to the LO Comp rule could be years down the road, and lenders should plan accordingly.

[1] A copy of the Letter can be found here .

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CFPB Publishes Annual High Cost Mortgage and QM Adjustments

Wed, 05 Sep 2018 10:04:00 GMT

The CFPB recently published a final rule regarding several annual adjustments it is required to make pursuant to Regulation Z. In relevant part, the adjustments reflect changes to the high cost mortgage thresholds under HOEPA, and the Qualified Mortgage (“QM”) points and fees limits under the ability to repay/QM provisions of Dodd-Frank. These changes will take effect January 1, 2019. A copy of the final rule may be found here .

2019 High Cost Mortgage Thresholds . Under the rule that implements the HOEPA points-and-fees coverage test, [1] the CFPB is required to annually adjust the total loan amount and fee thresholds that determine whether a transaction is a high cost mortgage. The final rule increases the current total loan amount threshold from $21,032 to $21,549, and the current points and fees threshold from $1,052 to $1,077. Accordingly, in 2019, a transaction will be a high-cost mortgage (1) if the total loan amount is $21,549 or more and the points and fees exceed 5 percent of the total loan amount, or (2) if the total loan amount is less than $21,549 and the points and fees exceed the lesser of $1,077 or 8 percent of the total loan amount.

2019 QM Loan Amount, Points, and Fee Limits . Pursuant to its ability to repay/QM rule, [2] the CFPB must annually adjust the points and fees limits that a loan cannot exceed to satisfy the requirements for a qualified mortgage. The CFPB must also annually adjust the related loan amount limits. Effective January 1, 2019, a covered transaction is a qualified mortgage if:

[1] 12 CFR 1026.32(a)(1)(ii).

[2] 12 CFR 1026.43(e)(3)(ii).

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Texas Department of Savings and Mortgage Lending to Stay Independent Agency

Wed, 05 Sep 2018 10:01:00 GMT

Background . Every twelve years, Texas law requires a periodic review of every state agency by the Sunset Advisory Commission. The primary purpose of the review is to determine whether the state agency should continue to exist, and if so, to make recommendations for increased agency efficiency and effectiveness.

The Recommendation . As many of you are likely aware, in April 2018, the Sunset Advisory Commission issued a report recommending the abolishment of the Texas Department of Savings and Mortgage Lending (“SML”) and its consolidation within the Texas Department of Banking. This recommendation was met by staunch public opposition by the Texas Mortgage Bankers Association, Texas Bankers Association, Independent Bankers Association of Texas, and the Texas Association of Builders (the Home Builders association).

The Decision . In a 9-3 vote, the Texas Sunset Commission reversed the recommendation of its staff and voted to continue the SML as a stand-alone agency. As a result, the SML should remain a separate agency for a least 12 more years, provided the Texas legislature ratifies the decision during the 2019 legislative session. This decision is welcomed news for the industry, which was overwhelmingly in support of maintaining the status quo of the SML.

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Supreme Court Holds Class Action Waivers in Arbitration Agreements Are Enforceable

Wed, 01 Aug 2018 15:33:00 GMT

In Epic Systems Corp. v. Lewis the United States Supreme Court reviewed three circuit court cases involving employer-employee arbitration agreements. [1] In each case, the main issue was whether employees and employers should be allowed to agree that any dispute between them will be resolved through arbitration, or whether employees should be permitted to bring class actions no matter what they agreed to with their employers.

The Court held that the law was clear, and the Federal Arbitration Act required courts to enforce arbitration agreements – including the terms of an agreement that provides for individualized arbitration proceeding. The Epic Systems holding expands the scope of terms parties may include in arbitration agreements, and confirms that these agreements will be enforced according to their terms.

Mortgage Bankers can expect to see the decision in Epic Systems significantly affect wage and hour class actions filed by loan officers and underwriters. Wise employers should contact their counsel to ensure employment arbitration agreements are properly drafted to limit their exposure and subject class action claims to dismissal.

[1] Lewis v. Epic Sys. Corp ., 823 F.3d 1147, 1151 (7th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017) and rev’d, 138 S. Ct. 1612 (2018); Morris v. Ernst & Young, LLP , 834 F.3d 975, 979 (9th Cir. 2016), cert. granted, 137 S. Ct. 809, 196 L. Ed. 2d 595 (2017) and rev’d sub nom. Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612 (2018); Murphy Oil USA, Inc. v. N.L.R.B ., 808 F.3d 1013, 1015 (5th Cir. 2015), aff’d sub nom. Epic Sys. Corp. v. Lewis , 138 S. Ct. 1612 (2018).

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Dodd-Frank Reform Highlights for Mortgage Bankers

Wed, 01 Aug 2018 15:30:00 GMT

Congress recently passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), and on May 24, 2018, President Trump signed the Act into law. The Act is not a widespread repeal of Dodd-Frank, but it does provide some welcome regulatory relief to financial institutions and changes to federal law concerning consumer mortgages. Below is a summary of some of the Act’s notable provisions affecting mortgage bankers:

Qualified Mortgages . The Act provides a new category of qualified mortgages for insured depository institutions and insured credit unions with less than $10 billion in consolidated assets. A “qualified mortgage” or QM is a loan that is deemed to comply with the ability to repay requirements of the Truth in Lending Act (TILA), provided certain requirements are met. To fit within the new category, the loan cannot have an interest-only or negative amortization feature and must follow the prepayment penalty limitations under TILA. The institution must also consider and document the consumer’s debt, income, and financial resources, but does not need to follow Appendix Q of the ability to repay rule, and must keep the loan in portfolio (subject to limited exceptions).

HMDA Exemptions . Certain insured depository institutions and insured credit unions are also exempt from the Home Mortgage Disclosure Act (HMDA) reporting categories added by Dodd-Frank and the HMDA Rule. To qualify for the reporting exemption regarding either closed-end mortgages or home equity lines of credit, the institution must have originated fewer than 500 such loans in each of the preceding two calendar years. Notably, the reporting exemption does not apply if the institution received a rating of “needs to improve record of meeting community credit needs” in each of its most recent two Community Reinvestment Act examinations, or “substantial noncompliance in meeting community credit needs” on its most recent CRA examination.

Mortgage Originator Transitional Licenses . The Act amends the SAFE Act to provide for a 120-day transitional license for mortgage loan originators moving from a depository institution to a non-depository institution, or a state licensed lender in one state to the same or another state-licensed lender in another state. To obtain the transitional license, the loan originator must meet the following requirements:

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CFPB Finalizes Rule to Eliminate the “Black Hole” Issue

Tue, 01 May 2018 15:25:00 GMT

On Thursday, April 26, 2018, the Consumer Financial Protection Bureau (“CFPB”) announced its long-awaited final amendments to the TILA/RESPA Integrated Disclosure Rule (“TRID”) that aim to eliminate the “black hole” issue. [1] Currently, the “black hole” issue limits a creditor’s ability to reset fee tolerances with a revised Closing Disclosure more than four business days before closing. The final rule is effective June 1, 2018, and eliminates a problem that has continued to plague creditors and increase costs to originate mortgage loans.

The “Black Hole” Issue

By way of background, TRID requires creditors to provide consumers with good faith estimates of loan terms and closing costs on the Loan Estimate. An estimated closing cost is disclosed in good faith if the charge paid by the consumer does not exceed the amount disclosed beyond the permitted tolerances under the rule.

If a borrower requests a revision or if a valid “changed circumstance” [2] exists, creditors may use revised estimates to reset tolerances. In effect, the revised estimates are compared to the charges actually paid by the consumer at closing determine whether a cost was disclosed in good faith. Typically, a revised Loan Estimate is the disclosure used to reset tolerances, but a Closing Disclosure may also be used in certain circumstances.

With respect to timing, the rule requires creditors to provide the consumer with these revised estimates within three business days of the creditor receiving information sufficient to establish a changed circumstance. In addition, creditors may not provide a revised Loan Estimate on or after the date a Closing Disclosure is provided the consumer, and the consumer must receive any revised Loan Estimate no later than four business days prior to consummation. If there are less than four business days between the time the revised estimates must be provided and consummation, a creditor may provide the revised estimate on a Closing Disclosure. However, there is currently no similar provision in the rule expressly permitting creditors to use a Closing Disclosure to reset tolerances if there are four or more days between the time the revised estimates must be provided and consummation.

As a result, issues arise where creditors are unable to provide either a revised Loan Estimate (because the initial Closing Disclosure has been provided) or a corrected Closing Disclosure (because there are more than four days prior to consummation) to reset tolerances. This situation is referred to as the “black hole” issue in the rule. Currently, if a changed circumstance occurs in the “black hole” that increases charges subject to tolerances, creditors could be forced to absorb costs that would otherwise be born by consumers.

The Final Rule

The final rule eliminates the “black hole” issue by removing the four-business-day limit on using a Closing Disclosure to increase closing costs subject to tolerances. Accordingly, the rule will soon permit creditors to reset tolerances with either an initial or corrected Closing Disclosure regardless of the number of days before closing. Creditors must still provide a revised version of the Loan Estimate or Closing Disclosure reflecting the revised estimate within three business days of receiving information establishing that a valid changed circumstance has occurred.

Despite initial concerns that removing the timing restriction may result in creditors providing an initial Closing Disclosure very early in the origination process, the CFPB declined to impose additional restrictions on a creditor’s ability to reset tolerances with a Closing Disclosure.

With these amendments, creditors will soon gain the flexibility needed to revise the Closing Disclosure and add or increase legitimate fees to a transaction. This flexibility will benefit both the creditor and the consumer alike by avoiding increased prices to obtain mortgage loans.

[1] The Final Rule was published in the Federal Register on May 2, 2018, and can be found here .

[2] 12 C.F.R. § 1026.19(e)(3)(iv). Valid changed circumstances include: an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. Id . § 1026.19(e)(3)(iv)(A).

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Amendments to Texas Home Equity Lending Interpretations

Thu, 05 Apr 2018 15:07:00 GMT

Effective March 29, 2018, the Finance Commission of Texas and the Texas Credit Union Commission (the “Commissions”) adopted amendments to their home equity lending interpretations (the “Amended Interpretations”). [1] As a reminder, Section 50(u) of the Texas Constitution authorizes the legislature to delegate authority to interpret its home equity lending provisions to state agencies, and provides a safe harbor for lenders relying on such interpretations in effect. [2] The Legislature appointed the Commissions to issue these interpretations. [3]

The Amended Interpretations implement the recent changes to Texas home equity lending law in Senate Joint Resolution 60 (“SJR 60”), adopted by Texas voters during the November 7, 2017, election. The DMBA’s November 2017 version of this report discusses the then proposed, now effective changes adopted by SJR 60 in further detail. [4] In November 2017, the Commissions also published their original proposal for interpretations implementing SJR 60 for comment. In the final Amended Interpretations, the Commissions incorporated some important clarifications and changes to these originally proposed interpretations. Below is a summary of some of the most important Amended Interpretations affecting Texas lenders.

Clarifying the Timing of Notices for Refinances of Home Equity Loans as Non-Home Equity Loans .

Perhaps the most important of the Amended Interpretations clarifies timing requirements for providing the new notice required by Section 50(f)(2)(D). As you may recall, the changes from SJR 60 now permit the refinance of a seasoned Texas home equity loan as a non-home equity rate and term refinance. To do so, the notice in Section 50(f)(2)(D) must be provided to the owner within three business days of the application and at least twelve days before closing. This requirement was problematic because consumers often are not aware, and lenders do not discover that the existing loan is a home equity loan until after the title commitment is received more than three days after the application. The Amended Interpretation makes it clear the 50(f)(2)(D) notice must be provided within three days of when the owner modifies the application or submits a new application specifying to refinance a home equity loan as a non-home equity loan.

The Amended Interpretations also bring clarity to the three-day and twelve-day timing requirements for providing the (f)(2)(D) notice. Compliance with the three-day requirement will be presumed timely if the lender mails the disclosure to the owner within the required three business days—consistent with the deadline for providing the loan estimate under federal law. With respect to the twelve-day requirement, the notice must still be delivered to the owner twelve days before closing. The Amended Interpretations provide, however, that if the notice is mailed, a period of three calendar days (excluding Sundays and federal legal public holidays) creates a presumption of sufficient mailing and delivery.

Clarifying the Charges a Lender May Advance in an (f)(2) Refinance .

The Amended Interpretations clarify which charges a lender may advance as part of the principal balance in a refinance of a home equity loans as a non-home equity loan or (f)(2) refinance. Section 50(f)(2)(B) added by SJR 60 provides that for an (f)(2) refinance, the extension of credit may not include funds other than (i) funds advanced to refinance a debt described in subsections (a)(1) through (a)(7); or (ii) actual costs and reserves required by the lender to refinance the debt. The Commission’s originally proposed interpretations, however, limited the costs and fees a lender may roll into the principal balance to those the lender incurred . As you might expect, this would have been problematic because many closing costs are not fees incurred by the lender, but instead costs that the lender requires the borrower to incur or pay (e.g., an origination fee). Thankfully, the Amended Interpretations clarify that lenders may advance actual costs and fees required by the lender.

Other Interpretations .

The Amended Interpretations also provide guidance on how to comply with the two percent fee cap for home equity loans, and bring the Commissions’ interpretations in line with the other changes added SJR 60 (e.g., updating who is an authorized lender, removing the old limitations on HELOC advances, etc.). The full text of the Amended Interpretations can be found here (43 Tex. Reg. 1839).

[1] Specifically, the Commissions adopted interpretations affecting the following sections: §§153.1, 153.5, 153.14, 153.17, 153.84, and 153.86; adopted new §153.45; and adopted the repeal of §153.87. These Amended Interpretations are published in the March 23, 2018, issue of the Texas Register and can be found here .

[2] This safe harbor applies to the Commissions’ interpretations in effect provided that no Texas or US appellate courts hold otherwise. See Tex. Const. art. XVI, § 50 (u).

[3] Tex. Fin. Code 11.308; 15.413.

[4] A copy of the November 2017 version of this report discussing the Constitutional amendments in SJR 60 can be found here .

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PHH v. CFPB: RESPA Holding Reinstated and CFPB’s Structure Deemed Constitutional

Thu, 01 Mar 2018 15:02:00 GMT

On January 31, 2018, the U.S. Court of Appeals for the D.C. Circuit issued its en banc decision in PHH v. CFPB . [1] As a reminder to those following this long-awaited decision, the Court’s en banc review was granted to reconsider the Court’s three-judge panel ruling issued in October 2016. The en banc Court reinstated panel’s decision regarding RESPA, but rejected the panel’s conclusion that the structure of the CFPB is unconstitutional.

Background:

On October 11, 2016, a three-judge panel of the D.C. Circuit held that the structure of the CFPB is unconstitutional because it is headed by a single director who is removable only for cause. The decision also overturned the CFPB’s interpretation of Section 8 of RESPA, held that the Bureau’s attempt to retroactively apply its interpretation of RESPA to PHH in an enforcement proceeding violated due process, and determined that RESPA’s three-year statute of limitations applied to CFPB administrative proceedings. A more complete review of the panel’s ruling can be found here and here . The CFPB petitioned the Court for a rehearing en banc , and oral arguments were held before the en banc Court on May 24, 2017.

The Panel’s RESPA Ruling is Reinstated:

The Court’s en banc decision reinstates the panel’s prior ruling regarding RESPA. The panel had held that RESPA permits captive mortgage re-insurance arrangements if mortgage re-insurers are paid no more than the reasonable value of the services provided, consistent with HUD’s prior interpretation. In pursuing its action against PHH, the CFPB announced—for the first time—a new interpretation of RESPA under which captive mortgage re-insurance agreements were prohibited. The panel held that RESPA’s language unambiguously allows such captive re-insurance arrangements, and that the CFPB’s attempt to retroactively apply its new interpretation violated due process. The en banc Court’s decision approves of the panel’s due process analysis, and remands the case to the CFPB for further proceedings.

The panel had also rejected the CFPB’s contention that no statute of limitations applies to administrative enforcement of RESPA. That aspect of the panel’s decision is also reinstated by the en banc Court’s decision.

The CFPB Structure Ruled Constitutional

The en banc Court held that the CFPB’s structure is constitutional and that the for-cause limitation on the President’s removal authority is a permissible exercise of congressional authority. The panel previously held that the CFPB’s single-director-removable-only-for-cause structure was unconstitutional because, among other things, it prevented the President from exercising the Faithful Execution clause. The en banc Court determined that the “for cause” removal limitations were consistent with restrictions developed for other financial regulators to insulate them from political pressures. Further, the Court reasoned that the CFPB’s structure may, in fact, bolster accountability and was consistent with presidential oversight of other agencies that regulate industries. In other words, the Court held that the constitutional issue was not even close: “[w]ide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions.”

Take-aways:

Although the constitutionality of the CFPB took center stage in the panel’s October 2016 ruling, the importance of the en banc Court’s reinstatement of its RESPA holding cannot be understated. The Court appears to have resurrected the safe harbors in RESPA Section 8(c)(2), and may warrant industry members to take another look at their advertising and services agreements. Whether or not PHH will seek a review of the constitutional holding by the Supreme Court remains to be seen.

[1] A copy of the en banc Court’s decision can be found here: https://www.cadc.uscourts.gov/internet/opinions.nsf/B7623651686D60D585258226005405AC/$file/15-1177.pdf

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Mortgage Legal and Compliance Report—February 2018

Sat, 03 Feb 2018 14:41:00 GMT

The CFPB’s New Mission Statement: No More “Pushing the Envelope,” and Ending “Regulation by Enforcement,” says Mulvaney

On January 23, 2018, the acting CFPB Director, Mick Mulvaney, sent an email to staff redirecting the agency’s mission and focus. In the email, Mulvaney emphasized that the law mandates the enforcement of consumer protection laws and that, although things would be different under his leadership, the CFPB will continue to fulfill this mandate.

Mulvaney noted, however, that the CFPB will no longer “push the envelope” in pursuit of the agency’s mission. He commented that he did not see the CFPB as the “good guys” out to fight the “bad guys,” but instead the agency would treat both consumers and financial services companies fairly and equally. To that end, the CFPB will focus its enforcement efforts on “quantifiable and unavoidable harm to the consumer.” Where no such harm exists, the agency will not “go looking for excuses to bring lawsuits.”

As for regulation, there will be “more formal rulemaking on which financial institutions can rely, and less regulation by enforcement.” The CFPB will prioritize its efforts on debt collection because of the high number of consumer complaints on that issue.

Mulvaney’s mission statement can be found here: https://www.documentcloud.org/documents/4357880-Mulvaney-Memo.html

Texas Adopts Pre-Licensing Education Expiration Period

The Finance Commission of Texas recently adopted two new rules regarding pre-licensing education requirements for residential mortgage loan originators (“RMLOs”). The new rules require the following individuals to retake the 20 hours of pre-licensing education as required by the S.A.F.E. Mortgage Licensing Act:

See 7 Texas Administrative Code (“TAC”) §§ 2.107; 81.109. The purpose of these rules is to implement changes to Texas Finance Code § 180.056(h), which now authorizes the Finance Commission to set the expiration periods for pre-licensing education of RMLOs. The five-year expiration period under the new rules is the same time-period prescribed by the previous version of Texas Finance Code § 180.056(h), but the Commission indicated that it intends to consider a reduction to a 3-year expiration period in fall 2018.

Texas Amends the Definition of “Physical Office ”

The Finance Commission also recently amended the Texas Administrative Code and simplified the definition of “physical office” for residential mortgage loan companies and mortgage bankers. The amendments define “physical office” as “an actual office where the business of mortgage lending and/or the business of taking or soliciting residential mortgage loan applications are conducted.” See TAC §§ 80.2; 81.2. The amendments are not substantive but instead divide the existing definition into separate sections. In addition, the specific requirements for a “physical office” have been moved to separate sections. See 7 TAC §§ 80.206; 81.206. This new definition was effective beginning January 7, 2018.

The CFPB and Federal Agencies Adjust Civil Penalties for Inflation

The CFPB recently issued a final rule [1] to adjust civil penalties within its jurisdiction for inflation. The adjustments are required by the Federal Civil Penalties Inflation Adjustment Act of 1990 which, pursuant to the 2015 Adjustment Act, requires federal agencies to adjust the civil penalties within their jurisdiction annually, not later than January 15. A civil money penalty is a fine imposed by a federal agency as a result of misconduct.

The civil penalties adjusted by the CFPB include the Tier 1-3 penalties set forth in Section 1055 of Dodd-Frank, as well as the civil penalties in the Interstate Land Sales Full Disclosure Act, Real Estate Settlement Procedures Act, SAFE Act, and Truth in Lending Act. The new penalty amounts are below:

To obtain the new penalty amounts, the CFPB multiplied each penalty amount by the “cost-of-living adjustment” multiplier and rounded to the nearest dollar. For the 2018 annual adjustment, the multiplier used was 1.02041. These amounts are calculated “for each day during which such violation continues.” The new penalty amounts apply to civil penalties assessed after January 15, 2018.

In addition, the National Credit Union Administration (NCUA), [2] the Office of the Comptroller of the Currency (OCC), [3] the Federal Deposit Insurance Corporation (FDIC), [4] and the Federal Reserve [5] issued similar adjustment notices in the Federal Register, updating the maximum civil money penalty amount that may be imposed by each agency.

[1] The CFPB final rule is available here: https://www.gpo.gov/fdsys/pkg/FR-2018-01-12/pdf/2018-00399.pdf .

[2] The NCUA final rule is available here: https://www.gpo.gov/fdsys/pkg/FR-2018-01-16/pdf/2018-00488.pdf .

[3] The OCC final rule is available here: https://www.gpo.gov/fdsys/pkg/FR-2018-01-12/pdf/2018-00521.pdf .

[4] The FDIC final rule is available here: https://www.fdic.gov/news/board/2017/2017-12-19-notice-sum-b-fr.pdf .

[5] The Federal Reserve final rule is available here: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180112a1.pdf .

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Mortgage Legal and Compliance Report: January 2018

Thu, 04 Jan 2018 14:26:00 GMT

New Year, New Disclosures

Texas mortgage lenders have several new, noteworthy disclosures to provide borrowers in the new year. Effective January 7, 2018, the Texas Mortgage Company Disclosure is changing. The revised Texas Mortgage Company Disclosure replaces the current version found in section 80.200(a) of the Texas Administrative Code, and must be provided to loan applicants with their initial application by a residential mortgage loan originator sponsored by a Texas licensed residential mortgage company. The revised disclosure simplifies the current disclosure language, provides consistency with the Texas Mortgage Banker Disclosure in 7 TAC § 81.200(a), and clarifies that residential mortgage loan originators will be paid in accordance with Regulation Z. This new disclosure can be found here .

In addition, two new disclosures accompany the new Texas home equity lending constitutional amendments voted into law by Texas voters this past November. [1] First, there is a new section 50(g) or “12-day” disclosure that must be provided to borrowers at least 12 days before closing any home equity loan governed by section 50(a)(6) of the Texas Constitution. Originators with home equity borrowers in their pipeline must provide these new disclosures and wait at least 12 days before closing any home equity refinances in 2018. Second, a different and new disclosure must be provided by those originators wishing to take advantage of the new constitutional provisions permitting the refinance of a home equity loan as a non-home equity, rate and term refinance. This new disclosure, required by section 50(f)(2)(D), must be provided within three business days of a borrower’s application (similar to the LE) and at least 12 days before closing. [2]

CFPB Eases HMDA Concerns

The CFPB recently published a Public Statement regarding HMDA data collected in 2018 and its intentions to reconsider certain aspects of the HMDA rule, available here . Beginning on January 1, 2018, financial institutions will submit HMDA data collected in 2017 and beyond using the CFPB’s new online platform. The CFPB stated that it does not intend to require data re-submission unless data errors are material or assess penalties with respect to errors in data collected in 2018 and reported in 2019, and that any examinations of 2018 HMDA data will be diagnostic to help institutions identify compliance weaknesses and will credit good-faith compliance efforts. Furthermore, the CFPB announced it intends to open a rulemaking to reconsider various aspects of the 2015 HMDA rule, such as the institutional and transactional coverage tests and the rule’s discretionary data points. In a news release published the same day, the CFPB elaborated that this rule making may re-examine lending-activity criteria that determine whether institutions are required to report mortgage data; may look at adjusting the new requirements to report certain types of transactions; and may re-assess the additional information that the rule requires beyond the new data points specified under the Dodd-Frank Act.

The FDIC and OCC have also issued very similar statements with respect to how their examination staff will treat HMDA data, available here and here .

CFPB Updates Guide to TRID Disclosure Forms

The Consumer Financial Protection Bureau recently issued an updated version of the TILA-RESPA Integrated Disclosure (“TRID”) Guide to the Loan Estimate and Closing Disclosure forms . The revised Guide incorporates the changes to the TRID rule that were issued in July 2017 and published in the August 11, 2017 Federal Register.

[1] For a summary of these new amendments, review our November 2017 Legal and Compliance Update here .

[2] For a copy of these home equity disclosures, e-mail steven@kubiklawfirm.com

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Proposition 2, Home Equity Lending Proposed Constitutional Amendments

Wed, 01 Nov 2017 22:24:00 GMT

The Significant Changes, Issues, and Why the Vote Matters

Earlier this year, the Texas Legislature passed Senate Joint Resolution 60 (S.J.R. 60), proposing amendments to the provisions of the Texas Constitution that govern home equity lending (the “Amendments”). [1] On November 7, 2017, the voters must decide whether to approve these Amendments, which appear on the ballot as Proposition 2. This legal update addresses (i) the significant changes these Amendments propose, (ii) the issues and interpretive clarifications needed if the Amendments are approved, and (iii) why the vote on November 7, 2017, matters.

Significant Proposed Changes:

Important Issues and Interpretive Clarifications Needed if Proposition 2 Passes

Provided that the Amendments are approved by the voters, lenders need to be aware of certain issues and interpretive clarifications needed with respect to the implementation of these changes.

A 12-day Moratorium on Home Equity Lending . Perhaps most significantly, lenders should note the amendment of the 12-day notice required by Section 50(g) for home equity loans, and the 12-day notice required by subsection (f)(2)(D) for rate and term refinances of home equity loans. Because the effective date of the Amendments is January 1, 2018, there would be a twelve-day window (January 1, 2018 through January 12, 2018) during which home equity loans and rate and term refinances of home equity loans cannot close. [2]

Interpretive Clarifications Needed . If Proposition 2 passes, there are also several questions that will need to be answered. Fortunately, the Texas Constitution provides that the Texas Finance Commission and Texas Credit Union Commission (together, the “Commissions”) have authority to issue home equity lending interpretations that lenders may rely upon as a safe harbor, even if the interpretations are later deemed incorrect. [3] It is anticipated that the Commissions will issue new proposed interpretations, but final amendments will likely not be effective until March 2018 at the earliest. Lenders and their counsel will need to determine how to address this dilemma. If the Amendments are approved, below is a sample of some of the most important interpretive questions the Commissions will need to address:

The Vote on November 7, 2017 Matters

If passed, the Amendments will (i) provide consumers greater flexibility and access to homestead equity through lower loan amount home equity loans and removing the restriction for agricultural tax exemptions; (ii) provide interest savings to consumers by allowing seasoned home equity loans to be refinanced as non-home equity loans, which generally have lower interest rates; and (iii) eliminate the arbitrary 50% LTV limit on HELOC additional advances. Regardless of your position with respect to the Amendments, be sure to vote so that your voice is heard.

[1] The text of S.J.R. 60 may be found here: http://www.legis.state.tx.us/tlodocs/85R/billtext/pdf/SJ00060F.pdf#navpanes=0 (last visited November 11, 2017).

[2] See Op. Tex. Att’y Gen. No. DM-452 (1997) (opining on implementation questions after the amendment authorizing home equity lending in Texas in 1997) (“Before the amendment becomes effective . . . the provisions of the amendment referred to in the notice have no legal effect. Notice given before the effective date of the amendment is not notice “prescribed by” the amendment. Therefore, the amendment’s notice requirement is not satisfied if notice is given before the effective date of the amendment, and thus the twelve-day waiting period is not triggered by such a notice . . . the notice to borrowers prescribed by the amendment is not effective if given before the amendment’s effective date.”).

[3] Tex. Const. art XVI § 50(u).

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TRID Rule Amendments and the CFPB’s New Proposal to Address the Black Hole Issue

Tue, 01 Aug 2017 15:21:00 GMT

On July 7, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued amendments to the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (“TRID” or “Know Before You Owe”) rule. These changes come nearly a year after the CFPB published its proposed version of the amendments. In large part, the amendments finalize the CFPB’s proposals and adopt changes to the TRID rule to reflect informal guidance previously provided by the CFPB. The final amendments will become effective 60 days after publication in the Federal Register, but compliance will remain optional until October 1, 018. [1]

Most notably, however, the amendments did not finalize perhaps the CFPB’s most important proposal addressing the “black hole” issue on resetting fee tolerances. Instead, the CFPB kicked the proverbial can down the road and published a new proposal on the issue (the “New Proposal”). [2] This legal update summarizes the “black hole” issue and highlights the New Proposal.

The “Black Hole” Issue

By way of background, TRID requires creditors to provide consumers with good faith estimates of loan terms and closing costs on a Loan Estimate. An estimated closing cost is disclosed in good faith if the charge paid by the consumer does not exceed the amount disclosed beyond the permitted tolerances.

If a borrower requests a revision or if a valid “changed circumstance” [3] exists, creditors may use revised estimates to reset tolerances. In effect, the revised estimates are compared to the charges actually paid by the consumer to determine whether a cost was disclosed in good faith. Typically, a revised Loan Estimate is the disclosure used to reset tolerances, but a Closing Disclosure may also be used in certain circumstances.

With respect to timing, the rule requires creditors to provide the consumer with these revised estimates within three business days of the creditor receiving information sufficient to establish a changed circumstance. In addition, creditors may not provide a revised Loan Estimate on or after the date a Closing Disclosure is provided the consumer, and the consumer must receive any revised Loan Estimate no later than four business days prior to consummation. If there are less than four business days between the time the revised estimates must be provided and consummation, a creditor may provide the revised estimate on a Closing Disclosure. However, there is currently no similar provision in the rule that explicitly states creditors may use a Closing Disclosure to reset tolerances if there are four or more days between the time the revised estimates must be provided and consummation.

As a result, issues arise where creditors are unable to provide either a revised Loan Estimate (because the initial Closing Disclosure has been provided) or a corrected Closing Disclosure (because there are more than four days prior to consummation) to reset tolerances. This situation is referred to as the “black hole” issue in the rule. If a changed circumstance occurs in the “black hole” and that change increases charges subject to tolerances, creditors could confront a claim for a refund of the excess charges.

The New Proposal

The CFPB originally included a proposal regarding the “black hole” in its proposed TRID amendments issued in July 2016. As originally proposed, the existing TRID Commentary provision that permits the use of a Closing Disclosure to reset tolerances (section 1026.19(e)(4)(ii)-1) would remain unchanged, and a new Commentary provision would be added (section 1026.19(e)(4)(ii)-2). The proposed new Commentary provision appeared to retain the timing element of the existing provision that creates the “black hole” issue for an initial Closing Disclosure, but permitted the use of a corrected Closing Disclosure to reset tolerances without regard to whether the revised disclosure is received within four business days of consummation (as long as the corrected Closing Disclosure is provided within three business days of the established changed circumstance). Many industry members interpreted the proposal to effectively eliminate the “black hole” issue with regard to a corrected Closing Disclosure.

In the New Proposal, however, the CFPB explains that it never intended to remove the four-business-day timing requirement for resetting tolerances with a corrected Closing Disclosure. Rather, the CFPB merely intended to clarify that, if the conditions for using a Closing Disclosure to reset tolerances are met, including the timing element, then either an initial Closing Disclosure or a corrected Closing Disclosure could be used to reset tolerances.

Given the disconnect, the CFPB did not finalize the originally proposed amendment and issued the New Proposal instead. The New Proposal seeks to eliminate the “black hole” altogether by removing the four-business-day limit for resetting tolerances with either an initial or corrected Closing Disclosure. Specifically, it proposes that creditors may use either initial or corrected Closing Disclosures to reflect changes in costs for purposes of determining if an estimated closing cost was disclosed in good faith, regardless of when the Closing Disclosure is provided relative to consummation. Creditors will remain limited to resetting tolerances to the circumstances currently set forth in the TRID rule, and still would need to issue a corrected Closing Disclosure within three business days of learning of the changed circumstance.

In sum, even though lenders must continue to face the “black hole” for the time being, the New Proposal will hopefully close the door on the issue when finalized. It will be important for lenders to submit public comments and share their practices with the CFPB to assure them that the proposed change balances the interests of lenders and consumers, while also advancing compliance with the rule. Comments on the New Proposal are due 60 days after its publication in the Federal Register. [4]

[1] The full text of the final amendments can be found here: http://files.consumerfinance.gov/f/documents/201707_cfpb_Final-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf

[2] The full text of the New Proposal can be found here: http://files.consumerfinance.gov/f/documents/201707_cfpb_Proposed-Rule_Amendments-to-Federal-Mortgage-Disclosure-Requirements_TILA.pdf

[3] 12 C.F.R. § 1026.19(e)(3)(iv). Valid changed circumstances include: an extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction; information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or new information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. Id . § 1026.19(e)(3)(iv)(A).

[4] The CFPB seeks comment on several issues, including:

(1) the extent to which the current four-business-day timing element has prevented creditors from resetting tolerances;

(2) the average costs and nature of the costs involved when the timing element has prevented creditors from resetting tolerances; and

(3) the extent to which creditors are providing the initial Closing Disclosure so that it is received “substantially before the required three business days prior to consummation with terms and costs that are nearly certain to be revised.”

The CFPB also notes that it designed the Closing Disclosure to be the final disclosure of costs, and it is concerned about whether the New Proposal, if adopted, could lead to Closing Disclosures being issued early, particularly at a time when future cost revisions are nearly certain. Further, the CFPB seeks comment on whether it should limit the circumstances in which a creditor may use a corrected Closing Disclosure to reset tolerances, or limit the third-party fees and creditor fees that can be reset with a corrected Closing Disclosure.

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PHH v. CFPB: Full D.C. Circuit Holds Oral Argument in Rehearing

Mon, 05 Jun 2017 22:07:00 GMT

On May 24, 2017, the U.S. Court of Appeals for the D.C. Circuit, sitting en banc , heard oral arguments in the rehearing of PHH Corp., et al. v. Consumer Financial Protection Bureau ( “PHH” ). The constitutional issue took center stage as the parties argued whether the CFPB’s structure is consistent with Article II of the Constitution.

Background

This case began as a CFPB enforcement action under the Real Estate Settlement Procedures Act (“RESPA”), but has evolved into an existential dilemma for the CFPB. On October 11, 2016, a three-judge panel of the D.C. Circuit held that the structure of the CFPB is unconstitutional because it is headed by a single director who is removable only for cause. The decision also overturned the CFPB’s interpretation of Section 8 of RESPA, held that the Bureau’s attempt to retroactively apply its interpretation of RESPA to PHH in an enforcement proceeding violated due process, and determined that RESPA’s three-year statute of limitations applied to CFPB administrative proceedings. The CFPB petitioned the Court for a rehearing en banc , and the D.C. Circuit granted the request on February 16, 2017.

The Argument

The en banc hearing primarily focused on the Constitutional issue, and featured arguments from both parties and the U.S. Department of Justice (DOJ). The DOJ, which had originally supported the CFPB’s position in PHH under President Obama, switched sides after President Trump took office and appeared at oral argument as amicus curiae arguing against the CFPB.

Counsel for PHH argued that the sweeping powers and single-director structure of the CFPB violates Constitution by diminishing the President’s power to see that the laws are faithfully executed. The panel repeatedly questioned this argument in light of Supreme Court cases that have upheld the for-cause limitation on the President’s ability to fire FTC Commissioners ( Humphrey’s Executor v. United States, 295 U.S. 602 (1935)) and the appointment of a single independent counsel ( Morrison v. Olson , 487 U.S. 654 (1988)).

Attorneys for both PHH and the DOJ attempted to distinguish these cases. Specifically, they aimed to distinguish Humphrey’s Executor as limited to multimember agencies, and Morrison as involving an inferior officer with limited jurisdiction and tenure. They further argued that these precedents were narrow exceptions to constitutional principles and should not be extended to the CFPB Director.

In response, the CFPB’s attorney argued that the President’s authority to fire the Director for cause makes the Director sufficiently accountable under the Constitution. Several judges questioned this logic and expressed concern that such a principle could be extended to even protect the President’s cabinet members. The Court further questioned whether certain aspects of the Bureau’s structure, such as the broad scope of its powers and its freedom from the appropriations process, should be considered by the Court as factors in its constitutional analysis. The Bureau’s counsel replied that each of those factors added “zero” to the analysis. In its rebuttal, PHH argued that these factors were not zeros, and are significant enough to make the CFPB unconstitutional even if it was a multimember Commission.

Notably, the arguments involved very little discussion of the underlying RESPA and statute of limitation issues. This perhaps indicates that the Court is less inclined to revisit these issues, but on the other hand, the oral arguments did not examine several issues on which the Court requested briefing. For example, the oral arguments did not examine the parties’ briefing on whether the Court could avoid ruling on the constitutional issue altogether.

Take-away

A decision from the Court is not expected for months. While questions asked during oral argument can often provide insight into a judge’s thought process, these questions do not always coincide with how a judge will vote on a particular issue. That said, several judges certainly gave an impression that they did not view the CFPB as a structural anomaly in comparison to other independent agencies. Furthermore, several judges appeared concerned that the Court of Appeals was bound by Humphrey’s Executor and Morrison , and that the Supreme Court will need to resolve whether to overrule or limit these cases. Naturally, this case may still have a long road ahead. Regardless of the outcome, we will continue to monitor this case and provide regular updates.

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Bills that Mortgage Bankers Should Follow This Session

Tue, 04 Apr 2017 22:11:00 GMT

The 85 ^th Session of the Texas Legislature is well underway, and several bills have been filed with the potential to dramatically impact Texas mortgage bankers. Below is a synopsis of three noteworthy bills to follow. [1]

Home Equity Lending Reform—HJR 99 and SJR 60

If passed, House Joint Resolution 99 and its senate companion, Senate Joint Resolution 60 , would be the most significant changes to Texas home equity lending in 14 years. This bill not only has the support of the Texas Mortgage Bankers Association, but also the Texas Bankers Association, Independent Bankers Association of Texas, the Texas Association of Realtors, and the two credit union trade organizations. With all that support, this bill has the potential to move quickly. Here’s what it does:

Redefines What Is Included in the Fee Cap. The current 3% fee cap for home equity loans often has an unintended consequence of preventing lenders from making—and consumers from obtaining—home equity loans under $100,000. HJR 99 attempts to eliminate this problem by (i) reducing the fee cap from 3% to 2% and (ii) excluding the following charges from the calculation of the 2% fee cap: appraisal fees, survey fees, title premiums or title examination charges in lieu of a title policy. In addition, HJR 99 codifies the Texas Supreme Court precedent [2] that bona fide discount points are not among the fees included in the fee cap.

Cleans up the Definition of an Authorized Lender. Although the Texas Constitution authorizes depository institutions to make home equity loans, it is silent with respect to subsidiaries of depository institutions. HJR 99 makes it clear that subsidiaries of depository institutions are authorized lenders under Article XVI Section 50(a)(6) of the Texas Constitution. Furthermore, the bill substitutes the outdated term “mortgage broker,” with “mortgage banker or mortgage company.”

Permits a Rate and Term Refinance of a Seasoned Home Equity Loan. Current law only allows a refinance of a home equity loan with another home equity loan or reverse mortgage. These provisions are commonly known as the “once a home equity, always a home equity” rule. HJR 99 would allow the refinance of a home equity loan after one year as a traditional rate and term refinance—presumably, at a lower rate and with lower closing costs.

Other conditions must also be met to allow such a rate and term refinance of a home equity loan. The total refinanced amount added to all other debt securing the homestead may not exceed 80% of the value of the property. In addition, borrowers must be provided a notice within three (3) days of their application for the refinance. That notice will, among other things, inform the consumer (i) that they have the option of refinancing as a home equity loan or non-home equity loan; (ii) that non-home equity loans may be foreclosed upon default without court order; (iii) that the consumer will have personal liability for any deficiency, and (iv) that the non-home equity loan may have other terms that are prohibited in a home equity loan.

Eliminates the Prohibition for Agricultural Property . HJR 99 repeals the restriction on making home equity loans secured by agricultural property.

Repeals the 50% limitation for HELOC Future Advances. Current law limits future advances on home equity lines of credit so that the total indebtedness may not exceed 50% of the value of the secured homestead. This restriction for HELOCS has long puzzled lenders and borrowers because Texas law permits home equity loans up to 80% of total value of the property. HJR 99 repeals the 50% limitation for HELOC future advances.

Authorizing Electronic Notaries—HB 1217

Imagine a world where you and your spouse did not need to take off an entire day from work to close a mortgage. This bill could make that world a reality, and move the mortgage industry one step closer from a paper based system to an electronic document system. This bill provides the framework to allow the performance of remote, online notarial acts by an electronic notary public. Naturally, this has drawn national attention as a potential model for electronic notary legislation across the country. As you might expect, the mechanics of this bill are complex and require an extensive credentialing and identity proofing process to prevent fraud. It will be interesting to watch whether this bill gains any traction this legislative session, but the future may be closer than you think.

Notice Requirements for Tax Lien Transfer Loans—HB 2832 and SB1397

These bills would require notice be provided to a mortgage lender before a property owner may take out a property tax lien transfer loan. Current law permits a property owner who is delinquent in paying their property taxes to take out a property tax lien transfer loan without notice to their mortgage lender. Tax liens on real property take priority over all other liens. Accordingly, tax lien lenders are currently permitted to step in front of the mortgage lienholder’s property interest without any notice to the lender. These bills would provide mortgage lenders an opportunity to work with the home owner to avoid both an impairment of their property rights, and the added fees and interest due to a tax lien lender.

[1] For more information regarding how to follow a bill through the Texas Legislature, visit : How to Follow a Bill Using TLO , http://www.capitol.state.tx.us/Resources/FollowABill.aspx (last visited April 4, 2017).

[2] See Fin. Com’n of Texas v. Norwood , 418 S.W.3d 566, 596 (Tex. 2013) (“[T]rue discount points are not fees ‘necessary to originate, evaluate, maintain, record, insure, or service’ but are an option available to the borrower and thus not subject to the 3% cap.”).

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The Future of the CFPB and its Rulemaking Authority in 2017

Mon, 06 Feb 2017 21:01:00 GMT

By Steven J. Kubik

Last Friday, you may have seen some variation of the following headlines: “ Trump to Take Steps Rolling Back Financial Regulations ” or “ Trump Moves to Undo Dodd-Frank Law .” Whether you are excited or terrified by these headlines, you likely have questions regarding the changes that this new year and new Presidential administration will bring affecting the mortgage industry. This article won’t pretend to have all the answers, but will attempt address a few with respect to the Consumer Financial Protection Bureau (the “CFPB”) and its rulemaking authority.

Will President Trump attempt to eliminate the CFPB and Dodd-Frank altogether?

Doubtful. To date, this type of complete dissolution does not appear to be an official agenda item for either President Trump or Republican leadership. The headlines referenced above are largely due to Trump’s executive order entitled “Presidential Executive Order on Core Principles for Regulating the United States Financial System.” [1] The text of this order does not specifically mention the mortgage industry or Dodd-Frank. Instead, the order grants authority to the Treasury Department to conduct a sweeping review of existing laws and regulations to ensure they align with the administration’s goals.

That said, the slew of recent executive orders indicates that President Trump is determined to fulfill campaign promises. With respect to Dodd-Frank, the President has previously called it a “disaster” and plans to “do a big number on it.” As such, change is likely coming for the mortgage industry, but the extent of that change remains a mystery. To be sure, any complete disbandment of the CFPB or Dodd-Frank would require Congress to enact legislation and cannot be accomplished by executive order alone.

What will happen to the CFPB’s Director and the CFPB’s Structure?

The answer to this question largely depends on the result of the PHH Corp. v. Consumer Financial Protection Bureau case, which has created a buzz in the mortgage industry since the D.C. Circuit’s opinion last October. [2] In case you missed, a summary of the opinion can be found in two parts, here and here .

In short, the case involves fines assessed by the CFPB against PHH for RESPA violations. The opinion not only addresses the legitimacy of the fines assessed, but also holds that the CFPB’s single-director structure is unconstitutional. If upheld, the President will be able to remove the Director without cause.

The result of PHH , however, is stayed pending a final outcome in the case. In November 2016, the CFPB petitioned the D.C. Ciruit for en banc [3] review of the decision. The Court has not yet ruled on the CFPB’s petition for en banc review, and it is rumored that even if denied, the CFPB will petition the Supreme Court for review.

It is possible that the courts will move slower than the new Republican-controlled Congress. Congress may choose to amend Dodd-Frank and change the structure of the CFPB before the courts have a final word. Such legislation would make the CFPB’s appeal regarding its structure moot.

At least for now, Richard Cordray will stay in his position as sole-director of the CFPB. His term is set to expire July 2018.

If Congress transfers rulemaking authority away from the CFPB, who will administer, abandon, or change the final rules?

The Dodd-Frank Act provides a list of enumerated consumer laws for which the CFPB has rulemaking authority. Dodd-Frank transferred some of the CFPB’s current rulemaking authority away from other federal agencies. For example, the Fed previously held rulemaking authority for the Truth in Lending Act (“TILA”), and the U.S. Department of Housing and Urban Development (“HUD”) previously had rulemaking authority for the Real Estate Settlement Procedures Act (“RESPA”).

If Congress amends Dodd-Frank to remove one or more of these consumer laws from the CFPB’s rulemaking authority, the rulemaking authority would revert to its previous owner, unless Congress specifies another agency. The new (or former) owner would then have rulemaking authority going forward.

Some consumer laws had no rulemaking authority until it was granted to the CFPB under Dodd-Frank, such as the Fair Debt Collection Practices Act (“FDCPA”). For now, the CFPB has not yet issued any rules under the FDCPA. As such, there is currently no risk that regulations issued by the CFPB will no longer have an agency to administer them.

If Congress transfers rulemaking authority away from the CFPB, what will happen to pending rules?

There are several CFPB rules which have not yet taken effect, including the proposed TRID Amendments published on August 15, 2016. [4] When the CFPB took over its rulemaking authority, it did not seek to finalize pending rules from a previous agency owner without first issuing its own proposal. Indeed, any new (or former) owner of rulemaking authority will likely want to tailor any pending rules to its own preferences. It is unclear whether a new owner of rulemaking authority may simply finalize a rule as proposed by the CFPB without issuing a new federal Register notice and opening a new period for public comment. As a practical matter, if rulemaking authority is transferred away from the CFPB it is unlikely that any pending rules will be finalized—at least in their present form.

[1] See Presidential Executive Order on Core Principles for Regulating the United States Financial System (February 3, 2016), available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states (identifying the Administration’s “Core Principles” with respect to financial regulation and directing the Secretary of the Treasury to consult with the heads of certain agencies and report to the President within 120 days regarding which laws, treaties, regulations, guidance, reporting and recordkeeping requirements that inhibit these Core Principles).

[2] PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016), available at https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf (last visited Oct. 18, 2016).

[3] The D.C. Circuit’s opinion in PHH was decided by three of the Court’s judges. By seeking an en banc review, the CFPB is asking for the entire Court (all D.C. Circuit judges) to rehear the case.

[4] See Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z) (August 15, 2016), 81 FR 54318, available at https://www.federalregister.gov/documents/2016/08/15/2016-18426/amendments-to-federal-mortgage-disclosure-requirements-under-the-truth-in-lending-act-regulation-z

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The CFPB’s Evolving “Meaningful Attorney Involvement” Standard

Wed, 01 Feb 2017 18:12:00 GMT

By Steven J. Kubik

The CFPB recently entered a consent order (the “Order”) targeting consumer debt collection law firms and challenging an alleged lack of “meaningful attorney involvement” necessary in consumer debt collection actions.

Takeaway

While the Order sheds light on the CFPB’s expectations concerning what constitutes “meaningful involvement,” the standard remains an evolving one. One thing is clear–creditors and law firms should expect increased scrutiny regarding attorney involvement in consumer collection matters. Prudent practice calls for comprehensive and well documented attorney involvement from the beginning of collection efforts.

The Order Details

The order was issued against two Oklahoma-based debt collection law firms and their principal. It alleges [1] conduct that violates the Fair Debt Collection Practices Act (the “FDCPA”) and Fair Credit Reporting Act (the “FCRA”). Further, it requires the firms to pay $577,135 in restitution to consumers, change their business practices, and pay a $78,800 penalty to the CFPB’s Civil Penalty Fund.

Specifically, the Order alleges that the firms violated the FDCPA and FCRA as follows:

Misrepresentations Regarding Attorney Involvement. The firms allegedly sent demand letters on law firm letterhead including attorneys’ names when no attorney had reviewed the account documentation. Further, the firms allegedly stated on collection calls that they were calling from a law firm when no attorney had reviewed the file. According to the Order, this conduct misled consumers that the collection efforts were either from an attorney, that the firm’s attorneys were meaningfully involved in reviewing the Consumer’s case, or had reached a professional judgment that the demand for collection was warranted.

Notarizing Client Affidavits Without Verification. The firms obtained affidavits from clients to use in debt collection lawsuits against consumers. In some instances, the firms would receive non-notarized affidavits from clients and allegedly notarize the affidavit for the client without any verification of the signature. Accordingly, this conduct allegedly misrepresented that the affidavits had been verified and notarized in accordance with Oklahoma law.

Furnishing Information to Credit Reporting Agencies without Written Policies. The firms allegedly furnished information to credit reporting agencies without having written policies and procedures addressing the transmission of consumer information, as required under the FDCPA.

This Order is the CFPB’s third consent order since late 2015 targeting consumer collection law firms and the “meaningful attorney involvement” standard. In December 2015, the CFPB entered a consent order against a Georgia-based law firm based upon allegations that its attorneys did not review account documentation before filing suit. Instead, the firm used an automated and non-attorney staff to generate more than 130,000 lawsuit complaints in a two-year period signed by a single attorney. The CFPB entered a similar consent order in April 2016 with a New Jersey-based consumer debt collection law firm. The CFPB again challenged the firm’s over-reliance on automated software, non-attorney staff, and found that attorneys often spent less than several minutes reviewing each file before filing suit.

Notably, this Order expands on the CFPB’s meaningful attorney involvement standard by prescribing specific conduct that the law firms must follow:

[1] The Order was entered without admission of any facts or conclusions of law except those required for jurisdiction.

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[1] The Order was entered without admission of any facts or conclusions of law except those required for jurisdiction.

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D.C. Circuit Limits the CFPB’s Power—Part II

Thu, 27 Oct 2016 19:10:00 GMT

This is Part II of a two-part blog series examining the D.C. Circuit Court’s opinion in PHH Corp. v. Consumer Financial Protection Bureau, [1] issued on October 11, 2016. Part I provided background information and examined one holding from the Court’s decision—that the single-director structure of the CFPB [2] was unconstitutional. The Court addressed this constitutional issue by holding that the CFPB’s director is now subject to oversight and removable at will by the President—a remedy the Court feels will not affect the ongoing operations of the CFPB.

This post will review perhaps the more significant holdings from the Court’s opinion, including the Court’s rejection of (i) the CFPB’s new interpretation that RESPA Section 8 did not allow captive reinsurance arrangements, (ii) the CFPB’s attempt to apply its new interpretation against PHH retroactively, and (iii) the CFPB’s argument that relevant statutes of limitation do not apply to its administrative enforcement actions.

Holding No. 2—RESPA Section 8(c) Allows Captive Reinsurance Arrangements

As the D.C. Circuit viewed it, “the basic statutory question in this case [was] not a close call.” [3] The Court rejected the CFPB’s interpretation that RESPA Section 8 did not permit the captive reinsurance arrangements that PHH had engaged in for decades relying on HUD’s guidance. [4] The Court noted that, standing alone, Section 8(a) could possibly be construed to call into question mortgage insurers’ arrangements to purchase reinsurance from a lender affiliate. [5] Indeed, one of RESPA’s purposes was to eliminate “kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” [6] However, as the industry has long understood, Section 8(c) “carve[s] out a series of expansive exceptions, qualifications, and safe harbors related to Section 8(a).” [7] In relevant part, the Court explained that Section 8(c)(2) provides that “[n]othing in this section shall be construed as prohibiting . . . the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or four services actually performed . . . .” [8]

Accordingly, the D.C. Circuit confirmed what the industry had been told and understood for decades: “Section 8(c) permits captive reinsurance arrangements where mortgage insurers pay no more than reasonable market value for the reinsurance.” [9]

Holding No. 3—The CFPB’s ‘Gamesmanship’ in Retroactively Applying New Rules of Law Will Not Be Tolerated

Even if the CFPB had correctly interpreted RESPA Section 8, the Court made it clear that it took exception to the CFPB’s “gamesmanship” in retroactively applying its new interpretation. In addition to decades of HUD guidance, the Court noted that HUD even “adopted a rule, Regulation X, under which captive reinsurance arrangements were permitted so long as the insurer paid reasonable market value for the reinsurance.” [10] The CFPB not only provided a new interpretation in 2015 that “represented a complete about-face from the Federal Government’s longstanding prior interpretation” of the statute, but also “ retroactively appl[ied] that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.” [11] The Court held that by doing so, “CFPB violated bedrock due process principles” [12] —principles that, in the words of the Court, “are Rule of Law 101.” [13]

The Court perhaps summed it up best: “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation.” [14]

Holding No. 4—Statutes of Limitations Apply to CFPB Enforcement Actions

Finally, the Court had little patience for the CFPB’s position that statutes of limitation did not apply to its administrative proceedings. The D.C. Circuit rejected the CFPB’s arguments that the Dodd-Frank Act, and specifically RESPA, do not impose any statute of limitations “on CFPB enforcement actions brought in an administrative proceeding, as opposed to in court.” [15] Instead, the Court characterized the language of the statute at issue, 12 U.S.C. § 2614, as “straightforward,” “logical,” and “predicable,” held that it clearly imposes a three-year statute of limitations on CFPB administrative actions, and described the CFPB’s contrary position as “absurd.” [16]

[1] PHH Corp. v. Consumer Fin. Protec. Bureau , 15-1177, 2016 WL 5898801, at *35 (D.C. Cir. Oct. 11, 2016), available at https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf (last visited Oct. 18, 2016).

[2] Acronyms and abbreviations not otherwise defined herein will have the same meaning as in Part I.

[3] PHH Corp. , 2016 WL 5898801, at *30.

[4] Id . at *5, 29.

[5] See id. at *6.

[6] S ee 12 U.S.C. § 2601(b)(2); see also id. § 2607(a) (plaining prohibiting such practices).

[7] See PHH Corp. , 2016 WL 5898801, at *6.

[8] Id. (quoting 12 U.S.C. § 2607(c)(2)).

[9] Id. at *30.

[10] Id. at *31 (citing 24 C.F.R. § 3500.14(g)).

[11] Id. at *33-34.

[12] Id. at *30.

[13] Id . at *35.

[14] Id. at *35.

[15] Id. at *5, 37.

[16] See id. at *39-41.

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D.C. Circuit Limits the CFPB’s Power—Part I

Wed, 19 Oct 2016 20:52:00 GMT

Current CFPB Director Richard Cordray (AP Photos/Russell Contreras)

This is Part I of a two-part series of blog posts that will examine the D.C. Circuit’s recent opinion in PHH Corp. v. Consumer Financial Protection Bureau [1] . In PHH , the Court vacated the CFPB’s $109 million order against PHH for alleged violations of Section 8 of the Real Estate Settlement Procedures Act (“RESPA”) involving captive reinsurance arrangements.

Most notably, the Court held that the CFPB’s single-director structure is unconstitutional under the Separation of Powers Doctrine. As a “targeted remedy” that “will not affect the ongoing operations of the CFPB,” the Court recast the CFPB as an executive agency and provided that the President can now supervise, direct, and remove its Director at will.

The Court also ruled on the merits of the case, holding that:

Undoubtedly, PHH is a blow to the CFPB’s broad powers granted under the Dodd-Frank Act. Although the CFPB may seek certiorari to the Supreme Court, the decision will likely have a significant impact on future CFPB enforcement actions. The decision might also result in an amendment to Regulation X, RESPA’s implementing statute, in an effort to ban captive reinsurance arrangements altogether.

The remainder of this post will provide background information and examine one important holding from this decision—the constitutionality of the CFPB’s single-Director structure. Part II will examine other important holdings from this decision.

Background

Captive Reinsurance Arrangements

Mortgage lenders like PHH require certain homebuyers to obtain mortgage insurance. In exchange for monthly premiums, mortgage insurance protects lenders by covering a portion of the lenders’ losses if the homebuyer defaults on his/her mortgage. To mitigate their risk, mortgage insurers may also obtain mortgage re insurance. Mortgage reinsurance protects mortgage insurers the same way mortgage insurance protects lenders.

Consistent with common industry practice, PHH referred borrowers to mortgage insurers that used the reinsurance services of PHH’s wholly owned subsidiary, Atrium Insurance Corp. This type of pay-to-play arrangement is known as a “captive reinsurance arrangement.”

Section 8 of RESPA and HUD’s Interpretation

One of RESPA’s stated purposes is “the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” [2] In order to achieve this purpose, Section 8(a) of RESPA provides that “[n]o person shall give and no personal shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” [3] Simply put, Section 8(a) prohibits, in relevant part, paying for a referral (e.g., a mortgage insurer paying a lender for its referral of borrowers).

Section 8(c), however, carves out a series of expansive exceptions, qualifications, and safe harbors related to Section 8(a), including: “Nothing in this section shall be construed as prohibiting . . . (2) the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed . . . .” [4]

Before the CFPB was created in 2010, HUD repeatedly interpreted Section 8(c) to allow bona fide transactions between a lender and mortgage insurer, as long as the mortgage insurer did not pay the lender for a referral. As such, HUD interpreted Section 8(c) allow captive reinsurance arrangements as long as the mortgage insurer paid no more than reasonable market value for the reinsurance.

CFPB’s Formation and Structure

In 2010, Congress created the CFPB via the Dodd-Frank Act. Congress organized the CFPB under a single Director who was only removable for cause during his or her five-year term—departing from the historical model of multi-member, independent agencies. This single Director oversees the CFPB’s broad authority to enforce nineteen different consumer protection laws. In the words of the D.C. Circuit, “the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President.” [5]

Dodd-Frank also provided that the CFPB would take over enforcement of Section 8 from HUD. By regulation, the CFPB carried forward HUD’s rules, policy statements, and guidance, subject to any future changes by the CFPB.

CFPB v. PHH

In 2015, the CFPB initiated an administrative enforcement action against PHH and, for the first time, interpreted Section 8 to prohibit captive reinsurance agreements even where the mortgage insurers pay no more than the reasonable market value to the reinsurers. Further, the CFPB sanctioned PHH for previous actions that PHH took relying on HUD’s prior interpretation of Section 8, ordering PHH to pay $109 million in disgorgement and enjoining PHH from entering into future captive reinsurance arrangements. PHH petitioned the D.C. Circuit Court of Appeals for review of the CFPB’s order.

Holding No. 1—The CFPB’s Single-Director Structure is Unconstitutional

The bulk of the D.C. Circuit’s opinion addresses PHH’s constitutional challenge to the single-Director structure of the CFPB. PHH argued that an independent agency with a single Director removable only for cause violates Article II of the Constitution, which requires either (i) the agency operate as an executive agency, where the President may remove the Director at will, or (ii) the agency be structured as a multi-member commission. The Court agreed.

The Court recognized Congress’s power to create independent agencies, [6] or agencies whose officials are not subject to the control of the President, but noted that the structure of the CFPB was a historical anomaly:

The Court’s primary concern with this structure was a lack of checks and balances, and observed that traditional multi-member independent agencies better safeguard individual liberties. [8] Following Supreme Court separation of powers precedent that emphasizes the importance of historical practice, [9] the Court held that the single-Director structure of the CFPB was unconstitutional. As a remedy, the Court ordered that the “for-cause” provision of the CFPA must be severed from the rest of the statute, allowing the President to remove the Director “at will.” The Court made clear, however, that the CFPB will continue to operate as it has in the past, but will now be under the “ultimate supervision and direction of the President.”

By: Steven J. Kubik

[1] PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016), available at https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf (last visited Oct. 18, 2016).

[2] 12 U.S.C. § 2601(b)(2).

[3] Id . § 2607(a).

[4] Id . § 2607(c).

[5] PHH, No. 15-1177 at 27.

[6] Id . at 4 (citing Humphrey’s Executor v. United States , 295 U.S. 602 (1935).

[7] Id . at 34.

[8] Id . at 46 (“In short, the deliberative process and multiple viewpoints in a multi-member independent agency can help ensure that an agency does not wrongly bring an enforcement action or adopt rules that unduly infringe on individual liberty.”).

[9] Id . at 38-39 (citations omitted).

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