Consumer Financial Protection Bureau

CFPB issues Advisory Opinion on contracts for deed

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On August 13, the Consumer Financial Protection Bureau (CFPB) issued an Advisory Opinion to remind all of us that contracts for deed (also called bonds for title, installment land contracts, land contracts, land sales contracts) on residential property are subject to the Truth in Lending Act (TILA), in the same manner as mortgage loans.

You can read the Advisory Opinion here and the accompanying press release here.  

The press release touts the action is intended to stop investors from setting borrowers up to fail. It states that the deals often have little oversight, and investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and extensive repairs, and at risk for losing their down payments and homes.

 The press release further argues that predatory lenders use contracts for deed to target low-income borrowers, particularly those in religious communities, and set them up to fail so the sellers can kick them out and repeat the process with a new family.

The houses are often sold at inflated prices, with high interest rates and balloon payments. The transactions often occur without the benefit of inspections required by mainstream lenders.

TILA applies only to creditors who make five or more loans per year, unless a particular loan is considered “high cost” credit. In that case, a single loan can trigger TILA. If TILA applies to a contract for deed:

  • The seller has a duty to access the buyer’s ability to repay;
  • The seller must provide interest rate and other disclosures required by TILA; and
  • In most cases, balloon payments are prohibited.

South Carolina real estate lawyers familiar with these issues have advised clients for years to avoid buying and selling residential real estate using contracts for deed. And the same lawyers have advised their fellow practitioners to avoid closing these transactions.

Be careful out there!

Supreme Court holds CFPB’s funding mechanism is constitutional

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The Consumer Financial Protection Bureau’s funding mechanism is constitutional, according to CFPB v. Community Financial Services Association, decided May 16.

Justice Clarence Thomas authored the 7-2 decision. Justices Samuel Alito and Neil Gorsuch dissented.

A payday lender trade association sued the CFPB in 2017, seeking to overturn a rule prohibiting debits from bank accounts and arguing that the CFPB and all its actions since 2010 were unconstitutional because of its funding structure.

The agency is housed inside the Federal Reserve and draws up to $600 million from the Federal Reserve annually. Funding was set up in this manner to insulate the CFPB from industry influence. Normal funding would include the regular appropriations process. Article 1, Section 9 of the Constitution (the Appropriations Clause) states that no money shall be withdrawn from the Treasury “but in the consequence of Appropriations made by Law.”

The association’s argument was that this deviation from the normal appropriations process gave the agency “perpetual” funding. The opinion held, “Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements.”

In addition to the CFPB, the Customs Service, Postal Service and revenue officers are all funded through non-annual, standing appropriations.

The dissent stated, “Unfortunately, today’s decision turns the Appropriations Clause into a minor vestige. The Court upholds a novel statutory scheme under which the powerful Consumer financial Protection Bureau (CFPB) may bankroll its own agenda without any congressional control or oversight.

From a practical perspective, I can’t imagine how difficult it would have been to undo the many investigations, rulings, and fines during the CFPB’s tenure. This decision holds that the Bureau’s actions stand.

CFPB highlights actions to combat mortgage servicers’ “junk fees”

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On April 24, the Consumer Financial Protection Bureau (CFPB) published an edition of its Supervisory Highlights that emphasizes the agency’s actions to combat “junk fees” charged by mortgage servicers. You can read the publication here.  

Examples of the illegal activities revealed by CFPB examinations included charging prohibited property inspection fees, sending deceptive notices to homeowners, and violating loss mitigation rules. The publication touts that in response to the agency’s findings, financial institutions refunded fees to borrowers and stopped illegal practices.

The agency also claims its examiners found some mortgage servicers failed to waive late fees and penalties that should have been waived because of COVID rules. Further, some servicers were cited for making late tax and insurance payments, causing borrowers to incur interest and penalties.

Last October, the agency announced its examination work from February to August of 2023 resulted in $140 million refunds to consumers for unlawful junk fees in the areas of bank account deposits, auto loan servicing, and international money transfers. Since that time, the agency states its work has resulted in an additional $120 million refunds to consumers in junk fees in the area of bank account deposits.

CFPB proposes overdraft fee limitation

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This news is only real estate adjacent, but it should be of interest to all of us who represent consumer clients who attempt to qualify for loans.

The Consumer Financial Protection Bureau issued a press release on January 17 proposing to rein in excessive overdraft fees charged by large financial institutions. The agency estimates this rule change would save consumers $3.5 billion or more per year.

You can read the press release here. The press release includes relevant attachments that include the rule, a fact sheet and other documents that should provide the information you need on this topic.

The Truth in Lending Act, enacted in 1968, generally requires lending institutions to disclose the cost of credit to consumer borrowers. But the Federal Reserve Board created an exemption for banks honoring checks when their depositor “inadvertently” overdrew their account.

Originally, overdrafts were infrequent, and overdraft fees were modest. In the 1990s and 2000s, with the rise of debit cards, large banks began raising fees and using the exemption to generate overdraft loans, creating quite the income stream.

The proposed rule would require large financial institutions to treat overdraft loans like credit cards, with all the related disclosure requirements. Alternatively, banks may charge a small fee in line with their costs. The CFPB suggests these fees may be as low as $3.

According to the press release, the agency took action in 2022 against three of the largest financial institutions to curb these fees. As a result, many banks began to voluntarily revise their overdraft policies. This proposed rule is a continuation of the agency’s efforts to control junk fees.

The CFPB is accepting comments on the proposed rule through April 1.

Congressional method for funding CFPB held unconstitutional

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A three-judge panel of the United States Fifth Circuit Court of Appeals ruled on October 19 that the Consumer Financial Protection Bureau’s funding structure is unconstitutional. *

Rather than receiving its funding through periodic Congressional appropriations, the CFPB is funded directly from the Federal Reserve, which is funded through bank assessments. This funding method was intended to remove some congressional influence on the bureau.

Most federal agencies receive annual appropriations from Congress that are determined each year through legislative negotiations. Many agencies have separate funding sources like fees and assessments collected from the entities they regulate. The arrangement, like CFPB’s, which provides for a continuous funding source, is common among financial regulatory agencies like the Federal Reserve, the FDIC, the Federal Housing Finance Agency, the National Credit Union Administration, and the Office of the Comptroller of the Currency.

Many commentators have suggested that this opinion will not stand because nothing in the Constitution prevents Congress from funding agencies in a variety of ways. The case is expected to be appealed to the full Fifth Circuit and after that to the Supreme Court. But while this holding stands, it renders all CFPB actions from its inception vulnerable to challenge.

*Community Financial Services Association of America, Ltd. v. CFPB

CFPB issues proposed rule to ban foreclosures until 2022

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The Consumer Financial Protection Bureau (CFPB) issued a notice on April 5 proposing an Amendment to Regulation X that would require a temporary COVID-19 emergency pre-foreclosure review period until December 31, 2021, for principal residences. This amendment would, in effect, stall foreclosures on principal residences until January of 2022. The press release, which can be read here, requests public comments on the proposal through May 10, 2021.

The press release states nearly three million borrowers are delinquent in mortgage payments and nearly 1.7 million will exit forbearance programs in September and the following months. The rule proposes to give these borrowers a chance to explore ways to resume making payments and to permit servicers to offer streamlined loan modification options to borrowers with COVID-related hardships.

Under current rules, borrowers must be 120 days delinquent before the foreclosure process can begin. Anticipating a wave of new foreclosures, the CFPB seeks to provide borrowers more time for the opportunity to be evaluated for loss mitigation.

Many provisions of the CARES Act apply only to federally backed mortgages, but the CFPB seeks, by this proposed rules change, to set a blanket standard across the mortgage industry.

CFPB issues a factsheet on title insurance disclosures

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Also updates disclosure FAQs

cfpb-logoThe Consumer Financial Protection Bureau (CFPB) has recently issued two documents that may help closing attorneys.

The first document is a factsheet on TRID title insurance disclosures. This document addresses differences between state disclosures and TRID disclosures for simultaneous issue rates. It also addresses the situation where the seller pays for title insurance.

The second document is an updated list of frequently asked questions (FAQs) on the TILA-RESPA Integrated Disclosures. The additions address seller paid costs, total payments on the closing disclosure, accounting for negative prepaid interest and whether a lender may require the consumer to sign and return the Loan Estimate and Closing Disclosure.

U. S. Supreme Court rules CFPB structure is unconstitutional

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CFPB building

The Supreme Court issued an order on Monday, June 29 holding that the structure of the Consumer Financial Protection Bureau is unconstitutional. But the agency has not been abolished.

In a 5-4 decision authored by Chief Justice John Roberts, the Court held that the agency run by a single director who can be fired by the President only for cause violates the separation of powers doctrine. The agency can be saved simply by striking the for-cause termination provision of the Dodd Frank Act.

There will be no immediate effect because the agency is currently being run by an acting director who has not been confirmed by the Senate. For this reason, the director can be fired by the President without case.

In the case, a California law firm alleged that an investigative demand issued by the CFPB is invalid on the grounds that the CFPB’s structure is unconstitutional.

Supreme Court to hear CFPB Constitutionality Challenge

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Seila Law, LLC v. Consumer Financial Protection Bureau likely to be heard by mid-2020

CFPB building

The United States Supreme Court has chosen a case to decide the constitutionality of the CFPB. The case is Seila Law LLC v. Consumer Financial Protection Bureau (U.S. Supreme Court 19-7). The announcement was made on Friday, December 27. The allegation in question is that the structure of the agency grants too much power to its director, in violation of the Constitution’s separation of powers doctrine.

Under the current structure, the director of the CFPB cannot be fired by the president absent “inefficiency, neglect of duty, or malfeasance in office.” The heads of other federal agencies may be removed at the pleasure of the president.

The order posted by the Court requested that both sides address the following question: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of separation of powers, can 12 U.S.C §5491(c)(3) be severed from the Dodd-Frank Act?”

The United States House of Representatives’ motion to file an amicus curiae brief because the Department of Justice has chosen not to defend the constitutionality of the agency.

Concern about the structure of the agency has been voiced since its inception based on the fact that such huge power has been placed in the hands of one individual director. The argument continues that the CFPB has more power than any agency ever created by Congress. While most federal agencies are controlled by commissions or by a director who serves at the pleasure of the President, the CFPB’s sole director is removable only for cause. Also, since all of the funding of the agency is not controlled by Congress, there is little legislative oversight.

In previous hearings, when the CFPB has been asked what the appropriate remedy should be if the structure of the agency is held to be unconstitutional, the CFPB has maintained that formative statute would have to be amended to allow the President to remove the director with or without cause.  Some have suggested that all of the actions of the CFPB might be suspect if its structure is held unconstitutional. Others have suggested that agency should be headed by a multi-person, bi-partisan commission rather than a single director for greater transparency and accountability.

If a decision in the case is announced in mid-2020, the presidential election could be affected since Sen. Elizabeth Warren’s role in creating the agency is a central pillar of her presidential bid.

Justice Brett Kavanaugh has made clear in a previous dissent that he believes the structure of the agency is unconstitutional.

Supreme Court to hear CFPB Challenge

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Seila Law, LLC v. Consumer Financial Protection Bureau likely to be heard by mid-2020

CFPB building

The United States Supreme Court announced on Friday, October 18, that it will hear a case challenging the constitutionality of the Consumer Financial Protection Bureau. The allegation in question is that the structure of the agency grants too much power to its director, in violation of the Constitution’s separation of powers doctrine.

Under the current structure, the director of the CFPB cannot be fired by the president absent “inefficiency, neglect of duty, or malfeasance in office.” The heads of other federal agencies may be removed at the pleasure of the president.

The order posted by the Court last Friday requested that both sides address whether the CFPB can remain in effect if its structure is found to be unconstitutional.

Concern about the structure of the agency has been voiced since its inception based on the fact that such huge power has been placed in the hands of one individual director. The argument continues that the CFPB has more power than any agency ever created by Congress. While most federal agencies are controlled by commissions or by a director who serves at the pleasure of the President, the CFPB’s sole director is removable only for cause. Also, since all of the funding of the agency is not controlled by Congress, there is little legislative oversight.

In previous hearings, when the CFPB has been asked what the appropriate remedy should be if the structure of the agency is held to be unconstitutional, the CFPB has maintained that formative statute would have to be amended to allow the President to remove the director with or without cause.  Some have suggested that all of the actions of the CFPB might be suspect if its structure is held unconstitutional. Others have suggested that agency should be headed by a multi-person, bi-partisan commission rather than a single director for greater transparency and accountability.

If a decision in the case is announced in mid-2020, the presidential election could be affected since Sen. Elizabeth Warren’s role in creating the agency is a central pillar of her presidential bid.

Justice Brett Kavanaugh has made clear in a previous dissent that he believes the structure of the agency is unconstitutional.