Constitutionality of CFPB upheld

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cfpb-logoThe D.C. Circuit Court of Appeals upheld the constitutionality of the Consumer Financial Protection Bureau (CFPB) in a case decided last week. This decision reverses the October 11, 2016 holding of a three-judge panel which ruled unanimously that the structure of the CFPB allowed its director to wield too much power.

The highly publicized case began when PHH Corp. was ordered by former CFPB Director Richard Cordray to pay $109 million in restitution resulting from illegal kickbacks to mortgage insurers pursuant to Section 8 of RESPA. An administrative law judge had ordered a $6 million penalty at the trial level, but former Director Cordray apparently wanted to set an example and ordered the “ill-gotten gains” to be disgorged. The trial court had limited the violations to loans that closed on or after July 21, 2008. Director Cordray applied the fines retroactively.

PHH brought suit, arguing that the CFPB is unconstitutional because the Director has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition stated, “Never before has so much power been consolidated in the hands of one individual, shielded from the President’s control and Congress’s power of the purse.” The petition argued that the Director is only removable for cause, distancing him from the power of the President, and that the agency is distanced from Congress’s power to refuse funding by allowing for funding directly from the Federal Reserve.

The lower Court agreed, writing, “Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency.” The lower Court removed the restriction that the Director can only be removed for cause, giving the President the power to remove the Director at will. The lower Court also reversed former Director Cordray’s retroactive applicability of fines.

The Court of Appeals upheld the constitutionality of the CFPB, preserving the single-director leadership and the independence of the agency. The ruling indicates the President can only fire the Director for cause and allows the current five-year terms to remain in place. Five-year terms will, of course, mean that directors of the agency may remain in place after the termination of the term of the president who appointed him or her.

The CFPB is largely the brain child of the Democratic Party, and Acting Director Mulvaney has taken steps to rein in its power since he was appointed by President Trump. The Court of Appeals ruling was mostly decided on ideological lines. One Republican appointee joined the Democratic appointed judges in upholding the CFPB’s structure.

The Court did rule in favor of PHH by rejecting the large penalty imposed by former Director Cordray. The decision requires that the penalty be reviewed again by the CFPB.

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Wells Fargo distributes new settlement agent memo

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Wells Fargo circulated a new Settlement Agent Communication on December 15, addressing several points that may be of interest to South Carolina closing attorneys. 

  • The Seller Closing Disclosure must be delivered to Wells Fargo prior to closing, and Wells’ performance reports of settlement agents will soon include proper receipt of the Seller CD.
  • Wells Fargo is adamant that the Borrower Closing Disclosure must be the form provided to the closing attorney by the lender. Wells will not tolerate substitutions or additions to the Borrower CD.
  • Closing attorneys are encouraged to communicate with the lender before, during and after closing to insure the accuracy of signing and disbursement dates on the borrower CD.
  • Closing attorneys are instructed to refrain from adding per diem interest charges in the payoff calculations of a Wells Fargo first mortgage when that mortgage is being refinanced with Wells. These payoffs will be net funded and will be the responsibility of the lender.
  • When a title insurance policy is delivered to the lender electronically, there is no need to also provide a paper copy.

The memo also contained a brief RESPA update indicating that despite the July 11 ruling against the CFPB by the D.C. Circuit Court of Appeals in the PHH Corp. v. CFPB case, Wells will continue to adhere to the 2015 bulletin distributed by the CFPB indicating Marketing Service Agreements are in disfavor.

CFPB Structure Held Unconstitutional in PHH Case

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Don’t get excited; this shouldn’t change much for SC dirt lawyers.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia ruled unanimously on October 11 that the structure of the Consumer Financial Protection Bureau allows its director to wield too much power.

This highly publicized case began when PHH Corp. was ordered by CFPB Director Richard Cordray to pay $109 million in restitution resulting from illegal kickbacks to mortgage insurers pursuant to Section 8 of RESPA. An administrative law judge had ordered a $6 million penalty at the trial level, but Director Cordray apparently wanted to set an example and ordered the “ill-gotten gains” to be disgorged. The trial court had limited the violations to loans that closed on or after July 21, 2008. Director Cordray applied the fines retroactively.

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PHH brought suit, arguing that the CFPB is unconstitutional because Director Cordray has the sole authority to issue final decisions, rendering the CFPB structure to be in violation of the separation of powers doctrine. The petition stated, “Never before has so much authority been consolidated in the hands of one individual, shielded from the President’s control and Congress’s power of the purse.” The petition argues that the Director is only removable for cause, distancing him from the power of the President, and is able to fund the agency from the Federal Reserve’s operating expenses, distancing him from Congress’s power to refuse funding.

The Court agreed. It wrote, “Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency.”

The restriction that the Director can only be removed “for cause” was severed, giving the President the power to remove the Director at will. This decision effectively makes the CFPB an agency of the Executive Branch rather than an independent agency.

The Court did not agree with Director Cordray imposing the huge fine retroactively. The Court explained:

“Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer’s direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet that’s precisely this case. Here, the CFPB is arguing that it has the authority to order PHH to pay $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged.”

It is not likely that this landmark decision will make any changes in our current closing practices. The Court stated specifically that the ongoing operations of the agency will not be affected. The Court vacated the CFPB’s order and remanded the case for further proceedings. We might also see an appeal. Regardless, the CFPB is still in charge of the closing process, and all the rules remain in place.

Dirt Lawyers: Beware of Marketing Services Agreements

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beware pumpkinsThe Consumer Financial Protection Bureau (CFPB) is scrutinizing Marketing Services Agreements (MSAs) in a way that appears to be contrary to decades of HUD guidance. In addition to a significant number of enforcement actions involving MSAs, the agency issued Compliance Bulletin 2015-05 on October 8 which casts doubt about whether the CFPB would ever approve an MSA.

CFPB Richard Cordray was quoted:  “We are deeply concerned about how marketing services agreements are undermining important consumer protections against kickbacks. Companies do not seem to be recognizing the extent of the risks posed by implementing and monitoring these agreements within the bounds of the law.”

The bulletin began with a seminar message: “The Bureau has received numerous inquiries and whistleblower tips from industry participants describing the harm that can stem from the use of MSAs, but has not received similar input suggesting the use of those agreements benefit either consumers or industry.”

The Bureau’s position appears to be that MSAs serve no useful purpose.

Let’s look at the background. First, the prohibition against kickbacks: Section 8(a) of RESPA prohibits giving or accepting “any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a party of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Second, the carve out that MSA participants have relied upon: Section 8(c)(2) provides “(n)othing in this section shall be construed as prohibiting the payment of bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

Based on years of HUD guidance and legal advice from industry authorities, many lenders, real estate agencies, law firms, title agencies and other providers have routinely entered into agreements to pay each other marketing fees. The entities often share office space as well as sophisticated marketing efforts.

The advice of HUD and the experts was, generally:

  • don’t tie the relationship or compensation to sales, referrals or productivity;
  • limit the services to marketing;
  • avoid exclusivity provisions;
  • value marketing services objectively. This requirement was often the sticking point because shared marketing campaigns are difficult to value. Some experts suggested hiring auditing or actuarial companies; and
  • track the services in the event proof is needed.

The bulletin suggested that the kickbacks and referral fees associated with MSAs may result in consumers paying higher prices for mortgages, and that the practice of steering business may indirectly undermine consumers’ ability to shop for mortgages.

Running afoul of the CFPB in this area has resulted in injunctive relief including bans on entering MSAs, bans on working in the mortgage industry for up to five years, and penalties totaling more than $75 million.

Wells Fargo, Bank of America and Prospect Mortgage have announced decisions to discontinue MSAs. The Mortgage Bankers Association, which had asked the CFPB for guidance on this topic, has now warned its members to take the bulletin very seriously because it appears to be a series of warnings rather than the requested guidance.

Because of the possibility of enormous potential liability, I urge South Carolina real estate lawyers to completely avoid MSAs in the current regulatory environment, at least until more guidance is provided either by the CFPB or court action.

Five Things Dirt Lawyers Need to Know Before August 1

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Prepare now for a smooth transition to the new CFPB regulations and forms

Our company has put together some general information about the CFPB regulations that become effective on August 1. I’m sharing a few tips with the letstalkdirtsc.com audience in an effort to assist with a smooth transition.

1 HandWhat transaction types are affected and exempt? The new rules and forms apply to most closed-end consumer credit transactions secured by real property. The following types of loans are affected:

  • Purchase money mortgages;
  • Refinances;
  • Mortgages on 25 acres or less;
  • Mortgages on vacant land;
  • Mortgages for construction purposes only; and
  • Mortgages on timeshares.

Consumer loans exempted from the new rules and forms are:

  • Reverse mortgages;
  • Home equity lines of credit (HELOCs);
  • Loans on chattel-dwelling/mobile homes only; and
  • Loans by creditors who originate less than five loans in a calendar year.

Creditors will be required to use a TILA disclosure and Good Faith Estimate (GFE), and closing attorneys will be required to use a 2010 HUD-1 Settlement Statement on the exempt loans.

Loans in progress (applications submitted prior to August 1, 2015) are not subject to the new rules or the new forms.

2 HandWhat are the new rules and forms? On November 20, 2013, the CFPB announced the completion of the new integrated mortgage disclosure forms along with their regulations (RESPA Regulation X and TILA Regulation Z) for the proper completion and timely delivery to the consumer.

The Loan Estimate – Currently, borrowers receive two forms from their lender at the beginning of the transaction: the GFE and initial TILA disclosure. For loan applications taken on or after August 1, the creditor will instead use a combined Loan Estimate form.

The Closing Disclosure – The HUD-1 Settlement Statement and the final TILA disclosure form have been combined into a single Closing Disclosure form. This new five-page form contains many loan terms and provisions in addition to the closing figures. Several earlier letstalkdirtsc.com blogs discussed which lenders that have announced they will prepare and deliver the Closing Disclosure. It appears that in all cases, closing attorneys will prepare the seller’s Closing Disclosure and a separate closing or disbursement statement to facilitate disbursement.

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How will the timing of a closing be impacted by Closing Disclosure delivery? The new rule requires borrowers to have three business days after receipt of the Closing Disclosure for review. The three-day review starts on the receipt of the form by the borrower. Absent some positive confirmation of receipt such as hand delivery, the form is “deemed received” three days after the delivery process is started (i.e., mailing). As a result, the combination of the delivery time period and the review time period results in six business days from mailing to closing.

After delivery of the initial Closing Disclosure, the following changes would require a re-disclosure and a new waiting period:

  • Increase of the APR by more than 1/8%;
  • Change in the loan program, for example, fixed rate to ARM; and
  • Addition of a pre-payment penalty.

Closing Disclosure Delivery Timeline Chart4 Hand

 

How will the communication of title and closing figures be handled? Lenders will continue to need accurate estimates of title and closing figures. Preparation of the Closing Disclosure will require a collaborative effort between lenders, closing attorneys and other vendors and may require fees to be submitted as early as two weeks prior to closing. Several lenders have announced that they will use electronic portals to send and receive information, eliminating the use of mail, e-mail and faxes between lenders and closing attorneys.

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How are title charges reflected on the new forms? The list of charges involving title insurance and closing activities must be grouped together and preceded by the word “Title”.

The CFPB requires that the full premium, not the discounted simultaneous issue premium, must be disclosed for the loan policy. The owner’s policy premium will be shown as “optional” and will be the total cost of the owner’s policy discounted by the cost of the loan policy and adding the simultaneous issue premium. Confusing?  Yes!

The line numbers have been removed from the HUD-1 form, and there are now seven fee areas:

  • Origination charges;
  • Services borrower did not shop for;
  • Services borrower did shop for;
  • Taxes and other government fees;
  • Pre-paids;
  • Initial escrow payment at closing; and
  • Other

Charges within each of these major groupings are listed alphabetically. Columns are provided to separate charges of the buyer, the seller, and others, as well as columns for payments both before and at closing.

Software and title insurance companies are doing extensive training in the form of seminars, webinars and written communications. If you intend to be a residential dirt lawyer after August 1, get yourself and your staff trained!

Five Things Real Estate Agents Need To Know Before August

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 Dirt lawyers: Educate your real estate agents!

Our company has developed resources to equip dirt lawyers to educate real estate agents about how the CFPB will impact them beginning August 1.  I’m sharing a few tips with the letstalkdirtsc.com audience because everyone will benefit if real estate agents are prepared.

This is a primer, a very basic beginning point. The CFPB will not significantly impact the day-to-day processing of sales, but buyers and sellers will look to real estate agents for general information about the new rules and forms, as well as the impact on the loan process and the closing. As the software companies complete their updates, everyone involved will be trained on the details of the Loan Estimates and Closing Disclosures.  For now, let’s give real estate agents the following information.

1They should be able to explain the Loan Estimate and Closing Disclosure before August 1. The Good Faith Estimate (GFE), a form required by the Real Estate Settlement Procedures Act (RESPA), and the initial Truth-in-Lending disclosure (TIL), a form required by the Truth-in-Lending Act (TILA) have been combined into a new form, the Loan Estimate. For loan applications taken on or after August 1, the three-page Loan Estimate will replace the GFE and the TIL and must be delivered within three business days of the application. The new five-page Closing Disclosure will replace the HUD-1 Settlement Statement and the final TILA form.

2The timing of a closing will be impacted by Closing Disclosure delivery.  The CFPB has determined that borrowers will be better served by having three days after receipt to review the Closing Disclosure prior to the closing. Absent a positive confirmation of receipt of the form (i.e., hand delivery), the form is “deemed received” three days after the delivery process is started (i.e., mailing). Several lenders have already announced that they will deliver the forms six days prior to closing.

Closing Disclosure Delivery Timeline Chart

3Title fees may need to be adjusted at closing and explained. The full premium for the lender’s title policy must be reflected on the Loan Estimate and the Closing Disclosure despite the fact that we have a “simultaneous issue” discount in our filed rates in South Carolina. The discount that title insurance companies in South Carolina offer lenders must be deducted from the charge for the owner’s policy. Also, the owner’s policy will be shown as “optional” on both documents. Closing attorneys may look to real estate agents to assist them in explaining the value of owner’s title insurance.

4Line numbers have been removed and there are now seven fee areas on the Closing Disclosure. The familiar line numbering on the HUD-1 will disappear. Instead, the fees and charges are placed on the Closing Disclosure in one of seven areas:

  1. Origination charges;
  2. Services borrower did not shop for;
  3. Services borrower did shop for;
  4. Taxes and other government fees;
  5. Pre-paids;
  6. Initial escrow payment at closing; and
  7. Other.

Individual charges within each of these major groupings are listed alphabetically. Columns are provided to separate charges owed by the buyer, seller and others, as well as columns for payments before and at closing.

5Clients will likely receive more than one Closing Disclosure. Since the buyer will receive the Closing Disclosure several days before the closing (and likely before the walk-through), the buyer will likely receive a new, adjusted Closing Disclosure at the closing. The CFPB has also mandated that changes in the financial numbers in any amount, must be re-disclosed, even post-closing.

Good luck educating your referral sources!

Don’t Expect Uniform Closing Procedures in 2015

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And … Bank of America makes a big announcement.

changes comingLenders will not collaborate on a standard and consistent process for closings under the new CFPB rules effective August 1, 2015, at least not according to Wells Fargo.

Wells Fargo’s December 10, 2014 Settlement Agent Communication answered nine FAQs from settlement agents, the first of which sought confirmation on whether to expect standard closing procedures from lenders. Wells responded with a “no,” and stated that each lender is accountable and must determine its own method for achieving compliance.

This mega lender had announced on September 24 that it will control the generation and delivery of the buyer/borrower Closing Disclosure (“CD”), the form that will replace the HUD-1 Settlement Statement. The stated rationale was that the new CD is governed by the Truth-in-Lending Act (“TILA”), not the Real Estate Settlement Procedures Act (RESPA), and the risks and penalties for lenders are more severe under TILA.

Bank of America announced on December 17 that it will follow suit by generating and delivering the buyer/borrower CD.  Both banks have indicated settlement agents will generate the seller’s CD. Other lenders have not announced whether they will follow this procedure. It is entirely possible that settlement agents (closing attorneys in South Carolina) will prepare the CDs for other lenders.

The December 10 memo did state that Wells will work closely with settlement agents to determine fees, prorations, and other content required for the CD and, importantly, Wells will not assume the responsibility for disbursing loans. This quote from the Communication provides some comfort with regard to Wells’ attitude about keeping local settlement agents involved in the closing process:

“The settlement agent is critical and continues to be responsible for executing the closing including document signing, notarization, disbursement of funds, document recordation and delivery of final documents post-closing.”

Also comforting was the promise of training plans for settlement agents in collaboration with American Land Title Association, title underwriters and other service providers. The plans are said to include many educational communications and an information guide.

Bank of America stated that it will use Closing Insight™, an industry tool developed by Real EC Technologies®. All documents, date and information will be exchanged through Closing Insight™, discontinuing the use of e-mail, fax and other document delivery methods.

Bank of America also indicated that the requirement for the buyer/borrower to receive the CD three business days prior to closing will intensify the need for the bank to work very closely with the settlement agent to schedule the details of the closing.

stay tunedFor more information about Real EC ® Technologies and Closing Insight™, Bank of America invited settlement agents to visit their website at www.bkfs.com/realec.  The December 17 memo indicated that many title and escrow production systems are working with RealEC® Technologies to enhance current integrations in support of Closing Insight™. The bank suggested that settlement agents reach out to their title and escrow production system provider directly.

Stay tuned!