Last week’s News Flash alerted readers that a second federal appellate court has now invalidated a NLRB recess appointment as incompatible with the meaning of the phrase, “the Recess of the Senate” in the Recess Appointment Clause of the Constitution. The result in the Third Circuit case, NLRB v. New Vista Nursing & Rehabilitation, though identical to the D.C. Circuit’s earlier decision in NLRB v. Noel Canning, was based on different facts and relies on a different rationale.  (Our legal alert on New Vista discusses the differences between the two decisions)

            Nevertheless, the confluence of decisions by two federal appellate courts at the very time that the Senate is about to take up President Obama’s renomination of Richard Cordray to head the CFPB gives Senate Republicans little incentive to agree to his confirmation.  Mr. Cordray’s occupancy of the CFPB Director position, as is well-known to readers of this blog, is the result of a recess appointment made on the very same day as the NLRB recess appointments that were held unconstitutional in Noel Canning.  As a result, Mr. Cordray’s appointment is equally vulnerable to legal challenge, especially in the D.C. Circuit.

            With that possibility, and the potential ensuing chaos from such a legal challenge, hanging over the Bureau like the sword of Damocles, the refusal of Senate Democrats and the Obama Administration to negotiate some of the changes to the role, structure and funding of the agency sought by Senate Republicans seems needlessly to court disaster.  The only possibility that gives the Administration a reprieve is a a grant of certiorari and reversal of the D.C. Circuit’s decision in Noel Canning.  The other possibilities – denial of certiorari or affirmance of the D.C. Circuit’s decision – make the filing of a suit to challenge final CFPB action (such as a rulemaking or an enforcement order) based on the invalidity of Cordray’s appointment increasingly tempting for someone aggrieved by such action.  Moreover, the longer this drags on, the more likely it becomes that someone with unassailable standing to litigate (unlike, for example, the original State National Bank of Big Spring) will file such a challenge.  Indeed, even if the Supreme Court were to grant certiorari in Noel Canning before its summer recess, the earliest a decision could be expected would be near the end of 2013 – by which time, Mr. Cordray’s recess appointment would be about to expire anyway. 

                All of this uncertainty could be averted by a deal that permits Mr. Cordray’s confirmation by the Senate.  This would all but eliminate any incentive to challenge his recess appointment.  The problem is not that Mr. Cordray, individually, is unconfirmable – indeed, he appears to be a dedicated and extremely capable public servant.  What holds up his confirmation are structural issues, such as the desire of Senate Republicans to transform the CFPB from a one-person agency to a multi-member Board or Commission and to make it subject to the appropriations process.  The addition of the Third Circuit’s New Vista decision raises the recess appointment stakes significantly, and continued refusal by Senate Democrats and the Obama Administration to negotiate seems increasingly high risk. Invalidation of Mr. Cordray’s recess appointment – and the consequent throwing into limbo of many of the actions taken by the CFPB since then – is unlikely to be in the interests of the financial services industries, the government, or consumers. 

In its Semiannual Report to Congress for the six month period ending March 31, 2013, the Federal Reserve Board’s Office of the Inspector General (OIG) indicates that, during the next semiannual reporting period (which ends October 31, 2013), the OIG expects to complete its evaluation of the CFPB’s practice of having enforcement attorneys present during examinations and issue its report.  The OIG’s plans to conduct “an evaluation of the CFPB’s integration of enforcement attorneys into its examinations of banking and nonbanking institutions’ compliance with applicable consumer protection laws and regulations” had been included in its work plan updated as of February 22, 2013.

The semiannual report indicates that during the next semiannual reporting period, the OIG also plans to complete evaluations of and issue reports on the CFPB’s hiring process and the CFPB’s compliance with the Small Business Regulatory Enforcement Fairness Act (SBREFA).  Among other requirements, SBREFA requires the CFPB to convene a small business panel before issuing regulations that the CFPB director expects to have a significant impact on a substantial number of small business entities.  According to the report, the OIG expects to issue a report on the results of its evaluation of the CFPB’s supervision program for large banks and non-banks by the end of 2013. 

The report includes summaries of the OIG’s 2013 report on its security control review of the CFPB’s Consumer Response System (CRS) and the OIG’s 2012 report on its annual audit of the CFPB’s information security program.  Those reports found that the CFPB needed to strengthen the security controls for the CRS and also strengthen its information security program.  

The semiannual report also discusses a March 2013 OIG report on the OIG’s evaluation of the CFPB’s contract solicitation and selection process.  The OIG found that the CFPB had expedited some contracts based on urgent requests from program officials.  Because the OIG was unable to determine why the CFPB had expedited those contracts, the OIG comments that “opportunities exist to strengthen contract file documentation when the CFPB expedites the procurement process in response to urgent requests.”  It also comments that “opportunities exist” to strengthen the CFPB’s internal controls related to compliance with the Federal Acquisition Regulation in the area of contract solicitation and selection.

Based on a Reuters article quoting counsel for Noel Canning, Gary Lofland, I had previously indicated that the Respondent would not oppose certiorari in the case.  I have now confirmed that report by telephone conversation with Mr. Lofland, who indicates that he plans later this week to make a filing advising the Supreme Court that Respondent does not oppose the granting of certiorari.  At that point, presumably, the case will be ready to go to conference.

The CFPB announced earlier this week that it has established a “framework” with the Conference of State Bank Supervisors (CSBS)  for coordination among the CFPB and state regulators on supervision and enforcement matters.  The framework states that it is “intended to establish a process for coordinated federal/state consumer protection supervision and enforcement of entities providing consumer products or services that are subject to concurrent jurisdiction of the CFPB and one or more [state financial regulatory authorities].”  It further states that it is “not a binding agreement” and instead is “a guide for effective and efficient coordination and collaboration of supervisory and enforcement activities.” 

The framework implements a provision of the 2011 memorandum of understanding (MOU) between the CFPB and CSBS regarding information sharing in which the parties agreed to work together to efficiently use federal and state resources, “including through the development of a framework for coordinating supervisory activities.”  The MOU was supplemented by a 2012 Statement of Intent detailing the types of information the CFPB planned to share with state regulators and the cooperative actions the CFPB planned to take.  According to the CFPB’s press release, in agreeing to the framework,  the CSBS was “acting on behalf of state financial regulatory authorities.”  However, as the CSBS notes in its press release on the framework, the CFPB’s non-bank jurisdiction “spans an array of industries that fall outside of the jurisdiction of CSBS members.”  It is presumably for that reason that the framework contemplates that it, in addition to the CSBS, it will be signed by “State Banking Commissioners or Other Appropriate State Officials.” 

The framework includes the following: 

• State regulators are to form a “State Coordinating Committee” that is responsible for state coordination with the CFPB with regard to supervision of non-bank entities.
• The process for examinations of depository institutions (meaning insured state-chartered depository institutions or credit unions with more than $10 billion in assets or their affiliates) and non-banks includes provisions dealing with coordination of examination scheduling and development of a comprehensive supervisory plan for coordinated supervision that includes an examination plan.  Examination plans are to include a “single entry or information request letter, where appropriate.”
• The CFPB and state regulators are to “share information and consult one another” regarding corrective action “in all cases where permitted by applicable law,” with such sharing or consultation to occur when possible “in a reasonable time” before corrective action is taken.  However, the framework expressly provides that the CFPB and a state regulator do not need to have the other’s  approval before initiating an enforcement action. 

Despite the CFPB’s statements in its press release about its “strong partnership” with state regulators and the framework representing an expansion of its efforts to coordinate with state regulators, Bloomberg reports that the uncertainty surrounding Director Cordray’s recess appointment may be slowing the CFPB’s interactions with state regulators.  The report discusses comments by Greg Zoeller, the Indiana Attorney General, that the CFPB’s plans to coordinate enforcement with state AGs have stalled as a result of the uncertainty.  Mr. Zoeller is also reported to have said that such uncertainty is deterring state AGs from exercising their authority under the Dodd-Frank Act to enforce federal consumer financial laws.

Despite expectations fueled by statements from Senate Majority Leader Harry Reid’s office that he planned to hold a procedural vote on Richard Cordray’s nomination this week, it now appears the Senate will not vote on the nomination before the Memorial Day recess.  According to a report in Politico, Senator Reid would not specify when the vote would occur when he spoke to a group of reporters yesterday.  Senator Reid is reported to have said only that he was “going to make sure” there will be a vote on Mr. Cordray and was unwilling to answer questions about reports that he will seek to change the Senate’s filibuster rules. 

Among the possible reasons for the delay is the possibility that the Third Circuit’s New Vista decision last week casting further doubt on the constitutionality of Mr. Cordray’s recess appointment is causing the Obama Administration to reconsider whether its apparent refusal to negotiate a deal with Republicans is the right strategy.

Last week, the Solicitor General finally filed his brief expressing the views of the United States on whether the U.S. Supreme Court should grant the petition for certiorari pending in Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc.  (The Supreme Court invited the Solicitor General to file the brief in October 2012.)  The case challenges the validity of HUD’s interpretation that disparate impact can be used to establish liability under the Fair Housing Act (FHA), even if there is no discriminatory intent.  We have been closely following the developments in the case because of its potential implications for the validity of the CFPB’s position that disparate impact can be used to establish ECOA liability. 

Predictably, the Solicitor General’s brief opposes the petition for certiorari.  The brief argues that the question of whether disparate impact claims are available under the FHA does not warrant review because there is no conflict in the courts of appeals (11 of which, according to the Solicitor General, have held such claims are available) and HUD’s rule interpreting the FHA to allow disparate impact claims is entitled to deference and is reasonable.  It also argues that the Supreme Court does not need to grant certiorari to settle a disagreement among the courts of appeal about how disparate impact claims should be analyzed because HUD’s rule establishes a uniform framework.  Finally, the brief argues that the case is not the right vehicle for deciding the FHA issue because of its interlocutory posture and the petitioners’ failure to raise the questions presented by the certiorari petition in the district court or Third Circuit. 

It is commonplace for the party that is opposed to the Solicitor General’s position to file a  supplemental brief in response and we understand that the Township of Mount Holly plans to file a supplemental brief this week.  We do not expect the respondent/plaintiff to file a supplemental brief.  Once the Township files its supplemental brief, the court will be positioned to consider the petition for certiorari in conference.   

The Mt. Holly case is currently back in the district court, having been remanded by the Third Circuit for further factual development after the Third Circuit reversed the district court’s grant of summary judgment.  The Magistrate Judge has scheduled settlement conferences for early next month in which the Solicitor General will not be involved. 

Even if the petition for certiorari is granted, it is possible Mt. Holly will settle before the Supreme Court has a chance to rule on the merits, like City of St. Paul v. Magner did last year.  The Supreme Court had granted certiorari in City of St. Paul, which raised the same issue under the FHA, but the case settled under murky circumstances on the eve of oral argument.

The CFPB has issued final “clarifying and technical” amendments to its final mortgage escrow account rule dealing with the establishment of mandatory escrow accounts on higher-priced mortgage loans (HPML).  

The final escrow rule contains exemptions for certain creditors operating primarily in “rural” or “underserved” areas. Such creditors are also the subject of (1) a provision allowing balloon payment mortgages in the final ability-to-repay rule, (2) an exemption from the balloon payment prohibition on high-cost mortgages in the 2013 final HOEPA rule, and (3) an exemption from a requirement to obtain a second appraisal for certain HPMLs in the 2013 interagency final appraisals rule.  These rules rely on the criteria for “rural” and “underserved” areas in the final escrow rule. 

The final amendments clarify how to determine whether a county is considered “rural” or “underserved” for purposes of the escrow rule and three other rules.  Concurrently with the amendments, the CFPB released a final list of “rural” or “underserved” counties which, according to the CFPB, is identical to the preliminary list it issued in March 2013.  For purposes of the escrow rule and other relevant rules, the CFPB has indicated that creditors may rely on this list as a safe harbor to determine whether a county is “rural” or “underserved” for loans made from
June 1, 2013, through December 31, 2013. The CFPB plans to issue an official list for 2014 when the necessary data becomes available. 

The final amendments also include a temporary provision to keep in place existing requirements concerning the assessment of a consumer’s ability to repay an HPML and limitations on prepayment penalties for HPMLs.  The final escrow rule had removed the regulatory text containing these provisions for HPMLs. The Title XIV rules which become effective on
January 10, 2014 expanded these requirements and limitations to cover most mortgage loans.  The final amendments keep the existing requirements and limitations in place for HPMLs until  January 10, 2014. 

The CFPB describes the escrow rule amendments as “the first final rule in connection with our planned issuances to clarify and provide additional guidance about the mortgage rules we issued in January.”  The CFPB has also issued proposed clarifications to its ability to repay/qualified mortgage and servicing rules.  Because the final escrow rule is effective June 1, 2013, the CFPB gave priority to finalizing the escrow rule amendments.

In another mortgage-related development, on May 15, 2013, the CFPB posted videos on the mortgage rules it finalized in January 2013.  In March 2013, the CFPB said that it planned to publish plain-language guides to the regulations in both written and video form to assist smaller businesses with limited compliance staff.

The CFPB has announced the settlement of an enforcement action in which it was alleged that two affiliated business arrangements (ABAs) violated Section 8 of the Real Estate Settlement Procedures Act.  

The arrangements involved two mortgage origination companies created by a Texas homebuilder who owned one company  together with a bank and the other company together with a mortgage company.  The CFPB charged that, through the ABAs, the homebuilder received unlawful referral fees for mortgage loans that he or his homebuilding company referred to the bank or mortgage company.

According to the consent order, the referral fees in the ABA with the bank were passed back to the homebuilder through profit distributions and such distributions were not entitled to the ABA “safe harbor” because the ABA was a sham as described in HUD’s Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements.  The consent order stated that the referral fees in the ABA with the mortgage company were in the form of payments made to the homebuilding company by the mortgage company pursuant to a service agreement. 

The consent order prevents the homebuilder, his homebuilding company and another affiliated company from engaging in any real estate settlement service business other than the sale of homes or owning an interest in any entity providing such services for five years.  It also requires the homebuilder to pay disgorgement in the amount of $118,194.20, which according to the CFPB, represents the full amount of money he received since early 2010 from the allegedly unlawful arrangements.  

We find it interesting that, in seeking disgorgement, the CFPB appears to have relied on the remedies available under Dodd-Frank Section 1055 rather than RESPA.  (The consent order cites to Section 1055 rather than to RESPA.)  Disgorgement is one of the forms of relief the CFPB  is specifically authorized to  seek in enforcement actions it brings under a federal consumer financial law.  

The HUD 1996 Statement of Policy referenced in the consent order was issued as guidance on RESPA’s application to ABAs and discusses the factors HUD would consider when assessing whether an ABA is a bona fide provider of settlement services or a sham arrangement. Unless and until the CFPB acts to change it (and there has been no indication the CFPB intends to do so), the Statement of Policy remains in effect. The CFPB’s enforcement action, while alleging facts that if true did not come close to satisfying the Statement of Policy, should nevertheless serve as a reminder to companies involved in ABAs to periodically review their arrangements with counsel for Section 8 compliance.  While it is important for the documentation for ABAs to satisfy the Statement of Policy, it is equally important that ABAs actually be operating in accordance with the Statement of Policy. 

The CFPB’s enforcement action resulted from a referral from the FDIC, which separately fined the bank involved in one of the ABAs. Given that the facts alleged by the CFPB indicated a clear RESPA violation, we find it interesting that the CFPB did not impose any penalty in addition to ordering disgorgement. Last month, the CFPB announced the settlement of enforcement actions against four national mortgage insurers involving allegations that the insurers paid kickbacks to mortgage lenders through captive reinsurance arrangements in  violation of RESPA Section 8.  In those settlements, the CFPB imposed substantial penalties on the insurers.

We have been critical of the failure of the CFPB’s white paper on payday and deposit advance loans to address the very real benefits of payday loans or the question whether (and when) such benefits outweigh the costs.  Similar criticism was also voiced by the Community Financial Services Association of America (CFSA), a national trade organization for payday lenders, in a letter to the CFPB.  In its letter, the CFSA commented on the absence of “real world context” from the report and called upon the CFPB to develop an “understanding [of] the choices and consequences faced by those in need of short-term credit and the risks of driving people to higher-cost products, expensive penalties or less-regulated providers.”

Last week, during the public session of the meeting of the CFPB’s Consumer Advisory Board (CAB), it appears Director Cordray and the CAB heard a similar message from actual payday loan customers and other industry supporters.  According to a report in the May 17, 2013 American Banker, dozens of payday loan supporters wearing stickers that read “My Credit … My Decision” attended the public session.  Among the comments made by supporters was that payday loans are often a cheaper option than overdraft fees.  The CFPB was urged by a supporter not to “demonize” payday loans and a payday loan customer expressed gratitude for being able to obtain such loans.

The CAB was scheduled to hold a separate session devoted to payday loans during its meeting which was not open to the public.  Upon learning that the public would be excluded from that session, an attorney for the CFSA sent a letter to the CFPB asserting that the CFPB’s action violated the Federal Advisory Committee Act.

The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit has scheduled a hearing for tomorrow, May 21, on “Qualified Mortgages: Examining the Impact of the Ability to Repay Rule.” 

There will be one panel consisting of two witnesses from the CFPB.  The CFPB officials scheduled to appear are Peter Carroll, Assistant Director for Mortgage Markets, and Kelly Cochran, Assistant Director for Regulations.