Alston & Bird Consumer Finance Blog
In a November 10 client advisory, our Financial Services & Products Group explores the case law and academic research surrounding the implications of a President removing a Senate-confirmed department head before the end of their term.
You can read the client alert here.
A&B ABstract:
On October 7, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) rescinded Compliance Bulletin 2015-05, RESPA Compliance and Marketing Services Agreements (“Bulletin 2015-05”). In addition, the Bureau published Frequently Asked Questions (“RESPA FAQs”) on the Real Estate Settlement Procedures Act (“RESPA”) Section 8 topics in an effort to “provide clearer rules of the road and to promote a culture of compliance.”
Background on Bulletin 2015-05
The Bureau issued the Bulletin 2015-05 on October 8, 2015, under then-Director Richard Cordray, in an effort to remind participants in the mortgage industry of the prohibition on kickbacks and referral fees under RESPA and to describe “the substantial risks posed by entering into marketing services agreements” (“MSAs”). At the time, the Bureau characterized Bulletin 2015-05 as a nonbinding general statement of policy that merely articulated considerations relevant to the Bureau’s exercise of its supervisory and enforcement authority. Consequently, Bulletin 2015-05 was not issued pursuant to the notice and comment rulemaking requirements under the Administrative Procedures Act (5 U.S.C. § 553(b)).
Through Bulletin 2015-05, however, the Bureau presented an ostensibly novel interpretation of RESPA Section 8 to caution against MSAs altogether.
For example, RESPA Section 8(c)(2) expressly 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 for services actually performed.” Similarly, Regulation X, 12 CFR § 1024.14(g)(iv), provides that “Section 8 of RESPA permits . . . 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.” Moreover, HUD’s long-standing interpretation of Section 8(c)(2) provided that Section 8(c)(2) only allows “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or services actually performed,” i.e., permitting only that compensation which is reasonably related to the goods or facilities provided or services performed” (HUD RESPA Statement of Policy 2001-1).
In contrast, the Bureau’s prior interpretive position was that the opportunity to enter into an MSA by contract was itself a thing of value, regardless of whether the resulting agreement provided for payment for bona fide services at fair market value. The Bureau relied on this interpretive theory in issuing Bulletin 2015-05, which effectively took the position that if a person is in a position to receive referrals from a third party, they could not otherwise do business with that party because the CFPB would attribute compensation paid to that party to be for referrals, even if the person paid fair market value for services actually rendered, because, the CFPB believed MSAs “are designed to evade” RESPA, such that engaging in MSAs poses a “substantial legal and regulatory risk of violating RESPA,” even where the MSA is “technically compliant with the provisions of RESPA.”
A three-judge panel of the D.C. Circuit Court, in PHH Corp. v. CFPB, rejected the Bureau’s theory, as it unanimously overturned then-Director Cordray’s interpretation of RESPA, holding that tying arrangements are ubiquitous and that Section 8 permits captive reinsurance arrangements so long as mortgage insurers pay no more than reasonable market value for reinsurance. The Court noted that the “CFPB’s interpretation of Regulation X is a facially nonsensical reading of Regulation X,” since Regulation X makes clear that, if a provider “makes a payment at reasonable market value for services actually provided, that payment is not a payment for a referral.” (emphasis in original).
The inconsistency between the Bureau’s apparent misinterpretation of Section 8, as espoused in Bulletin 2015-05, and longstanding HUD interpretations (and the D.C. Circuit’s decision in PHH Corp.), led to calls for rescission of Bulletin 2015-05.
Bureau’s Rescission of Bulletin 2015-05
In rescinding Bulletin 2015-05, the Bureau acknowledged that the bulletin “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X.” Consistent with the rescission, Bulletin 2015-05 no longer has any force or effect. The Bureau noted that its rescission of Bulletin 2015-05 does not mean that MSAs are per se or presumptively legal. Rather, whether a particular MSA violates RESPA Section 8 will depend on specific facts and circumstances, including the details of how the MSA is structured and implemented. The Bureau made clear that MSAs remain subject to scrutiny, and that the CFPB remains committed to vigorous enforcement of RESPA Section 8.
RESPA FAQS
Contemporaneous with its rescission of Bulletin 2015-05, the Bureau issued FAQs pertaining to compliance with RESPA Section 8. The FAQs provide an overview of the provisions of RESPA Section 8 and respective Regulation X sections, and address the application of certain provisions to common scenarios described in Bureau inquiries involving gifts and promotional activities, and MSAs.
With respect to MSAs, the FAQs provide guidance on the following questions:
Notably, the FAQs provides that under RESPA Section 8(c)(2), if the MSA or conduct under the MSA reflects an agreement for the payment for bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed, the MSA or the conduct is not prohibited. Thus, RESPA Section 8 does not prohibit payments under MSAs if the purported marketing services are actually provided, and if the payments are reasonably related to the market value of the provided services only.
Takeaway
While rescission of Bulletin 2015-05 is likely to be welcomed by the industry and help to restore confidence in the viability of MSAs under the current legal landscape, it remains to be seen how the Bureau’s priorities on RESPA Section 8 enforcement will change. Companies should consider reviewing existing MSAs to ensure compliance with the Bureau’s new guidance. Moreover, it should be noted that the Bureau specifically designated its new FAQs as “compliance aids” as opposed to official interpretations. Under the Bureau’s policy statement on Compliance Aids issued earlier this year, the Bureau states only that it “does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.” An interpretive rule issued by the Bureau, to the contrary, affords market participants a clear legal safe harbor from liability under RESPA.
On October 6, Alston & Bird will host “CFPB: Current Enforcement Measures Related to Mortgage Servicing,” a webinar that will explore why there has been a discernible uptick in enforcement activity and how Director Kraninger’s continued focus on these activities affect Mortgage Servicing activities.
The panelists will provide perspective on the dynamics of the CFPB’s Supervision, Enforcement and Fair Lending Division (SEFL) and factors used to weigh supervision vs. enforcement. The CFPB indicates the finalized Collection Rule will be issued toward the end of the month, and our goal is to assist the industry in understanding and preparation.
Hear how servicers are impacted by CFPB enforcement:
Please RSVP here. For additional questions, contact Megan Belliveau at megan.belliveau@alston.com or 202.239.3134.
A&B ABstract: The FTC is seeking public comment on proposed changes to five FCRA rules aimed at clarifying that these rules, as promulgated by the FTC, apply only to motor vehicle dealers, as equivalent rules promulgated by the CFPB will apply to other entities.
The Federal Trade Commission (“FTC”) has announced it is seeking public comment on proposed changes to existing rules implementing parts of the Fair Credit Reporting Act (“FCRA”). According to the FTC, the proposed changes would clarify that five FCRA rules promulgated by the FTC apply only to motor vehicle dealers.
This clarification is needed because after the Dodd-Frank Act transferred to the Consumer Financial Protection Bureau (“CFPB”) the FTC’s rulemaking authority under certain portions of the FCRA, the FTC rescinded several of its FCRA rules, which had been replaced by rules issued by the CFPB. However, the FTC retained rulemaking authority for other rules to the extent the rules apply to motor vehicle dealers (as defined in the Dodd-Frank Act) that are predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.
In particular, the rule changes (each of which are addressed in separate Notices of Proposed Rule Making) would apply to the following five rules:
Each of these FTC rules, as revised, will be limited in scope to apply only in relation to motor vehicle dealers, subject to certain exceptions, and those persons and entities originally covered by these rules who are not motor vehicle dealers remain subject to similar rulemakings promulgated by the CFPB. For example, with regard to the Pre-screen Opt-Out Notice Rule, the proposed amendment would replace the general term “person” with the term “motor vehicle dealers,” as defined, thus narrowing the scope of the rule to entities that are “predominantly engaged in the sale and servicing of motor vehicles, excluding those dealers that directly extend credit to consumers and do not routinely assign the extensions of credit to an unaffiliated third party.” The proposed rule amendments also reinstate certain model notices that are otherwise identical to the CFPB’s model notices applicable to certain entities that are not motor vehicle dealers.
Additionally, the FTC is seeking comment on the effectiveness of these five rules including the following considerations:
Takeaways: These proposed amendments to the relevant FCRA rules will serve to clarify the distinction between the rules applicable to motor vehicle dealers – promulgated by the FTC – and rules applicable to other entities, which have been issued by the CFPB. Comments on these issues must be submitted to the FTC within 75 days from the date the notices of proposed rulemaking are published in the Federal Register. Instructions on how to file comments will be included in the notices published in the Federal Register.
A&B ABstract:
Recently, the Consumer Financial Protection Bureau (“CFPB”) brought its first ever redlining case against a non-depository institution. While the CFPB has yet to issue guidance regarding how it would evaluate a non-bank lender’s activities for potential redlining, the CFPB’s allegations in this case provide some insight to mortgage lenders regarding compliance expectations.
On July 15, 2020, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender engaged in the redlining of African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) in violation of the Equal Credit Opportunity Act (“ECOA”) and, in turn, the Consumer Financial Protection Act (“CFPA”).
The complaint does not assert any claims under the Fair Housing Act (“FHA”), as that fair lending statute is enforced by the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”). Typically, “redlining” refers to a specific form of discrimination whereby the lender provides unequal access to, or unequal terms of, credit because of the prohibited basis characteristics of the residents of the area in which the loan applicant resides or in which the residential property to be mortgaged is located.
According to the complaint, during the January 1, 2014 to December 31, 2017 time period, Townstone “engaged in unlawful redlining and acts or practices directed at prospective applicants that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago MSA.” In support of this claim, the CFPB asserts that Townstone’s weekly marketing radio shows and podcasts included statements about African Americans and predominantly African-American neighborhoods (using terms such as “scary” and “jungle”) that would discourage African-American prospective applicants from applying to Townstone for mortgage loans.
Apart from the allegations regarding Townstone’s radio shows and podcasts, the complaint does not point to any intentional conduct or effort by Townstone to discriminate against African Americans or African-American neighborhoods. Rather, the complaint arrives at a general conclusion that Townstone “made no effort to market directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target any marketing toward African-Americans and did not employ an African-American loan officer among its 17 loan officers in the Chicago MSA. As a result, Townstone received few applications from African-Americans and only a handful of applications from residents of majority African-American neighborhoods.
However, with respect to the allegation that Townstone did not specifically target any marketing toward African-Americans, the CFPB concedes that Townstone generated 90% of its applications from radio advertising on an AM radio station that “reached the entire Chicago MSA” and thus included residents of majority African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ any African-American loan officers, it is unclear how the CFPB expects that the race of a particular loan officer would have increased the number of applications from members from the same racial group, since Townstone’s business model relied upon leads received through radio advertising rather than referrals.
HUD and DOJ brought early redlining cases under a disparate treatment theory of discrimination, which requires evidence of a lender’s discriminatory motive or intent. More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s failure to market to, and infiltrate, geographic areas that have a strong minority presence.
As further support for its claim against Townstone, the CFPB cites to data comparing the loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of the loan applications received by Townstone were from African Americans, the average among peer lenders was 9.8%. Similarly, only between 1.4% and 2.3% of Townstone’s loan applications came from majority African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In further support of its claim, the CFPB argues that African Americans make up approximately 30% of the population of Chicago, though fails to note the Chicago MSA’s African-American population of approximately 16%.
Given this data, the complaint asserts that Townstone acted to meet the credit needs of majority-white neighborhoods in the Chicago MSA while avoiding the credit needs of majority African-American neighborhoods. As a result, the CFPB alleges that Townstone thereby discouraged prospective applicants from applying to Townstone for mortgage loans in those neighborhoods.
In response to the allegations, Townstone has published a fact sheet defending itself against the CFPB’s claim and noting its efforts to “reach as broad a geographic area as possible” by considering legitimate, non-discriminatory factors such as signal strength, and referencing other marketing measures specifically targeted at the African-American community. Further, Townstone has hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.
The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even though they are not subject to Community Reinvestment Act requirements regarding meeting the needs of an entire assessment area. Further, the complaint reminds lenders that their performance – measured primarily by number of loan applications received – will be compared against that of other lenders with similar size and loan origination volume. As such, lenders seeking to mitigate fair lending risk should evaluate the geographic distribution of their lending activity to determine whether, during a particular time period, they were significantly less likely to take loan applications from minority areas than non-minority areas.
More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim absent the traditional allegation that the lender sought to draw a “red line” around a particular demographic group or geographic area. Townstone’s radio advertising was not restricted to a particular demographic group or geographic area, nor could Townstone have altered the radio signals somehow to include or exclude particular groups or geographic areas. Further, Townstone had no control over the demographics of the AM radio station’s audience or that of particular radio shows.
Rather than alleging a traditional claim of redlining (i.e., actively avoiding a particular demographic group or geographic area), the CFPB seeks to hold Townstone liable for failing to conduct affirmative outreach and marketing to African-Americans. For example, the CFPB points out that Townstone had no African-American loan officers. Yet a lender’s failure to perform affirmative outreach to certain demographic groups or geographic areas, including by hiring loan officers of a particular demographic group, does not constitute redlining – nor are such actions required by ECOA.
The only allegation that Townstone redlined, in the traditional sense, is that its employees made statements that may have been intended to discourage African-American consumers from seeking a loan from Townstone. It is unclear whether these statements were intended to be commercial speech or merely ad hoc commentary regarding local current events.
Finally, it is worth noting that ECOA prohibits a creditor from discriminating against any “applicant,” which Regulation B clarifies to include prospective applicants. While the complaint alleges that Townstone discriminated against both prospective applicants and applicants, the CFPB makes no claim that Townstone’s actions had any effect on consumers who already had applied for a loan.
Ultimately, the complaint appears to signal the CFPB’s return to more aggressive and creative redlining enforcement under ECOA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid regulatory risk.