D.C. Circuit Court Finds the CFPB Misinterpreted Section 8 of RESPA and Violated Due Process with Retroactive Application

D.C. Circuit Court Finds the CFPB Misinterpreted Section 8 of RESPA and Violated Due Process with Retroactive ApplicationThe D.C. Circuit Court issued its long-awaited opinion in PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir., filed 2015) regarding the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) single-director structure, and the CFPB’s attempted enforcement action against PHH Corp. (PHH) for alleged violations of the Real Estate Settlement Procedures Act (RESPA). While the biggest headline coming out of that decision is that the CFPB’s structure, as designed by the Dodd-Frank Act, was determined to be unconstitutional, the Court also issued significant opinions regarding statutes of limitations in administrative actions, and the CFPB’s attempt to retroactively apply a novel interpretation of Section 8 of RESPA. With regard to the last point, the D.C. Circuit held that the CFPB’s interpretation of Section 8 of RESPA was inconsistent with the statute’s text, and that retroactively applying that interpretation violated due process because it was in direct conflict with prior guidance issued by the Department of Housing and Urban Development (HUD).

CFPB’s Interpretation of Section 8 of RESPA

In the context of this case, Section 8(a) of RESPA prohibits “payment by a mortgage insurer to a lender for the lender’s referral of a customer to the mortgage insurer.” However, section 8(c) provides that “[n]othing in [Section 8] 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” (12 U.S.C. § 2607(c)(2)). HUD, the federal agency responsible for enforcing RESPA prior to the CFPB’s formation, publicly interpreted this to mean that a “bona fide” payment is one that is consistent with the reasonable market value of the good or service.

The CFPB, on the other hand, took the opinion that a mortgage insurer’s payment for reinsurance is not “bona fide” if it is part of a tying arrangement. In other words, the CFPB took issue with the practice of referring customers to a mortgage insurer that would, in turn, purchase reinsurance from the lender. The Court bluntly noted that the CFPB’s interpretation “makes little sense,” that “Section 8(c) of RESPA specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case,” and that “the CFPB’s interpretation flouts not only the text of the statute but also decades of carefully and repeatedly considered government interpretations” (PHH Corp. v. CFPB, No. 15-1177 at 74, 75, and 76).

Retroactive Application Violates Due Process

Next, the Court addressed the CFPB’s attempt to retroactively apply its new interpretation to PHH’s prior reinsurance arrangements. As mentioned above, when HUD was tasked with enforcing RESPA, it publicly issued opinion letters in 1997 and 2004 explaining that captive reinsurance arrangements are “permissible if the payments made to the reinsurer (1) are ‘for reinsurance services actually furnished or for services performed’ and (2) are ‘bona fide compensation that does not exceed the value of such services.’” (citing letter from John P. Kennedy, Associate General Counsel for Finance and Regulatory Compliance, Department of Housing and Urban Development, to American Land Title Association 1 (Aug. 12, 2004) (J.A. 259)). In essence, so long as any fee paid for reinsurance bears a reasonable relationship to the market value of that reinsurance, then it does not violate Section 8(a) of RESPA.

In 2015, once the CFPB was assigned to enforce RESPA, they determined that captive reinsurance arrangements were prohibited by Section 8 because the payment was part of a tying arrangement. Relying upon its new interpretation, the CFPB attempted to penalize PHH for conduct that occurred as far back as 2008. Citing numerous Supreme Court cases, the D.C. Circuit Court held that the CFPB’s retroactive application is prohibited by the Due Process Clause. Because HUD had previously issued widely relied upon guidance on this issue and the CFPB had never publicly changed course—which they are free to do—the CFPB cannot retroactively impose adverse consequences for an entity’s past conduct that was structured in reliance upon the government’s prior advice.

The CFPB argued that nothing about HUD’s prior opinions should have given entities a reason to rely upon them, noting that they were not reflected in a binding rule. The Court strongly rebuked the CFPB’s position with the following statement:

We therefore find this particular CFPB argument deeply unsettling in a Nation built on the Rule of Law. 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. The rule of law constrains the governors as well as the governed.

After reiterating that the CFPB’s interpretation of RESPA is impermissible, the D.C. Circuit Court remanded the case so that the CFPB may determine whether the fees paid by any mortgage insurers were more than the reasonable market value to the reinsurer, subject to any applicable statutes of limitations.


In addition to being perhaps the strongest public rebuke of the CFPB’s authority to date, this holding reiterates and confirms that the CFPB is subject to prior agencies’ interpretations. The CFPB may adopt different interpretations of consumer financial laws, but those interpretations must be made public before an entity can retroactively be punished for actions that are consistent with the prior agency’s guidance.

Creditors and Debt Collectors Should Pay Close Attention to the CFPB’s Consent Order with Navy Federal Credit Union

Creditors and Debt Collectors Should Pay Close Attention to the CFPB’s Consent Order with Navy Federal Credit UnionThe Consumer Financial Protection Bureau (CFPB) announced a consent order with Navy Federal Credit Union (Navy Federal) on October 11, 2016. While financial institutions should always analyze CFPB consent orders closely and carefully scrutinize their relevant practices in light of the consent order, first-party creditors, debt collectors, and any financial institution that electronically restricts access due to a consumer’s default status should pay particular attention to this agreement.

CFPB Applies FDCPA Restrictions via UDAAP

In the consent order, the CFPB indicated that Navy Federal:

  • Threatened legal action or wage garnishment unless the consumer made a payment even though Navy Federal rarely took legal action;
  • Threatened to contact the consumer’s commanding officer when it had no intention to do so; and
  • Made representations to consumers regarding the impact on the consumer’s credit score of paying or failing to pay the debt when Navy Federal had not analyzed the particular consumer’s credit history to validate those assertions.

These allegations are common in enforcement actions involving the Fair Debt Collections Practices Act (FDCPA).  See 15 U.S.C. § 1692e (“The threat to take any action that cannot legally be taken or that is not intended to be taken.”); July 2013 Bulletin on Representations Regarding the Effect of Debt Payments on Credit Reports and Credit Scores. The CFPB, in this consent order, however, indicated that these actions constituted “unfair, deceptive, or abusive” acts or practices (UDAAP) under the Consumer Financial Protection Act of 2010 (CFPA).

The CFPB’s use of UDAAP in this instance demonstrates the importance of FDCPA compliance for first-party creditors, as the CFPB has shown on numerous instances that it views conduct that would otherwise violate the FDCPA as a UDAAP. See, e.g., July 2013 Bulletin on UDAAPs (indicating that the CFPB views “empty threat” type allegations as UDAAPs). This will be even more important once the CFPB issues its new debt collection rules implementing the FDCPA. As a result, first-party creditors, like third-party debt collectors, should pay close attention to the CFPB’s debt collection proposal.

CFPB Ignores a Contractual Provision to Find a UDAAP

In the consent order, the CFPB also indicated that Navy Federal’s threats to disclose the debts to consumers’ military commanders constituted a UDAAP because Navy Federal was not authorized to disclose the debt to the consumers’ commanding officer. In doing so, the CFPB ignored a provision in the consumers’ account agreements that authorized this practice because the provision “was buried in fine print, non-negotiable, and not bargained for by consumers.”

The CFPB clearly believed this was an important point to make, as it had already established the conduct at issue was a UDAAP. Nonetheless, the consent order provided no guidance as to what constitutes “fine print” or how a financial intuition should structure its agreements to avoid similar results in the future. Additionally, given that virtually no contractual provisions in credit agreements are negotiated and bargained for by consumers, the implications of this consent order could be extremely broad. Under this line of reasoning, the CFPB could invalidate almost any provision.

Electronic Access Restrictions

The CFPB also addressed Navy Federal’s practice of freezing consumers’ electronic access and disabling electronic services after consumers became delinquent on credit accounts. The CFPB claimed that Navy Federal’s electronic access restriction was unfair to consumers because it was likely to cause injuries to consumers, the injuries were not reasonably avoidable, and the injuries were not outweighed by any countervailing benefit. The CFPB appeared to take issue with Navy Federal’s practice of applying the restriction at the member level by freezing the consumer’s access for all accounts even though the delinquency was only related to the credit account.

Financial institutions, however, should be careful about interpreting this consent order too narrowly. For instance, while the CFPB’s statement of its claim targeted Navy Federal’s specific electronic access restrictions, it is not hard to envision the CFPB claiming electronic access restrictions based upon default status constitute UDAAPs. For instance, the CFPB noted that Navy Federal’s restrictions:

  • Prevented consumers from “managing their accounts online;”
  • Prevented consumers from “accessing online or mobile platforms to check account balances;” and
  • Prevented consumers from “adding travel alert[s] to the consumer’s account through mobile platforms.”

Any electronic account restriction that limits a consumer’s ability to view account information and manage their account online arguably presents these same issues. Moreover, while the CFPB focused on the fact that the injuries were not reasonably avoidable because Navy Federal did not clearly disclose the policy when consumers opened accounts or before they became delinquent, a clearer disclosure may not have ultimately resolved the issue, as the CFPB may have simply said the disclosure was too “fine print” or non-negotiable. Plus, in the past, the CFPB has indicated that this prong may be satisfied simply by the fact that the practice is common in the industry. See CFPB Exam Manual, p. 175 (“[I]f almost all market participants engage in a practice, a consumer’s incentive to search elsewhere for better terms is reduced, and the practice may not be reasonably avoidable.”).

In light of the Navy Federal consent order, financial institutions should take a close look at their policies, practices, disclosures, and exceptions to electronic access restrictions tied to default status. While it is clear that access restrictions at the consumer level rather than the account level are problematic, it may have much broader implications and may be a shot across the bow to the financial industry concerning electronic access restrictions.

PHH v. CFPB: Statutes of Limitation Apply To CFPB Administrative Proceedings: What You Need To Know

PHH v. CFPB: Statutes of Limitation Apply To CFPB Administrative Proceedings: What You Need To KnowThe D.C. Circuit Court released its highly anticipated opinion in PHH v. Consumer Financial Protection Bureau on October 11. This post addresses one important holding from that opinion. In other posts, we will be analyzing the court’s holding regarding the constitutionality of the CFPB’s single-director structure, and the court’s determination that the CFPB violated due process by retroactively applying a new interpretation of Section 8 of RESPA.


The D.C. Circuit Court made headlines recently with its ruling that the CFPB’s structure was unconstitutional. Just as critically for companies or individuals facing enforcement actions by the CFPB, the court also held that statutes of limitation apply to CFPB administrative proceedings. In this case, the court held that the CFPB was bound by the three-year statute of limitations in RESPA, whether the CFPB was enforcing consumer financial laws through a civil action or administrative proceeding. Moving forward, if this holding survives a likely appeal by the CFPB, this decision will have major implications for government enforcement agencies and anyone that is targeted in an enforcement action.

CFPB’s Position

The CFPB took the bold position that no statute of limitations applied when the CFPB enforced consumer financial laws through administrative proceedings rather than courts. The CFPB argued that administrative proceedings were not actions that were covered by a statute of limitations. While the CFPB admitted to being bound by a statute of limitations when it brings a civil action in court, the CFPB posited that it could hold administrative proceedings any number of years after the alleged wrongdoing occurred with the only limitations on its authority being prosecutorial discretion and the equitable defense of laches.

Court Decision

The D.C. Circuit Court was unanimous in holding that action includes administrative enforcement proceedings brought by the Bureau and that statutes of limitation apply to those proceedings. In his opinion for the court, Judge Kavanaugh wrote that the CFPB’s position that no statute of limitations applied to administrative proceedings was alarming and absurd. Pointing to the Supreme Court’s unanimous opinion in Gabelli, Judge Kavanaugh emphasized the importance of time limits on penalty actions, quoting that it ‘would be utterly repugnant to the genius of our laws’ if actions for penalties could be brought at any distance of time.

Impact on Future CFPB Enforcement Actions

The CFPB can no longer rely on its belief that no statutes of limitation apply in administrative proceedings. This will have a significant impact on the CFPB’s ability to negotiate settlements regarding any wrongdoing that is alleged to have occurred prior to the relevant statute of limitations. In a number of prior orders, the CFPB has identified acts and practices that happened many years outside of an applicable statute of limitations as the basis for its conclusion that a company violated consumer financial laws.

Moving forward, the CFPB should only be able to bring an administrative proceeding or civil action within the time allotted by the relevant statute of limitations identified in the law under which the CFPB is bringing a civil or administrative action. The Supreme Court’s decision in Gabelli takes on added importance for CFPB enforcement actions as the Court held in that case that the statute of limitations for government agencies to bring enforcement actions begins to run from the date of the alleged misconduct, rather than the date the enforcement agency claims to have discovered the misconduct. In light of these rulings, future CFPB actions and orders should only identify misconduct that is alleged to have begun within the number of years provided by the relevant statute of limitations.

Impact on state enforcement actions

The CFPB is by no means the only government enforcement agency that has relied on the belief that statutes of limitation do not apply to administrative proceedings. In states where civil enforcement agencies are authorized to bring administrative actions against entities, state enforcers have made the argument that state statutes of limitation do not apply to administrative proceedings. While it will take some time for this decision to trickle down to state courts and administrative law bodies, expect to see a number of challenges to state level administrative actions that allege wrongdoing that occurred outside of a state’s statute of limitations.

What to do if you’re facing an enforcement investigation

If you find yourself in the position of being the subject of a government enforcement action, go back and take a close look at the years in which the government is alleging that any misconduct occurred. While companies may have doubted the persuasiveness of statute of limitations arguments in the past given the government’s position that no statute of limitations applied to administrative proceedings, there is now strong precedent that all government enforcement agencies must apply a statute of limitations in administrative proceedings. While you can expect the CFPB to appeal this decision, for now gone are the days where a regulator can say with a straight face that no statute of limitations whatsoever applies to administrative proceedings.

Appellate Court Decision Holding CFPB Unconstitutional Promises Significant Implications

Appellate Court Decision Holding CFPB Unconstitutional Promises Significant ImplicationsIn a landmark decision, the U.S. Court of Appeals for the D.C. Circuit held that the Consumer Financial Protection Bureau’s (CFPB) structure violated the Constitution’s separation-of-powers requirements. In PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir., filed 2015), a majority of the Court held that the CFPB’s structure violated the Constitution because the agency was headed by a single director who could only be removed by the President for cause. The unanimous panel further held that the CFPB had erred in its statutory interpretation of RESPA (as well as its refusal to honor past regulatory guidance of the statute), and thus reversed the large damages imposed against PHH. The decision has significant implications, not just to the lending community, but also to any highly regulated industries.


In 2014, the CFPB brought an administrative enforcement action against PHH Corporation, a mortgage lender, alleging violations of certain anti-kickback provisions in Section 8 of the Real Estate Settlement Procedures Act. PHH defended against the claims, arguing that its conduct was based on express statutory guidance authored by the Department of Housing and Urban Development, when it was the agency charged with interpreting the statute. An administrative law judge found in favor of the CFPB and ordered PHH to disgorge approximately $6.5 million in illegal fees. PHH used the administrative procedure to appeal to the CFPB’s Director, who not only affirmed PHH’s liability, but increased the disgorgement amount to $109 million. PHH then sought judicial review of the agency decision in the U.S. Court of Appeals for the D.C. Circuit.

D.C. Circuit Holds Statute Unconstitutional

In a lengthy opinion written by Judge Brett Kavanaugh and joined in full by Senior Judge Raymond Randolph, the Court held that because the CFPB is headed by a single director who can be removed by the President only for cause, it was neither an executive agency nor an independent agency that comported with the Constitution’s separation-of-powers requirements. The Court began by noting the fundamental role the separation-of-powers doctrine serves in the U.S. Constitution and the long-standing precedent from the Supreme Court holding that, in order for a regulatory agency to be constitutionally constructed, it must either be accountable to the President as an executive agency or a true independent agency. The Court further held that central to an agency’s independent status is its governance by a board of commissioners or directors instead of a sole director. The Court based this requirement on two principles: (1) the reasoning behind the Supreme Court’s decision in Humphrey’s Executor v. United States, 295 U.S. 602 (1935) that recognized the constitutional validity of independent agencies based on their ability to operate as “a body of experts appointed by law and informed by experience,” and (2) longstanding historical practice and precedent of structuring independent agencies to be headed by a panel of commissioners or directors. After analyzing and ultimately distinguishing two of the three examples offered by the CFPB of other independent agencies headed by a sole independent director (the Court noted CFPB’s proposed example of the Federal Housing Finance Agency, but declined to take it as an example of historical practice given that it was created around the same time as the CFPB), the Court concluded that CFPB’s organizational structure was unprecedented in independent agency history. Based on recent decisions from the U.S. Supreme Court in Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S. 477 (2010) and NLRB v. Noel Canning, 134 S. Ct. 2550 (2014), which emphasized the role of historical practice in addressing separation-of-powers questions, the Court concluded that the CFPB’s novel structure gave too much unaccountable power to the agency and its director and therefore held it to be unconstitutional.

Although the Court concluded that the CFPB’s structure violated the Constitution, the Court stopped short of ordering the agency to unwind operations. Instead, it ordered that the restriction on removal of the director only “for cause” should be stricken. Having ordered that provision stricken, the Court deemed it to be severed from the rest of the statute, allowing the CFPB to continue to operate as an executive agency. The Court considered the possibility of ordering the CFPB to be reorganized into a multi-member body, but declined to do so given the possibility of gridlock over appointments, as well as the threat of judicial overreach. However, the Court did note that Congress had the option of enacting legislation reorganizing the agency in that fashion. That may prove to be the most expedient approach, given the danger (or at least perceived danger) of abrupt, politicized decision-making by an agency that is completely beholden to the President.

Having addressed the headline-grabbing constitutional issue, the Court then turned to address the merits of the case—which, despite the lack of fanfare, may prove more meaningful in practice for institutions subject to the CFPB’s regulatory reach. The Court ruled against the CFPB on both of the merits issued and presented for review, holding that the agency could not penalize a company for actions conducted in reliance on previous agency guidance concerning an interpretation of federal law and that the CFPB was in fact limited to a three-year statute of limitations in bringing administrative enforcement actions against firms allegedly in violation of regulations. We will analyze those holdings and their implications in more detail in separate blog posts.

Senior Judge Randolph joined the majority decision authored by Judge Kavanaugh, but also wrote separately to express his belief that the administrative law judge that initially considered the case against PHH and wrote a recommendation should have been considered an “inferior Officer” under the Constitution, and thus was not properly appointed to the case when he was assigned by an administrative law judge acting on behalf of the Securities and Exchange Commission and CFPB. Judge Karen Henderson dissented from the majority’s constitutional holding, noting that she did not believe the Court needed to reach that issue, but joined the majority’s holdings regarding the merits of the CFPB’s claims.

Implications of Ruling

The scope of the Court’s constitutional ruling remains to be seen. In other instances where courts have held that regulatory agencies were unconstitutionally structured, the remedy was to undo the effect of any administrative enforcement actions still pending, although the agency retained the ability to start over again with its enforcement efforts under a new constitutional structure. The PHH Court avoided that issue by choosing to address the merits of the CFPB’s interpretation of the statute. Going forward, however, major questions remain unanswered regarding the effect of past and pending agency enforcement conduct, which, according to the D.C. Circuit Court, has taken place under an unconstitutional structure. Factors such as the finality of the rulings in those actions and their method of resolution (i.e., a contested adjudication versus a settlement) will probably dictate whether those rulings remain fully binding. We anticipate those issues to be vigorously litigated in the coming weeks and months.

The Prepaid Rule is Finally Here

The Prepaid Rule is Finally HereLast week, the CFPB issued its long-awaited final rule amending Regulation E (Electronic Funds Transfer Act) and Regulation Z (Truth in Lending Act) to create regulations for prepaid financial products (Prepaid Rule). The CFPB’s original proposed rule was issued in 2014. The Prepaid Rule is effective on October 1, 2017, although the requirement to submit prepaid account agreements to the CFPB is not effective until October 1, 2018. Financial institutions do not have to pull prepaid access devices or materials produced prior to October 1, 2017, but will be required to provide consumers with change in terms notices and updated initial disclosures in many cases.

The term “prepaid account” has been added to the definition of “account” under Regulation E, and such accounts (including payroll card accounts and government benefit accounts) must meet two tests for coverage. Certain types of accounts, which meet one or both of these tests, are not considered prepaid accounts and are specifically excluded from coverage, such as gift cards, gift certificates, health savings account cards, and a state benefits distribution cards.

Under Regulation E, certain pre-acquisition disclosures are required to be provided to a consumer generally before the consumer acquires the prepaid account. A consumer acquires a prepaid account by purchasing, opening, or choosing to be paid via prepaid account. The short form disclosure is required to be in a specific format and should contain required fee and other information, including information about linked overdraft features, to help the customer understand the key terms of the account. In close proximity to the short form disclosure, the financial institution name, name of the prepaid account program, any purchase price for the prepaid account, and any fee for activating the prepaid account should also be disclosed.

A long form disclosure containing more comprehensive fee and other information about the prepaid account must also be furnished to the consumer. For prepaid accounts offering an overdraft credit feature, the long form disclosure must also include certain Regulation Z disclosures.

There are also required disclosures for the physical card or other access device.  If no physical access device is provided, the disclosures must be provided on the website, mobile application or other entry point that the consumer uses to access the prepaid account.

Regulation E rules on error resolution and liability generally apply to prepaid accounts regardless of whether the financial institution has completed its customer identification and verification process with respect to an account, but the Prepaid Rule does not require provisional credit to be extended for unverified accounts. Periodic statements are required for prepaid accounts, but not when certain methods of accessing information are made available to the consumer.

Issuers are required to submit to the CFPB their new and amended prepaid account agreements and must notify the CFPB of any withdrawn agreements no later than 30 days after the issuer offers, amends or stops offering the agreement. Prepaid account issuers must also publicly post on their own websites agreements that are offered to the general public.

The Prepaid Rule adds the new term “hybrid prepaid-credit card” to Regulation Z to address overdraft credit features that are offered in connection with prepaid accounts. The Prepaid Rule generally requires prepaid account issuers to structure an overdraft credit feature accessible by a hybrid prepaid-credit card as a separate credit feature, not as a negative balance to a prepaid account. Under the Prepaid Rule, an overdraft credit feature may only be structured as a negative balance on a prepaid account in very limited circumstances.

Because of its broad scope and significant disclosure requirements, issuers should carefully scrutinize the new Prepaid Rule and initiate compliance plans as soon as possible in order to meet the effective date.

Treasury Department Issues Guidance Intended to Ease Dollar-Denominated Foreign Transactions with Iran

Treasury Department Issues Guidance Intended to Ease Dollar-Denominated Foreign Transactions with IranThe United States Treasury Department’s Office of Foreign Asset Control (OFAC) amended its guidance on Iranian sanctions to clarify that some transactions with Iran by non-U.S. institutions are permitted, provided that such transactions do not directly run through the U.S. financial system. The new guidance comes amid complaints from Iran that it is not receiving the sanctions relief bargained for under the Iran Nuclear Deal because remaining U.S. sanctions have effectively scared foreign companies from doing business with Iran. OFAC’s amended guidance is intended to facilitate foreigners engaging in dollar-denominated transactions with Iran.

Specifically, OFAC amended its FAQs related to banking measures transacted with non-U.S. entities and added three new FAQs related to the due diligence requirements for banking customers. The revised guidance clarifies that foreign transactions (to include foreign subsidiaries of U.S. financial institutions) with non-sanctioned entities that are nonetheless “minority owned” or “controlled in whole or in part by an Iranian or Iran-related person on the SDN list” are “not necessarily sanctionable” under U.S. regulations. These clarifications effectively remove the de facto ban on dollar-denominated, foreign transactions with Iranian firms that may be controlled by a person or entity that remains subject to U.S. sanctions.

Caution is always paramount, however, in any transaction subject to OFAC oversight. First, the new guidance does not permit U.S. entities from engaging in transactions with Iran absent a specific license from OFAC. Second, the new guidance on due diligence requirements should give pause to any institution that does not have full awareness of the persons and entities with whom it transacts business. FAQ M. 12 for instance states that OFAC still expects a non-U.S. financial institution to repeat the due diligence that its customers have performed on downstream Iranian individuals or entities if it “has reason to believe that those processes are insufficient.” Similarly, FAQ M. 10 states that while it is “not necessarily sanctionable for a non-U.S. person to engage in transactions with an entity that is not on the SDN list but that is minority owned . . . by an Iranian or Iran-related person on the SDN List [], OFAC recommends exercising caution . .. to ensure that such transactions do not involve [persons or entities on the SDN list].” This loose language gives wide berth for OFAC to find fault with Iranian transactions that have even an air of insufficient controls. So while foreign-based institutions may now more freely conduct business in Iran, they should still actively avoid transactions that lack complete clarity about the concerned parties or entities.

The Eleventh Circuit has spoken: “Debtors who surrender property must get out of the creditor’s way”

The Eleventh Circuit has spoken: "Debtors who surrender property must get out of the creditor's way"In recent years, there has been a hotbed of litigation across the nation, particularly in Florida state and bankruptcy courts, regarding a debtor’s ability to contest a secured creditor’s foreclosure notwithstanding the debtor’s previous “surrender” of the subject collateral in bankruptcy. The issue ultimately made its way to the Eleventh Circuit and, much to the delight of lenders and mortgage servicers, the Eleventh Circuit ruled in convincing fashion: “Debtors who surrender property must get out of the creditor’s way.” In re Failla, Case No. 15-15626, 2016 WL 5750666 (11th Cir. October 4, 2016).

In Failla, the debtors owned a home in Boca Raton, Florida, which was subject to a mortgage held by Citibank. The debtors defaulted on their home loan in 2009 and subsequently filed chapter 7 bankruptcy in 2011. During their bankruptcy, the debtors filed a statement of intention as required under Section 521(a)(2) of the Bankruptcy Code, pursuant to which they stated their intention to “surrender” the home. Because the home was fully encumbered by the mortgage and thus had no value for the bankruptcy estate, the bankruptcy trustee chose not to liquidate the home and instead “abandoned” the property back to the debtors.

Following these events in the bankruptcy, Citibank moved forward with its foreclosure action in Florida state court. However, when the debtors continued to contest Citibank’s foreclosure proceeding, Citibank returned to the bankruptcy court and requested that the court enter an order requiring the debtors to withdraw their defenses in the state court foreclosure proceeding due to their previous surrender of the home. The bankruptcy court granted Citibank’s motion, which the district court affirmed on the debtors’ initial appeal. The debtors then appealed to the Eleventh Circuit.

The Eleventh Circuit recognized that the overarching issue of whether a debtor who agrees to “surrender” his house in bankruptcy may subsequently contest the lender’s foreclosure action required the Court to address the sub-issues of (1) what “surrender” means within the context of Section 521(a)(2) and whether the debtors had satisfied their declared intention to surrender their home, and (2) in order to answer the first sub-issue, to whom the debtors must surrender the property.

Addressing these questions, the Eleventh Circuit first held that a debtor who chooses to “surrender” his house pursuant to Section 521(a)(2), surrenders the property to both the trustee and the creditor. Specifically, the debtor first surrenders the property to the trustee, who has the choice of either liquidating the property or abandoning the property. If the trustee abandons the property, the debtor then surrenders the property to the creditor. Second, the Eleventh Circuit held that while the term “surrender” does not require a debtor to physically deliver the property to the creditor, the term does require the debtor to relinquish his rights in the property and drop his opposition to a foreclosure action. Citing Black’s Law Dictionary, the Eleventh Circuit held that surrender means “giving up of a right or claim,” and that debtors who surrender their property can no longer contest a foreclosure action — “Otherwise, debtors could obtain a discharge based, in part, on their sworn statement to surrender and ‘enjoy possession of the collateral indefinitely while hindering and prolonging the state court process.’” Highlighting the inequities of such a result, the Eleventh Circuit noted: “In bankruptcy, as in life, a person does not get to have his cake and eat it too.” Finally, citing Section 105 of the Bankruptcy Code, the Eleventh Circuit held that bankruptcy courts have the power to enforce the surrender by ordering debtors to withdraw their affirmative defenses and to dismiss their counterclaims asserted in a subsequent state court foreclosure proceeding.

While Failla was issued in the context of a chapter 7 bankruptcy, it appears that the Eleventh Circuit’s ruling as to the consequences of a debtor’s “surrender” of collateral will apply just the same in chapter 11 and chapter 13 bankruptcies. Notably, our firm actually litigated the issue of a debtor’s “surrender” of collateral within the context of a chapter 11 bankruptcy and obtained a published opinion from the United States Bankruptcy Court for the Northern District of Florida that is consistent with the Eleventh Circuit’s opinion in Failla. See In re Holoka, 525 B.R. 495 (Bankr. N.D. Fla. 2014).

With the Eleventh Circuit’s ruling now on record, the message is clear: “Debtors who surrender property must get out of the creditor’s way.” Fortunately for lenders and mortgage servicers in Florida, the path to foreclosing on surrendered collateral should be far less troublesome moving forward.

Don’t Get Caught By Surprise: NMLS Adds New Requirements in Connection with Renewal

Don’t Get Caught By Surprise: NMLS Adds New Requirements in Connection with RenewalIf a company is keeping its Nationwide Multistate Licensing System (NMLS) record current, the renewal season should be a relatively painless exercise in fee collection. However, in addition to the normal renewal housekeeping measures, there are a few new twists to the 2016-2017 NMLS renewal process that you should be aware of so that you don’t get caught by surprise.

Everyone knows that the path to a smooth renewal lies in advance preparation. Compliance professionals know that they need to keep track of a multitude of items including, but not limited to: 1) identifying any outstanding license items early and making efforts to clear them; 2) being aware of early renewal submission deadlines to increase the chance of renewal being approved prior to year-end; 3) preparing to submit renewal fees via credit card to decrease any potential ACH transaction processing delays; and 4) continuing to monitor the NMLS for any additional requested items after renewal submissions have been made.

However, the NMLS has added three new functionalities in connection to the 2016-2017 renewal process that may catch you by surprise. To get ahead of the game, a company should make plans to complete these items now and not wait until the renewal window to open on November 1:

  1. Complete the conversion process to Electronic Surety Bonds (ESB) for certain licenses held with the Indiana Department of Financial Institutions, Iowa Division of Banking and Massachusetts Division of Banks. NMLS has recently released functionality to track ESB and these jurisdictions are requiring that the conversion of paper bonds to ESB take place in conjunction with renewal. While these agencies are not implementing ESB for all license types, mortgage, consumer finance and money transmission licenses are included. Visit the ESB Adoption Table here to view a complete list of licenses currently subject to ESB.
    Keep in mind that a licensee must first grant authority to the surety bond provider in the NMLS to issue the ESB. In order to complete the ESB conversion process in the NMLS, a control person, who is an officer of the company, will be required to attest to and submit the bond in the NMLS. If your company holds one of the licenses subject to ESB during the renewal window, start the conversion process early.
  2. Prepare MU2 control persons to be fingerprinted so that Criminal Background Checks (CBC) can be submitted through NMLS in connection with renewal. The NMLS has released functionality that allows MU2 control persons (including direct owners, executive officers, individual indirect owners, qualified individuals and non-licensed branch managers) to complete CBC through the NMLS in 26 currently participating states. While the requirement to submit a CBC through NMLS varies by license type, position held, and agency, certain states will require MU2 control persons to complete a CBC through NMLS as a condition of the license renewal application.
    Generally, to obtain a CBC through the NMLS, the control person must complete two steps: 1) authorizing a CBC, and then 2) scheduling and completing a fingerprint appointment with Fieldprint through NMLS. Please note that Fieldprint is the only NMLS approved vendor for this process. Even if the control person has electronic scanned fingerprints from another vendor, they still must schedule an appointment with Fieldprint through NMLS to have their fingerprints re-scanned with a Fieldprint agent as part of this process. If a company holds a license that will require CBC through the NMLS as part of renewal, the appointments for taking control person fingerprints can be scheduled now.
  3. Make sure that any computer used for NMLS filings is up to date. NMLS has implemented an access restriction for outdated internet browsers. Users must be sure that their internet browser is updated prior to attempting to access the NMLS site for renewals. This is particularly important if individual control persons will be attesting remotely.

Taking care of the above items now may reduce the likelihood of unpleasant surprises and ensure that your company is able to continue to conduct business after the New Year.

Is Your Company Compliant? CFPB Requires Written Enterprise-Wide UDAAP Risk-Management Program

Is Your Company Compliant? CFPB Requires Written Enterprise-Wide UDAAP Risk-Management ProgramThe Consumer Financial Protection Bureau (CFPB) ordered First National Bank of Omaha (FNBO) to pay a $4.5 million civil money penalty and $27.75 million in customer restitution for violations of engaging in deceptive marketing tactics and illegally billing consumers for add-on credit productions under the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices (UDAAP). In addition to the monetary assessments, the CFPB took the novel step of ordering FNBO to develop “a written, enterprise-wide UDAAP risk-management program for any consumer financial products or services” it offers. In making the UDAAP risk-management program a part of the consent order, the CFPB is undoubtedly signaling its expectation that financial services institutions develop and implement a UDAAP risk-management component as part of the company’s broader compliance management system.

What Should Be Included in a UDAAP Risk-Management Program?

While there is no universal, one-size-fits-all approach to developing a UDAAP compliance plan, the FNBO consent order provides a good road map of the components the CFPB is focused on.

First and foremost, a financial services company should analyze the types of financial products it offers and the consumer segments to which it markets. One crucial element in preventing UDAAP violations is understanding how your products and services may pose risks to your consumer base. A key component of this risk analysis should focus on consumer complaint monitoring, which should be done by a sufficiently autonomous department within the organization or an outside vendor. This comprehensive approach is particularly important in light of the consumer-facing nature of UDAAP, which places significant emphasis on consumer understanding, as opposed to more disclosure-focused, traditional regulatory provisions.

With this background, a company can more fully establish a compliant UDAAP program. The CFPB expects the following components to be included in an enterprise-wide UDAAP risk- management system:

  1. A written comprehensive assessment, to be conducted on an annual basis, of the UDAAP risk associated with the governance, control, marketing, sales, delivery, servicing, and fulfillment of consumer financial products and services;
  2. Development and maintenance of written policies and procedures to effectively and systematically manage, prevent, detect, mitigate, and report the UDAAP risks;
  3. Comprehensive written training procedures for employees and service providers on unfair, deceptive, or abusive acts or practices; and
  4. Written policies and procedures to ensure that risk management, internal audit, and corporate compliance programs have the requisite authority and status so that appropriate reviews of products and services marketed or sold by the financial institution or its service providers may occur and deficiencies are identified and properly remedied.

In addition, even after a UDAAP risk-management program is implemented, financial institutions must actively monitor and analyze trends in consumer complaints, new products and services and customer demographics, and make periodic adjustments to the program. Analyzing the consumer experience and understanding how those experiences may violate UDAAP is the key to a successful UDAAP risk-management program.

The FNBO consent order continues the CFPB’s trend towards utilizing UDAAP as a tool to regulate via enforcement. In light of this trend, financial institutions under the CFPB’s oversight would be wise to develop and implement a comprehensive UDAAP risk-management program.

CFPB’s New Loss Mitigation and Servicing Transfer Requirements Provide Clarity But Create Additional Compliance Challenges – Attend Part 4 of Our Webinar Series to Learn More

CFPB’s New Loss Mitigation and Servicing Transfer Requirements Provide Clarity But Create Additional Compliance Challenges – Attend Part 4 of Our Webinar Series to Learn MoreA few short weeks after releasing a special edition Supervisory Highlights report that focused exclusively on mortgage servicing observations and, in particular, loss mitigation and servicing transfer issues, the CFPB released a 901-page set of amendments overhauling the existing mortgage servicing regulatory framework. A significant portion of those amendments relate to the same areas that were identified by the CFPB in its June report as posing particular compliance challenges—loss mitigation and servicing transfers. Some of the new requirements and commentary in the 2016 final rule will be helpful as they clarify existing areas that are subject to different interpretations and are applied inconsistently across the industry. However, much of the new rule is likely to pose the same types of technological stresses and compliance challenges that the CFPB just highlighted in June.

Upcoming Webinar

If this is an area you would like to learn more about, we encourage you to join us for Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series, which is scheduled for Thursday, October 6, and will focus entirely on the new rules related to loss mitigation and default servicing. This includes amendments related to the definition of delinquency, early intervention obligations, various aspects of the loss mitigation process, and loss mitigation applications that are in-flight when the servicing of a loan is transferred to a new servicer.

Supervisory Highlights Mortgage Servicing Special Edition

As we previously reported, towards the end of June, the CFPB released a special edition of its semi-annual Supervisory Highlights report focusing entirely on issues uncovered over the past couple of years during reviews of mortgage servicers. The CFPB noted that it continues to observe compliance risks, particularly in the areas of loss mitigation and servicing transfers, and has concluded that many of these problems can be traced back to “[o]utdated and deficient servicing technology.”

The report, which is the first of its kind to focus entirely on one product line, details more than 30 violations and issues that have been uncovered during supervisory examinations of mortgage servicers. Those violations primarily relate to loss mitigation procedural requirements, policies and procedures, and servicing transfers that occur during the loss mitigation process. In those areas, the CFPB identified notices with deficient content, notices that were not timely sent to borrowers, inadequate policies and procedures, and servicers failing to properly handle loss mitigation in connection with a servicing transfer.

2016 Final Rule

With respect to loss mitigation and servicing transfer-related requirements, the CFPB’s 2016 final rule generally includes two types of amendments. First, the CFPB is expanding upon existing requirements to provide the industry with additional clarity and detail on how it expects servicers to handle certain scenarios. In addition, the CFPB is also adding entirely new obligations, many of which may be challenging to implement, and comply with, given existing technology limitations.

  1. Clarifying Amendments

Some of the CFPB’s amendments related to loss mitigation provide much-needed clarity with respect to existing requirements that are ambiguous and subject to different interpretation. For example, when selecting a “reasonable date” for an incomplete loss mitigation application acknowledgment letter, the existing commentary explains that servicers “should” select the date that preserves the maximum borrower rights, and that servicers “should consider” certain milestones when setting that date.

As a result of the uncertain language used by the CFPB in the last iteration of the rule, this is an area where servicers across the industry have struggled to ensure compliance and have taken a variety of different approaches. Some servicers provide a set number of days in all acknowledgment letters (perhaps with a reminder letter being sent at expiration), others have created formulas based upon the enumerated milestones with outer limits for the amount of time that can be given, while others have chosen to always select the next milestone date regardless of how far in the future it may be.

Unlike the existing framework, the 2016 final rule provides prescriptive and clearly defined guidance on how to select a “reasonable date.” Going forward, as a result of the CFPB’s amendments, servicers very likely will all use the same formula when choosing the reasonable date for an incomplete loss mitigation application acknowledgment letter.

Another area where the CFPB’s existing regulatory framework produced inconsistent results is when a borrower submits a complete loss mitigation application, but the servicer is missing information and/or documentation outside of the borrower’s control. In those instances, servicers have been unclear on how to handle applications when the 30-day evaluation timeframe expires and the servicer is unable to complete its review. Because the existing rule does not specifically address these scenarios, some servicers choose to deny applications in order to meet the 30-day evaluation requirement, while others send notices informing borrowers that a decision will be made once all information and/or documentation is received. Again, the CFPB recognized this was an area of concern and has provided well-defined requirements that will guide servicers through these difficult scenarios.

  1. New Obligations

In addition to providing clarity to areas where it was badly needed, the 2016 final rule also adds a significant number of new obligations that will pose the same types of compliance challenges that were highlighted in the June Supervisory Highlights report. Among other things, the rule imposes entirely new notice requirements, revised content requirements for existing notices, new policies and procedures that must be maintained, and procedural requirements that utilize data points that may not currently be captured by many servicers’ technology platforms.

For example, the new rule will require servicers to send borrowers a new notice after offering a short-term forbearance or short-term repayment plan containing, among other things, the terms of the agreement. Servicers may also have to develop new notices for when a complete loss mitigation application is received, and when necessary third-party information and/or documentation is needed at the end of the 30-day evaluation period. Finally, the 2016 final rule adds prescriptive and complex notice and dual tracking requirements for loans that are transferred while the loss mitigation process is underway.

The result is that, while many servicers have spent the past few years developing and refining systems and processes to comply with the existing regulatory framework, everyone must once again shift their focus towards implementation of the new regulations. Given the 2016 final rule’s proximity to the CFPB’s Supervisory Highlights report, servicers should pay particular attention to technology limitations and necessary systems changes that will be needed for compliance with the 2016 final rule.

Register to attend Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series

In Part 4 of our “CFPB Mortgage Servicing Amendments” Webinar Series, we will discuss all of the CFPB’s amendments that relate to default servicing. We will discuss the implications these rules may have and will provide practical implementation tips based upon prior experience in this area.

Please join us on Thursday, October 6, from 11:30 a.m. to 12:30 p.m. CT, to learn “What You Need to Know” about the new requirements related to loss mitigation. Click here to RSVP to the webinar. Webinar login information will be provided prior to the event.