Recent MRB Administrative Actions Highlight that Minutiae Matters to HUD

On April 4, 2017, the Mortgagee Review Board (MRB) of the U.S. Department for Housing and Urban Development (HUD) published an entry in the Federal Register titled "Mortgagee Review Board: Administrative Actions." The entry describes 25 separate administrative actions the MRB took against various lenders and servicers from October 1, 2015, to September 30, 2016. In addition, the notice lists 106 lenders who were required to pay a civil money penalty for allegedly failing to meet their annual recertification requirements. In addition, the MRB withdrew FHA approval from another 147 lenders who allegedly failed to meet the annual recertification requirements. These actions confirm the recent perceived uptick in MRB enforcement activity.

The MRB actions covered a wide range of alleged conduct. Some of the allegations applied to only one or two loans in the lender or servicer's (often large) portfolio. They included things like:

  • False certification as to compliance with HUD/FHA regulations
  • Failure to notify HUD about state enforcement actions
  • Failing to use correct branch identification numbers in originating certain mortgages
  • Failure to perform quality control reviews on certain defaulted loans
  • Failing to address "appraisal deficiencies" in certain loan applications
  • Failing to notify HUD of acquisitions or mergers
  • Failing to adequately document source of closing funds for certain borrowers
  • An accounting error resulting from including two loans as assets on the wrong year's balance sheet
  • Employing a bank manager who had been indicted for bank fraud
  • "Improper" loan servicing
  • Failing to properly engage in loss mitigation on certain loans
  • Failing to timely disburse escrow funds
  • Improperly charging fees to certain borrowers
  • Failing to check the excluded parties list system before approving borrowers for HAMP modifications
  • Sending outdated information to borrowers in connection with loan modifications
  • Using faxed copies of documents in underwriting after failing to obtain the originals or validating the documents' authenticity
  • Entering an incorrect social security number in the Credit Alert Verification Reporting System when checking a borrower's credit

The fines and penalties for these violations ranged from as little as $3,500 all the way to $113 million. The larger penalties were generally obtained as part of settlements between the lenders or servicers and other federal agencies such as the Department of Justice. The nature of the violations at issue and the size of the penalties highlight the MRB's continued focus on both loan- and institution-level compliance with applicable HUD and FHA regulations.

- Constantinos G. Panagopoulos and Theodore R. Flo


Regular CFPB Service Provider Examinations Have Begun; More Service Providers to Face Examinations

At the program held on April 7 titled “The State of Consumer Protection Initiatives” at the American Bar Association Business Law Section Consumer Financial Services Committee 2017 Spring Meeting, Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, announced that the CFPB has begun to examine service providers on a regular, systematic basis, particularly those supporting the mortgage industry. Since its inception, the CFPB has had the authority to supervise service providers. However, in the past, the CFPB has only examined some service providers on an ad hoc basis. The change represents a significant expansion of the CFPB’s use of its supervisory authority and will substantially increase the number and types of entities facing CFPB examinations. We will conduct a webinar on this important subject on June 13, 2017. Click here to register.

A “service provider” is generally defined in Section 1002(26)(A) of Dodd-Frank as “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person that:

(i) Participates in designing, operating, or maintaining the consumer financial product or service; or
(ii) Processes transactions relating to the consumer financial product or service….”

Sections 1024(e) and 1025(d) of Dodd-Frank authorize the CFPB to supervise a service provider to a bank or nonbank already supervised by the CFPB—namely, depository institutions with more than $10 billion in assets and the following types of nonbanks:

  1. Mortgage originators, brokers, or servicers
  2. Payday lenders
  3. Private student lenders
  4. A “larger participant of a market for other consumer financial products or services” as defined by a CFPB rule. The CFPB so far has issued rules covering larger participants in the following industries: auto finance, debt collection, student loan servicing, consumer reporting, and international money transfers. (At an earlier program held at the ABA meeting, Ms. Twohig stated that CFPB’s next larger participant rule will deal with consumer installment lending and auto title loans.)

Not only is this expansion of the CFPB’s supervision program important to service providers, it is important for banks and nonbanks already supervised by the CFPB because the CFPB’s position is that they can be vicariously liable for violations of law committed by their service providers.

- Alan S. Kaplinsky


The Framers Did Not Rest Our Liberties on “Bureaucratic Minutiae,” PHH Argues

PHH filed its reply brief with the D.C. Circuit on April 10 in the en banc rehearing of the PHH case. We have blogged extensively about the case since its inception. Central to the case is whether the CFPB’s single-director-removable-only-for-cause structure is constitutional. Of course, the CFPB fiercely defends its structure, while PHH, the DOJ, and others argue that the CFPB’s structure epitomizes Congressional usurpation of executive power in violation of the constitution’s separation of powers principles.

If the CFPB’s structure is constitutional then there is no reason why Congress can’t divest the President of all executive power, PHH argues. “[I]f Congress can divest the President of power to execute the consumer financial laws, then it may do so for the environmental laws, the criminal laws, or any other law affecting millions of Americans.” “The absence of any discernible limiting principle is a telling indication that the CFPB’s view of the separation of powers is wrong.”

Even if existing Supreme Court precedent authorizes Congress to assign some executive power to independent agencies, PHH argued that the CFPB’s structure goes too far. “No Supreme Court case condones the CFPB’s historically anomalous combination of power and lack of democratic accountability, and the Constitution forbids it.” The fact that the CFPB has the power of a cabinet-level agency while lacking any democratic accountability or structural safeguards is a sure sign that its structure is unconstitutional.

The only remedy to the CFPB’s unconstitutional structure, PHH argues, is to dismantle the agency entirely. “The CFPB’s primary constitutional defect, the Director’s unaccountability [], is not a wart to be surgically removed. Congress placed it right at the agency’s heart, and it cannot be removed without changing the nature of what Congress adopted.”

PHH’s reply completes the briefing in this appeal. Oral arguments are scheduled to take place on May 24, with each side being given 30 minutes to argue. On April 11, the D.C. Circuit granted the DOJ’s request for 10 minutes to present its views during oral argument.

- Theodore R. Flo


DOJ Seeks Leave to Participate in PHH en banc Rehearing Oral Argument

The Department of Justice, with the consent of PHH and the CFPB, has filed an unopposed motion with the D.C. Circuit requesting 10 minutes of argument time in the oral argument to be held on May 24, 2017, in the rehearing en banc in the PHH case.

The DOJ filed an amicus brief in which it agreed with PHH’s position that the CFPB’s structure is unconstitutional but advocated a more limited remedial measure than PHH is seeking. In contrast to PHH which has argued that the CFPB should be dismantled in its entirety, the DOJ supports keeping the CFPB intact with a director removable at will by the President.

The D.C. Circuit has allocated 30 minutes per side for oral argument. In its motion seeking argument time, the DOJ states that because “our position in this case does not fully align with either party,” it is requesting that “instead of sharing time with either party, we receive a total of ten minutes for the United States.”

- Barbara S. Mishkin


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