early cfpb enforcement actions – what they mean to your...

Early CFPB Enforcement Actions – what they mean to your business

American Land Title Association Annual Convention Boston, Massachusetts

October 9, 2015 Phil Schulman, Esq. Frances X. Riley, III, Esq. Donald A. O’Neill, Esq.

Early CFPB Enforcement Actions 2

AGENDA TOPICS

Early CFPB Enforcement Actions – what they mean to your business Agenda Topics 1. Summary of CFPB’s Authority and Enforcement Powers 2. Recent Court Decisions and Consent Orders

o AfBAs o RESPA o UDAAP o Marketing Service Agreements (MSAs) o Mortgage Insurance and Reinsurance

3. Questions


SPEAKERS

Early CFPB Enforcement Actions – what they mean to your business Speakers • Phil Schulman • Frances X. Riley III • Donald A. O’Neill


Summary of CFPB’s Authority and Enforcement Powers

Early CFPB Enforcement Actions – and what they mean to your business Section One – Summary of CFPB’s Authority and Enforcement Powers

• Direct authority pursuant to CFP Act of 2010

• Delegated and supervisory authority

• Ability to initiate enforcement actions in Federal court or administrative proceedings

• CFPB Bulletin 2011-04 Enforcement

• CFPB Bulletin 2013-06 – Responsible Business Conduct: Self-policing, Self-reporting, Remediation and Cooperation



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 The stated GOAL of the CFPB is to: “ . . . implement and, where applicable, enforce Federal consumer financial laws consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and the markets for consumer financial products and services are fair, transparent, and competitive.” Dodd-Frank Act section 1021, 12 U.S.C. section 5511 (emphasis added)



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 Title X of the Dodd Frank Act established the CFPB as an independent agency within the Board of Governors of the Federal Reserve System Authorized to conduct hearings and adjudication proceedings to ensure or enforce compliance with: “ . . . any other Federal law that the Bureau is authorized to enforce, . . . .” Note: while the CFPB has primary federal consumer financial oversight the OCC, FRB, FDIC, NCUA, FTC and HUD continue to hold some consumer protection powers.



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 Title X created . . . “enforcement powers including powers to conduct investigations and implement enforcement actions to enforce federal consumer finance laws.” Section 1052 authorizes the CFPB to . . . “engage in joint, interagency investigations and requests for information, including matters relating to fair lending” – which gives the Bureau authority to conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General, or both. Section 1053 establishes rules for Cease and Desist proceedings.



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 The Dodd Frank Act authorizes the CFPB to:

• commence civil action or administrative proceeding

• impose a civil penalty, or

• seek all appropriate legal and equitable relief including a permanent or temporary injunction.



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 The Dodd Frank Act limitations:

• No action under Title X may be commenced more than three years after the date of discovery of the violation.

• No exemplary or punitive damages.

• Costs may be recovered by the CFPB, states Attorneys General or state regulators, if they prevail.



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 The CFPB has authority to investigate alleged violations and implement broad enforcement relief, including:

• Rescission or reformation of contracts • Refund of money • Disgorgement and refund of various types of assets • Return of real property • Restitution • Disgorgement or compensation for unjust enrichment • Payment of damages or other monetary relief • Public notification regarding violations • Limits on the activities or functions of the person or entity • Civil monetary penalties.



Authority Granted by Dodd Frank Wall Street Reform and Consumer Protection Act - 2010 Limits on civil penalties:

• Not to exceed $5,000 for each day during which the violation or failure to pay continues;

• $25,000 for each day for any person that recklessly

engages in a violation of a federal consumer financial law; and

• Up to $1,000,000 for each day for any person that knowingly violates a federal consumer financial law.



Announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. Bulletin also includes specifics for responses - including paper size, font size and length. Responses have to be received by the CFPB by no later than 14 calendar days after the notice.

CFPB BULLETIN 2011-04 Enforcement



Guidance to . . . “encourage activity that has concrete and substantial benefits for consumers and contributes significantly to the success of the Bureau’s mission.”

• Self-policing

• Self-reporting

• Remediation

• Cooperation

CFPB BULLETIN 2013-06 Responsible Business Conduct


Recent cases and consent orders – re: AfBAs

Early CFPB Enforcement Actions – and what they mean to your business Section Two – Recent consent order re: AfBAs

• Background – AfBAs

• Requirements for creating “safe harbor” • Appendix D Affiliated Business Disclosure Statement

• Recent enforcement actions

• JRHBW Realty, Inc. dba RealtySouth; TitleSouth, LLC



Background – AfBA

RESPA Section 8(c)(4) provides that “affiliated business arrangements are permitted as long as: • a disclosure of the existence of the arrangement and a

written estimate of the charge or range of charges generally made by the provider to which the person is referred (commonly referred to as an ABA Disclosure) is provided;

• the consumer is not required to use the affiliated business; and

• the only ‘thing of value’ received as a result of the arrangement is limited to a return on an ownership interest.”

12 U.S.C. section 2607(c) (4) (emphasis added)



Background – AfBA – Appendix D Disclosure Form “Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for [settlement of your loan] [or] [purchase, sale or refinance of] the subject property. THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVCIES AND THE BEST RATE FOR THESE SERVICES.”


Resources

Early CFPB Enforcement Actions – and what they mean to your business Resources • www.consumerfinance.gov • www.ALTA.org • www.MBA.org • www.mortgagecompliancemagazine.com

http://www.consumerfinance.gov/

http://www.mba.org/

CFBP’S RESPA & UDAAP ENFORCEMENT: WHAT DOES IT MEAN TO THE TITLE INDUSTRY Respa Section 8 (non-MSA) enforcement

and consent orders Cordray’s PHH Decision Service Provider’s UDAAP liability Consent Order Trends SAUL EWING LLP

1st Alliance Lending, LLC • Facts:

– First Alliance mortgage lender focused primarily on providing loss-mitigation financing to distressed borrowers • Obtained troubled mortgages from servicers, and offer

consumers new loans with reduced principal amounts under federally related mortgage programs.

– Relied upon hedge fund investment to fund loans. – Split revenues and fees with affiliates of the hedge fund. – 2011, First Alliance secured less costly financing and

ended funding arrangements with the hedge fund and its affiliates.

– For some reason, First Alliance continued to split origination and loss-mitigation fees with Hedge Fund’s affiliates from 83 loans made between August 2011 and April 2012.

SAUL EWING LLP

1st Alliance Lending, LLC

• 1st Alliance does the right thing – Self reports RESPA violation to CFPB and fully

cooperates with the CFPB’s investigation. – CFPB reports that 1st Alliance’s conduct was

wholly consistent with Responsible Business Conduct bulletin.

• Consent Order – First Alliance required to pay a civil money

penalty of $83,000 to the Bureau and agrees not to violate RESPA in the future. SAUL EWING LLP

CFPB v. Borders & Borders PLC (2013) • Facts:

– Enforcement action in U.S. District Court for the Western District of Kentucky against law firm and its named members.

– Allegations: • Borders & Borders and members operated nine joint

ventures with the owners and managers of local real estate and mortgage broker companies.

• Used companies to disguise the payment of referral fees/kick backs as distributions to the companies’ members. – Real estate brokerage/agent partner referred buyer to B&B for

representation on purchase – B&B would make sure that one of the “affiliated” JV title

company provided the title/settlement services for the transaction

– Profits from JV title company would be split among owners of the JV.

SAUL EWING LLP

CFPB v. Borders & Borders PLC • Allegations continued

– None of the nine joint ventures were not bona fide entities: • Did not have their own office space, email addresses,

or phone numbers; • All nine companies shared a single independent

contractor to provide core title services; also an employee of Borders & Borders;

• No other customers except home buyers that had been referred by B&B;

• No advertising to attract other business; • All general and core title services were performed by

B&B employees and JV’s did not cover their own expenses.

SAUL EWING LLP

CFPB v. Borders & Borders PLC Relief Sought by CFPB Disgorgement of all revenue “earned”

by JVs. Individual and corporate members of JVs.

Injunctions against B&B and its members, and all other JV members from being members of or affiliated with an ABA.

SAUL EWING LLP

CFPB v. Borders & Borders PLC CFPB current position:

Is not and does not need to reply on 10 Part HUD Sham AfBA test (6th Cir. decision irrelevant).

Parties agreed to enter into JV agreements based on separate agreements between members to refer business to one another.

SAUL EWING LLP

CFPB V. PAUL TAYLOR (2013) FACTS:

Taylor (president of Paul Taylor Corp. – builder) and Benchmark Bank have JV mortgage company (Stratford Mortgage Services, LC). $25,000 capital contribution each.

Taylor and Willow Bend Mortgage Co. have JV mortgage company (PTH Mortgage Company).

Taylor referred all of his buyers to either Stratford or PTH. Stratford and PTH performed no mortgage originations,

underwriting or processing services – Benchmark or Willow did with one employee.

Taylor received ownership distributions and payments pursuant to an administrative “services agreement”. SAUL EWING LLP

CFPB V. PAUL TAYLOR (2013) CFPB Alleges Sham Affiliated Business using U.S.

Department of Housing and Urban Development Statement of Policy 1996-2 Regarding Sham Controlled Business Arrangements, 61 Fed. Reg. 29,258 (June 7, 1996).

Taylor Settlement and Consent Order. Taylor paid $118,194.20, the full amount his distributions for 3 yrs. Taylor and his companies prohibited from direct or beneficial

ownership interest of more than one percent shall cease and desist from engaging in real estate settlement services (other than the sale of homes), or maintaining an ownership interest in any entity that provides or purports to provide real estate settlement services for a period of five years. SAUL EWING LLP

CFPB v. STONEBRIDGE TITLE SERVICES

FACTS: Stonebridge “employed” individuals as

sales representatives who had relationships with referral sources, closing attorneys, etc.

Individuals conducted little or no sales services.

Individuals work was not directed or controlled by Stonebridge

Paid as W-2 employees.

SAUL EWING LLP

CFPB v. STONEBRIDGE TITLE SERVICES

Finding: Individuals were not W-2 employees, but

rather independent contractors paid on basis of referrals. Violation of RESPA 8(a).

SAUL EWING LLP

CFBP v. JRHBW Realty, Inc., d/b/a RealtySouth and TitleSouth LLC CFBP Consent Order – 8(c)(4) Disclosure deficiencies.

Did not use the format of Appendix D. Did not use capital letters or another means of highlighting the fact that

consumers could obtain similar settlement services from other providers. Did not advise that customers were free to shop around for those services

in a separate statement in disclosure, Rather incorporated into the end of a list of descriptions of seven

affiliated businesses, and was hidden in what appeared to be a second description of RealtySouth.

Disclosure form (given by Realty South) included marketing statements touting the benefit and value of the affiliated entities. "[w]e at RealtySouth believe our affiliates provide superior service,

value, and convenience;" "we believe that our affiliates' charges are reasonable and are competitive with the amounts charge by other for the same services;" and "[w]ith competitive, reasonable rates, coupled with the smooth and efficient manner in which the transaction will be handled, the affiliates of RealtySouth are in a unique position to provide you with exceptional value and service in handling your transaction."

SAUL EWING LLP

CFBP v. JRHBW Realty, Inc., d/b/a RealtySouth and TitleSouth LLC Found a Section 8(a) violation:

Violated Section 8(a) of RESPA by giving and receiving a thing of value pursuant to an agreement or understanding that RealtySouth refer settlement services related to federally related mortgage loans to TitleSouth by affirmatively influencing the selection of TitleSouth through the

designation of that affiliate in the 2011 Purchase Contract and 2012 Purchase Contract, as well as a pattern and practice of referrals to TitleSouth, resulting in increased distributions to the entities' shared parent company.

Marketing through the Disclosure Statements Why:

AfBA disclosure requirements were not met and marketing statements Allowed CFPB to say the receipt of distributions from AfBA

(generated from referral of business to the TitleSouth) was not exempted from 8(a) restrictions.

SAUL EWING LLP

CFBP v. PHH Decision CFPB v. PHH (Jan. 2014) Cordray’s decision on appeal (2015)

The Section 8(c) provisions: not exceptions to Section 8 Conduct that is not per se violations of Section 8 Look to parties’ agreement and conduct to

analyze Agreement/Understanding that

Agreement is entered into based on agreement to refer

SAUL EWING LLP

CFBP v. PHH Decision

Section 8(c)(4) Receipt of distributions from JV if

Notice of interest and benefit No required use Payments based on ownership interest

After Cordray’s decision?

SAUL EWING LLP

CFPB UDAAP ENFORCEMENT

Dodd-Frank defines “unfair” and “deceptive”

Dodd-Frank does not define “abusive”

Look to FTC guidelines and enforcement actions Targeted Acts:

Acts that curtail notice of potential loss; make it so loss cannot be avoided; Limit choice Failure to respond to consumer loss and complaints

SAUL EWING LLP

CFPB V. UNIVERSAL DEBT & PAYMENT SOLUTIONS LLC (2015) AFFIRMED THAT CFPB HAS UDAAP

ENFORCMENT AUTHORITY OVER “SERVICE PROVIDERS” SERVICE PROVIDER: ANY PERSON OR AFFILIATE

OF THAT PERSON WHO PROVIDES MATERIAL SERVICES TO COVERED PERSON.

COVERED PERSON: THOSE ENGAGED IN OFFERING OR PROVIDING A CONSUMER FINANCIAL PRODUCTS OR SERVICE TO CONSUMERS.

SERVICE PROVIDER WHOSE MATERIAL SERVICES PROVIDE SUBSTANTIAL ASSISTANCE TO A COVERED PERSON’S UDAAP VIOLATION IS SUBJECT TO ENFORCMENT ACTION.

SAUL EWING LLP

CFPB V. UNIVERSAL DEBT & PAYMENT SOLUTIONS LLC (2015) TITLE UNDERWRITERS AND TITLE AGENTS ARE

SERVICE PROVIDERS. CLOSING/SETTLEMENT AGENTS ARE SERVICE

PROVIDERS.

DIRECT UDAAP LIABILITY: If services facilitate or contribute to the ill intended schemes, if the injury was a predictable consequence of those actions.

INDIRECT UDAAP LIABILITY: Providing substantial assistance (not proximate cause), i.e., associated with activities in such a way to bring about eventual consequences. SAUL EWING LLP

Consent Order Trends

Requirement that defendant not participate in affiliated settlement service for at least 5 years.

Implementation of separate policies and procedures that CFPB is permitted to audit. Failed audit leads to UDAAP violation

Consumer restitution payment, in addition to penalty payment.

SAUL EWING LLP

Phillip L. Schulman K&L Gates LLP 1601 K Street NW Washington, DC 20006 (202) 778-9027 [email protected]

October 9, 2015

© Copyright 2015 by K&L Gates LLP. All rights reserved.

This presentation is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. DC-9940752-v1

TO AGREE TO MARKET, OR NOT TO AGREE TO MARKET…

that is the Question

AMERICAN LAND TITLE ASSOCIATION ANNUAL CONVENTION

Section 8(a) reads

No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a prat of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Section 8(b) reads

No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.

These subsections constitute RESPA’s prohibitions, and serve as the bases for enforcement proceedings and private litigation

Thou Shall Not….Provisions

klgates.com 39

Section 8(c) sets forth RESPA’s permissible conduct ● Iists conduct Congress identified as acceptable

Importantly, the subsection begins “Nothing in this section [i.e., sections 8(a) and 8(b)], shall be construed as prohibiting…”

• the “payment of a fee” to attorneys, title company agents, or lender agents “for services actually performed” (Section 8(c)(1));

• “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” (Section 8(c)(2));

• “payments pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and brokers” (Section8(c)(3)); and

• Affiliated business arrangements “so long as [safe harbor requirements are satisfied] (Section 8(c)(4)

Permissible Conduct

klgates.com 40

Elements of Section 8(c)(2)

Payment for Goods Provided and/or Services Performed

2 Part Test Good/Services must be actual, necessary and

distinct

Payment must be commensurate with the value of goods/services

Interest In MSAs Had, Until Recently, Been on the Rise

1. Significant increase in FHA net worth requirements soured many prospective AfBA members

2. New QM Rules affiliated charges counted toward 3% cap

3. Advantages to MSAs no capitalization no infrastructure payment not tied to volume

Types of MSAs Two Types of Marketing Agreements

1. Flat Fee Agreements

most prevalent

payment not for referral of particular transaction

services include signage, web banners, brochures, customer lists, co-advertising, etc.

2. Per-Transaction Agreements

Market to particular customers

no sale = no fee earned

HUD’s View of MSAs

1. HUD has never claimed MSAs are illegal

2. Just the opposite

3. MSAs that meet the 8(c)(2) exception do not violate Section 8(a)

4. HUD explains its views to the world in June 2010 Interpretive Rule

HUD Interpretive Rule June 2010 1. HUD stuck with 8(c)(2) Exemption

2. But HUD chips away at Exemption opposes direct consumer solicitations

opposes directly handing consumer information

opposes exclusivity

prefers referrer be an agent

prefers written agreement

prefers written disclosure

See, 5th, 6th, 7th and 11th Circuit Court opinions 1. In Howland (7th Cir.), Court stated as long as defendant provided only

services…they are allowed a reasonable fee under Section 8(c)(2)

2. In Glover (8th Cir.), Court held that Section 8(c) clearly anticipates payments to individuals for goods or facilities

• “excludes these payments from the Section 8(a) prescription”

3. In Edwards (9th Cir.) – August 2015

“Notwithstanding the general prohibition of exchanging anything of value for a referral, a statutory safe harbor exempts a payment from RESPA violation if the payment – despite being made simultaneously with a referral – was for goods or facilities actually furnished or for services actually performed.” See, Id. §2607(c)(2).

Federal Courts Have Long Held Section 8(c)(2) Creates a Safe Harbor to Protect Conduct Otherwise Actionable Under Sections 8(a) and 8(b)

klgates.com 46

WHERE DOES CFPB STAND ON MSAs?

CFPB Views on MSAs and Section 8(c)(2)

1. Lighthouse Title Consent Order September 2014

2. PHH Appeal Decision – June 2014 8(c)(2) does not exempt prohibited conduct under Section

8(a)

3. CFPB Press Release on MSAs July 2015

CFPB Weighs In: Lighthouse Title Consent Order Findings and Allegations

1. Lighthouse enters into series of MSAs with various real estate brokers in return, brokers would refer title business without MSAs, Lighthouse feared loss of business no determination of FMV under the MSA

2. CFPB alleges monthly fee based upon revenues generated monthly fee based on what competitors willing to pay

brokers failure to monitors brokers to confirm services actually

provided

CFPB Weighs In: Lighthouse Title Consent Order (cont’d)

Findings and Allegations 3. Entering into a contract is a “thing of value” even if

fees paid under contract are at FM

4. Entering into a contract with understanding that brokers will refer title business violates Section 8(a) of RESPA

5. IMPORTANT: CFPB does not say MSAs are per se illegal

But if payment is in any way for referral of business and not for services performed = violates Section 8(a)

PHH Decision – June 2014 1. PHH Decision addressed Section 8(a) and (c) in

the context of mortgage insurance and reinsurance – not MSAs

2. But like MSAs captive reinsurance relies upon Section 8(c)(2) to justify its compliance with RESPA So CFPB views in PHH important to legality of MSAs

3. PHH mortgage claimed its conduct fell within 8(c)(2) because payments to it were bona fide compensation … for services actually performed

PHH Decision – June 2014 (cont’d)

4. CFPB adopted: New and stark interpretation of Section 8(c)(2) at odds

with plain language of the statute

5. According to CFPB Section 8(c)(2) does not provide a substantial exemption

from Section 8(a)

Because 8(a) prohibits a payment that is tied in any way to a referral of business

6. In other words, if there is a referral in the transaction – 8(c)(2) cannot preempt or cure the 8(a) prohibition

7. Section 8(c)(2) merely: “clarifies Section 8(a) … but does not provide a substantive exemption from Section 8(a)”

CFPB Press Release – July 2015 1. Given the uncertainty and risk associated with MSAs –

several lenders announced they were ceasing their MSA activities

2. Same day, CFPB issued the following press release: “Wells Fargo’s decision to exit all marketing services agreements is an important step for the mortgage industry towards ensuring compliance with the RESPA statute and freeing up more choices for consumers. We are concerned that such agreements can carry significant legal risk for companies and undermine transparency for consumers. Companies should take note of today’s action and consider carefully whether their own business practices comply with the consumer protections provided under the law, which bars kickbacks for customer referral.”

CFPB Press Release – July 2015 (cont’d)

3. IMPORTANT

* Press Release says we applaud actions of these lenders

MSAs are high risk

SS Providers should make sure their activities comply with RESPA

* Press Release does not say MSAs are per se illegal

MSAs Best Practices

1. Avoid quid-pro-quo agreements payments never for referral of business

2. Independent third party valuation a must

3. Trust but Verify have Broker certify to services performed

but conduct periodic on-site audits

4. Services should be geared to advertising to general public not individual consumers

5. Do not pay for direct consumer solicitations nor access to sales staff

MSAs Best Practices (cont’d)

6. Avoid exclusive arrangements

7. Avoid preferential designations

8. Disclosure Statement to consumers encouraged

9. Justify reasons for adjusting monthly fees

10. Comply with Section 8(c)(2)

Early CFPB Enforcement Actions

Audience Questions

Early CFPB Enforcement Actions – and what they mean to your business

Questions?


Speaker Contact Information

Early CFPB Enforcement Actions – and what they mean to your business Speaker Contact Information Phil Schulman, Esq. Frances X. Riley, III, Esq. K&L Gates, LLP Saul Ewing, LLP [email protected] [email protected] 202.778.9000 609.452.3150 Donald O’Neill, Esq. WFG National Title Insurance Company [email protected] 916.300.1817

mailto:[email protected]

mailto:[email protected]


Disclaimer

Early CFPB Enforcement Actions – and what they mean to your business Disclaimer The foregoing information is not a substitute for legal advice, is for your reference only and is not intended to represent the only approach to any particular issue. This information should not be construed as legal, financial or business advice and users should consult competent legal counsel and subject-matter experts to be sure that the policies adopted and implemented meet the requirements unique to your company.

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