CFPB Head Appointment In Jeopardy

January 30, 2013

Source: Weiner, Brodsky, Kider, PC

On Friday, January 25, 2013, the United States Court of Appeals for the D.C. Circuit emphatically struck down President Obama’s January 2012 “recess appointments” of three members to the National Labor Relations Board. In doing so, the Court emphasized the narrow construction of the Constitution’s Recess Appointments Clause in a sweeping manner that is sure to bolster current challenges to Richard Cordray’s “recess appointment” as Director of the Consumer Financial Protection Bureau on the same day.

Generally, the Constitution requires Presidential Appointments to be confirmed with the “advice and consent” of the Senate. The Recess Appointments Clause provides the President with the power to appoint executive officers during times of Congressional recess, without Senate confirmation, when the Senate cannot provide its advice and consent. The DC Circuit struck down the President’s NLRB “recess appointments” on two separate grounds: (1) “Recess” as used in the Constitution means only the specific time period between official sessions of Congress; and (2) the vacancy being filled by a
“recess appointment” must arise during a recess of Congress. The DC Circuit found that neither of these conditions was present in the President’s “recess appointments” to the NLRB in January 2012.

In its ruling regarding the definition of “the Recess,” the DC Circuit construed the term narrowly because the Constitution uses different terms in different portions of its enumerated powers, specifically using the terms “adjournment” and “Recess” in different aspects for its enumeration of Congressional powers, and found no basis to adopt the NLRB’s argument that recess can mean indeterminate periods of inactivity by Congress and should be within Presidential discretion to determine. The DC Circuit forcefully and colorfully rejected these arguments: “An interpretation of ‘the Recess’ that permits the President to decide when the Senate is in recess would demolish the checks and balances inherent in the advice-and-consent requirement, giving the President free rein to appoint his desired nominees at any time he pleases, whether that time be a weekend, lunch, or even when the Senate is in session and he is merely displeased with its inaction.”

The DC Circuit also rejected the government’s position that any vacancy can be filled during recess, instead holding that the explicit language of the Constitution holds that recess appointments may only be used for vacancies that arise during the recess. The DC Circuit further held that any such vacancy must be filled during the same recess, otherwise the President cannot use the recess appointment power.

This decision will likely heavily influence the current litigation pending against the recess appointment of Richard Cordray as Director of the CFPB, as Director Cordray was appointed by President Obama on the same day by a purported “recess appointment.” This decision places not only Director Cordray’s appointment in doubt, but places into question the validity of a number of actions taken by him or the CFPB since the Dodd- Frank Act required a Director to be in place prior to the CFPB obtaining certain of its supervisory authorities.

We will continue to monitor this situation as new developments arise.


CFPB Proposes Loan Officer Composition Rules

August 17, 2012

Just in as reported in HousingWire late Friday…more details and analysis will follow next week….

The Consumer Financial Protection Bureau proposed rules on August 17 that it says will bring greater accountability to the home loan origination market and make it easier for consumers to understand loan costs. They expand existing regulations governing loan originator compensation and qualifications, while implementing new laws.

The proposed rules require lenders to offer consumers a comparable, alternative loan with no upfront discount points, origination points or fees that are retained by lenders or their affiliates before it imposes upfront points and fees on consumers. The ban on paying or receiving commissions based on terms of the transaction other than the loan amount will continue, but with some refinements. For example, the proposal allows reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances. Lenders will be forced to reduce interest rates when consumers elect to pay upfront points, expressed as a percentage of the loan amount, or fees to covers costs associated with origination or prepaid interest charges.

Earlier in the year, the CFPB considered a flat origination fee that could not vary with the size of the loan. However, after meeting with outside groups and small businesses, the bureau decided that approach “was not in anyone’s interest,” a senior CFPB official said on a conference call. “After looking at that information, we thought (a flat fee) would have a disproportionate impact on lower income borrowers,” the official said. “Also, it seemed like it would be a very complicated approach, that is you could have multiple fees, which goes against the notion of simple disclosure and shopping tool for consumers.”

Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators must meet different sets of qualification and screening standards, depending on whether they work for a bank, thrift, mortgage brokerage or nonprofit organization. The CFPB is proposing to implement Dodd-Frank Act requirements that subject all loan originators to character and fitness requirements, criminal background checks and training requirements for loan originators.

“The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable,” the bureau said in a statement. The public has October 16 to provide comments on the proposed rules, which the CFPB will analyze before finalizing in January. “Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”

CFPB Considers Changes In Loan Officer Compensation

August 8, 2012

The Consumer Financial Protection Bureau will consider an exemption for a Dodd-Frank Act rule prohibiting mortgage loan officers from being paid by both the borrower and the brokerage firm. The Federal Reserve rule went into effect in April 2011, forbidding payments to loan officers based on a mortgage’s terms or conditions. The rules also keep a loan officer from being paid by both the borrower and any other party in the deal. This was meant to crack down on the practice of steering borrowers into higher cost loans, which would result in a higher payment for the loan officer.

The CFPB held a meeting with industry members in June to discuss possible exemptions. The Fed rule without any leeway goes into effect January 21, 2013. “Because these types of compensation are present in the vast majority of originations and the payment of upfront points and fees is widespread, implementation without exemption would significantly change the financing for most current mortgage loan originations,” the CFPB said in an outline of proposals released in May.

The exemption under consideration would allow borrowers to pay discount points resulting in a minimum deduction of the interest rate for each point paid upfront and a “flat” origination fee that cannot vary with the size of the loan. But the Mortgage Bankers Association even pushed back against that stipulation in a letter. “The CFPB could make this determination by concluding that absent an exemption, all points and fees would have to be included in the rate, resulting in higher rates and less affordable credit for borrowers. This would provide ample basis for either waiver or exemption,” according to the MBA letter. Borrowers of loans with a lower balance could end up being charged higher fees as a percentage of their mortgage than wealthier homeowners taking out larger loans, according to the trade group. Also, a flat fee could result in smaller mortgages exceeding minimal percentage-based triggers under the pending CFPB rule on the Qualified Mortgage. Originators would be prohibited under the current proposal from extending higher-priced mortgages without determining a borrower’s ability to repay. It defines a higher-priced loan as having an interest rate set by 1.5 percentage points more than a comparable transaction. Flat fees on smaller loans could push the expense beyond this threshold, making less available due to a lenders’ heightened liability should the loan later default.

CFPB Director Richard Cordray testified earlier in the year that easing restrictions on the loan officer compensation rule would be “sensible.” The CFPB is considering a slew of other exemptions as well, even allowing a dual-compensation in some particular states but not others, according to the MBA. Or, it might apply the flat fee exemption to particular mortgages, not all of them. The bureau said it might also allow the exemption to sunset the partial exemption after five years. This would give the CFPB time to evaluate the rule to see how it is working with the exemption. “At that time, the CFPB will have had time to conduct a more detailed assessment of the payment of points and fees in a more stable regulatory environment to determine the long-term regulatory regime that would maximize consumer protections and credit availability,” according to the proposal outlined in May.

But the MBA pushed back even against that, complaining a sunset or partial implementation would result in higher costs and confusion. They want a clear broad exemption from a rule that was once highly contested in court before industry representatives dropped suits last year. “Nearly 16 months ago, the lending industry implemented the Federal Reserve’s loan officer compensation rules, which required a complete overhaul of compensation practices for mortgage loan originators,” the MBA wrote. “The implementation process was problematic, guidance that seemed to extend far beyond the rules was provided, and compliance was demanded in too short a period.” Source: HousingWire

The Truth About The New Disclosures

July 31, 2012
By JOHN WEISTART MCT FORUM – McClatchy-Tribune Information Services
The housing and mortgage crisis is far from settled. The devastating personal and financial impacts on consumers will be with us for a very long time.

The total loss of asset value among U.S. consumers is about $7 trillion. The median net worth of a 50-year old couple in the United States has dropped from $167,000 in 2004 to $118,000 in 2010, mostly due to the decline in home values.

In addition, we face many years of lost future opportunities. Because so much family income is now devoted to feeding underwater mortgages and mortgage default debt, millions of people will receive less education, less support and fewer opportunities to move to better jobs in new locations.

So any discussion of reforms that will correct the mortgage problems of the past should be treated as a serious matter.

For reasons that are far from clear, that has not been the initial response to a carefully crafted proposal to change the way prospective mortgage terms are presented to consumers. The proposal from the Consumer Financial Protection Bureau was greeted with a hearty round of catcalls: “Yet another government agency running amuck” “New Mortgage Disclosures are a Bust” “EPIC FAIL!” Everyone is entitled to his or her opinion, perhaps.

But a very disturbing feature of these commentaries is the huge amount of misinformation and political innuendo that they introduce into a matter that is of critical importance, both to families living ordinary lives and to the general economy.

For example, one commentator, a real estate finance professor appearing on “The Willis Report” on Fox Business News, boldly asserts: “they deleted (in the proposed disclosures) the single most important piece of information for consumers, which is the APR” (annual percentage rate).

This is simply not true. The APR is on page three of the new disclosure form.

Another example, from a law professor’s op-ed piece in the Wall Street Journal: “The agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.” Again, not true. The actual text of the proposed rule is 209 pages. The majority of that text merely restates existing law and is not new.

And then there is the same Wall Street Journal author who states that the regulations will limit the consumer’s ability to choose a mortgage that runs a few years with a big balloon payment at the end.

Again, 100 percent wrong. The proposed regulations do not place any limitations on access to balloon payment mortgages.

We can do much better than this muddle of inflammatory characterization and disinformation. We should restart the discussion of the regulations, and this time promise temperance and accuracy.

There are many serious issues that need to be discussed with respect to the proposed regulations. For example, the financial bureau staff undertook carefully structured consumer testing of different forms of disclosure language. Those tests showed that the prior forms of disclosure generated widespread confusion among consumers and the potential for huge consumer financial losses. Are we confident that enough testing has been done? It is very difficult to change a new disclosure once it has been approved.

How about extending the testing period to allow for the actual use of different versions of the forms in real world transactions, as some industry sources have proposed? Some types of disclosure may be better than others when the great time pressures of an actual real estate closing are added to the mix.

And shouldn’t we reward creditors who consistently do a superb job of educating consumers about their mortgages? Removing them from the regulatory process for a period of time would allow the bureau to give more attention to the truly bad actors who obfuscate, rather than make clear, what mortgage terms mean.

We have gotten off to a bad start in an important public discussion. But there is still time to turn away from the earlier efforts at incineration and have an honest, neutral examination of these well-presented proposed mortgage disclosure rules.

CFPB Re-Opens Qualified Mortgage Comments–Keys on DTI Ratio

May 31, 2012

From Housing Wire: Armed with new data, the Consumer Financial Protection Bureau is reopening the comment period for the qualified mortgage proposal.

The proposal addresses the definition of a qualified mortgage, or a consumer’s ability-to-repay requirement for a loan secured by a home.

The proposal’s original comment period closed in July 2011, but the bureau is reopening it until July 9 to seek comments specifically on new data and information obtained during and after the close of the original comment period.

The qualified mortgage rule is one of the most important Dodd-Frank rules governing how mortgages will be written and is likely to arrive by the end of the year. Industry trade groups and influential market players are meeting regularly with administration and regulatory officials to ensure the rule does not limit mortgage availability in the future.

In response to information received the public, the bureau is seeking comments and data on potential litigation costs and liability risks associated with violation of ability-to-repay requirements.

The commenters’ estimated costs and damages ranged from $70,000 to $110,000 depending on various assumptions, such as the interest rate on a loan or whether the presumption of compliance is a safe harbor or a rebuttable presumption. However, some consumer groups assert the potential incidence of litigation is relatively small, and therefore liability cost and risk are minimal for mortgage creditors.

The new proposal suggests CFPB may be serious about giving borrowers the ability to challenge whether they should have received the loan, said Jaret Seiberg, senior policy analyst at Guggenheim Securities, in a commentary note about the CFPB’s report: “As a result, we believe the risk is rising for an adverse ruling in 2013.”

New data the CFPB received from the Federal Housing Finance Agency consists of all single-family mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, but does not include private-label mortgage-backed securities bought by the government-sponsored entitites.

Among other elements, the data include payment-to-income and debt-to-income ratios at origination; initial loan-to-value ratios; and borrower credit scores.

The CFPB is using the data to perform statistical analyses to assist it in defining a qualified mortgage and examining various measures of delinquency and their relationship to other variables such as a consumer’s total DTI ratio.

“Loan performance, as measured by delinquency rate such as 60 days or more delinquent, is an appropriate metric to evaluate whether consumers had the ability to repay those loans at the time made,” CFPB said in a report. “These specific tabulations include first-lien mortgages for first or second homes, that have fully documented income and that are fully amortizing with a maturity that does not exceed 30 years.”

Delinquency rates for loans meeting strict DTI requirements shrunk dramatically from 1997 to 2009. In 1997, 4.38% of loans with a DTI below 46 were delinquent for more than 60 days; in 2009 that number had fallen to 0.78%.

Twenty Percent Down Payment Standard To Get Better?

May 30, 2012

A group of federal regulators will likely lower the proposed 20% down payment requirement for home-loan lenders who wish to avoid holding added credit risk on the securitization of mortgages. The five federal regulators proposed the rule in March 2011 under the Dodd-Frank Act. It requires a bank to maintain 5% of the credit risk for home loans and other loans sold to the secondary market, also known as skin-in-the-game.

The exception is the qualified residential mortgage, which requires at least a 20% down payment from the borrower, among other standards including a tightened debt-to-income ratio. Regulators are expected to loosen these restrictions in a finalized rule due this year after the Consumer Financial Protection Bureau cements new guidelines on the broader qualified mortgage rule. David Stevens, CEO of the Mortgage Bankers Association, said from his talks with policymakers in recent weeks that the down payment requirement on the QRM will likely be lowered.

When rule makers announced the proposal last year, fair lending groups and industry officials immediately criticized it for shutting out first-time homebuyers who could not afford the upfront costs. A report from CoreLogic showed 39% of buyers in 2010 put less than 20% down on their purchase. The Department of Housing and Urban Development suggested to Congress last year a 10% down payment threshold instead.  Source: HousingWire

CFPB To Regulate Originations Including Flat Fee Proposal

May 10, 2012

 From: Ballard Spahr

The Consumer Financial Protection Bureau announced yesterday that it will propose residential mortgage loan origination standards this summer, with a goal of adopting final rules in January 2013. The standards will address the compensation of loan originators, the charging of discount points and origination points and fees, and uniform qualification requirements for individuals who are loan originators.

The proposal will implement a portion of the loan originator compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are similar in some respects to a loan originator compensation rule adopted by the Fed in 2010 under the Truth in Lending Act.

Although the CFPB proposal will address the compensation of loan originators and certain other issues, it will not address the Dodd-Frank provisions that prohibit steering by loan originators. The CFPB plans to address the anti-steering provisions “at a later time.”

The important elements of the proposal under consideration by the CFPB are:

Originator Qualifications

Under the SAFE Act loan originator employees of depository institutions must be registered and loan originator employees of non-depository institutions must be licensed, and the requirements for licensing are more onerous. In particular, to obtain a license an originator must (1) not have a felony conviction, (2) demonstrate appropriate character, fitness and financial responsibility, (3) satisfy education requirements and (4) pass a test.

The CFPB is considering requirements that originators employed by depository institutions must meet character, fitness, and criminal background standards equivalent to the standards for obtaining a license, and that the depository institutions provide appropriate training to the originators commensurate with the size and mortgage lending activity of the institution.

Points and Fees

Dodd-Frank provides that a consumer may pay a loan originator’s compensation, but a creditor could not pay a loan originator’s compensation unless the consumer did not pay any loan originator compensation and also did not pay any upfront discount points, origination points or fees, other than bona fide third-party charges, except as permitted by a regulatory exception.

The CFPB is considering an exception under which a creditor could pay loan originator compensation as long as (1) the consumer does not pay any originator compensation, (2) if the consumer pays any discount points, the points must be bona fide (pursuant to standards that the CFPB is developing under the ability to repay requirements) and the creditor also must offer the option of a no discount point loan, (3) if the consumer pays any origination fees, the fees are “flat” and cannot vary with the size of the loan, and (4) any upfront fees paid to an affiliate of the creditor or loan originator are also “flat” and cannot vary with the size of the loan, except payments for title insurance which can vary based on the loan size.

The CFPB, thus, is considering an exception that would prohibit the common percentage-based loan origination fee in cases in which the creditor paid compensation to a loan originator. It is unclear if the CFPB understands that it is common practice for lenders to offer a range of rate and discount point combinations for a given loan.


The existing loan originator compensation rule prohibits the compensation of a loan originator based on the terms or conditions of a loan, or on a proxy for the terms or conditions of a loan. The CFPB acknowledges the uncertainty created by the proxy restriction, and is considering establishing a test for whether a factor is such a proxy.

Under the test, a factor would be a proxy for a loan term or condition if (1) the factor substantially correlates with a loan term, and (2) the loan originator has discretion to use the factor to present a loan to the consumer with more costly or less advantageous term(s) than the term(s) of another loan available through the originator for which the consumer likely qualifies. It appears that further guidance will be needed for companies to better understand how to assess factors under the test.

Compensation Based on Profits

The Fed staff interpreted the existing loan originator compensation rule to prohibit the compensation of loan originators based on mortgage-related profits. The CFPB is considering proposals that would permit loan originators to be compensated based on mortgage business profits subject to various restrictions, but compensation to a loan originator based on profitability of the loans he or she originates would not be permitted. Consistent with guidance provided in Bulletin 2012-02.

The CFPB is considering an exception for various qualified retirement and related plans. The CFPB also is considering exceptions that would permit compensation through bonuses, or through qualified or non-qualified plan contributions, based on profits if the total mortgage revenue portion of the profits was limited, and/or both the number of loans made by an originator and the proportion of the originator’s loans as compared to the loans made by the company were below certain levels (no specific levels are proposed).

Pricing Concessions

Under the existing loan originator compensation rule, a loan originator may not reduce his or her compensation or pay for a borrower cost as a method of providing a pricing concession to the consumer. The CFPB is considering a proposal that would allow a loan originator to cover unanticipated increases in third party settlement charges, if the charges are not controlled by the originator, creditor or an affiliate of either, and the charges exceed or are in addition to amounts disclosed in the Good Faith Estimate.

Point Banks

The Fed staff interpreted the existing loan originator compensation rule to prohibit various arrangements, often called “point banks,” under which a loan originator could apply credits to adjust the standard pricing on a loan. The CFPB is considering a proposal that would define point bank arrangements as “compensation” for purposes of the loan originator compensation provisions, and that would provide guidance on circumstances in which the awarding of points to originators would not violate the provisions.

The CFPB is considering an approach under which a creditor could contribute to a point bank if (1) the creditor does not base the amount of the contribution for a given transaction on the terms or conditions of the transaction, (2) the creditor does not change its contributions to the point bank over time based on terms or conditions of the originator’s loans, or on whether the originator overdraws the point bank, and (3) if the originator may overdraw the point bank, the creditor does not reduce the originator’s commission on a transaction when he or she does so.

Broker-Paid Compensation

The CFPB interprets the Dodd-Frank loan originator compensation provisions to prohibit a mortgage brokerage firm from paying compensation to a loan originator employee based on a specific loan transaction, such as a commission based on the loan amount, if the consumer pays compensation to the brokerage firm. The CFPB is considering an exemption that would permit a mortgage brokerage firm to pay compensation to a loan originator employee based on a specific transaction as long as the conditions noted above on upfront points and fees that would permit a creditor to pay originator compensation are met.

A summary of the issues being considered by the CFPB is set forth in outline to be used by a Small Business Review Panel being convened pursuant to the Small Business Regulatory Enforcement Fairness Act.

The CFPB also presents questions on which it seeks comments from small business representatives.

Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).