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Compliance Insights Top News: Court Rules on RESPA Enforcement and CFPB Constitutionality

Steven Stachowicz, Managing Director Risk and Compliance

In our most recent edition of Compliance Insights, we highlight the compelling news regarding the U.S. Court of Appeals for the District of Columbia Circuit’s ruling in favor of a large, non-bank mortgage servicer seeking relief from an order by the Consumer Financial Protection Bureau (CFPB) to pay more than $100 million in penalties related to the assessment of mortgage reinsurance premiums charged on loans dating back to July 2008.

The court ruled that the CFPB violated the servicer’s due process standards by retroactively applying a regulatory interpretation to invalidate a long-standing and accepted pronouncement from the Department of Housing and Urban Development (HUD) regarding the Real Estate Settlement Procedures Act (RESPA). The court also ruled that the CFPB’s case did not correctly consider the applicable statute of limitations, which could result in effectively “open-ended” liability for the financial servicing industry. The court further held that statutes of limitations apply not only to RESPA, but also to all 19 of the consumer protection statutes that the CFPB administers.

Even more notably, the court agreed with the lender’s assertion that the structure of the CFPB (created under the Dodd-Frank Act as an independent agency under a single director, rather than a board or group of commissioners) constituted “unprecedented and potentially inappropriate concentration of power in a single person,” in violation of the constitutional separation-of-powers doctrine. Although harsh in its criticism of the CFPB’s enforcement approach, the court rejected the lender’s request to shut the agency down until Congress could legislatively fix the constitutional concerns. Instead, it ruled that the director should serve at the will of the president, making the CFPB an executive department rather than an independent agency.

The ultimate effects of the ruling are unclear in light of the pending election and the likelihood of a CFPB appeal. Financial institutions should monitor developments in this case closely.

In other compliance news, the Federal Deposit Insurance Corporation (FDIC) has issued draft guidance on third-party lending. With a growing trend toward partnerships between insured depository institutions and third parties such as marketplace lenders and third-party technology providers, as well as recent challenges encountered by institutions implementing complex lending and servicing regulatory requirements, such as the TILA-RESPA Integrated Disclosures (TRID) in October 2015, third-party lending relationships are drawing increased regulatory scrutiny.

The draft, published in July, expands on the FDIC’s existing 2008 guidance regarding third-party risk management and outlines risk management considerations for depository institutions that have arrangements in which they rely on a third party to perform a significant aspect of the lending process, such as underwriting, origination, servicing and collection. The FDIC’s assertion here is that when banks partner with third parties, they effectively “integrate” the internal processes of the third party into their own system, increasing operational complexity and risk.  Transaction risks increase when assignee liability is taken into account. Consumer compliance risk is affected to the extent that the third party has established an effective compliance management system.

To mitigate these risks, the FDIC proposes that institutions implement a risk management program specifically for third-party lending arrangements, and robust processes to evaluate and monitor these relationships.

Other compliance topics covered in the October Compliance Insights newsletter include:

  • The Bahamas Leak and the Call for Global Transparency
  • CFPB Wins Tribal Lending-Related Case Against Nonbank Servicer
  • HMDA Implications of the Updated Uniform Residential Loan Application

To learn more about these developments and download the newsletter, click here.

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