CFPB Nonbank Registration, PHH Court Challenge Eyed This Fall

cfpb nonbank registration phh-court challenge eyed this fall

Even the most experienced and hardened mortgage industry players may find themselves taken aback upon careful review of an embryonic proposal by the Consumer Financial Protection Bureau that, if carried to term, would require nonbank financial institutions to register with the CFPB, observers warn.

In a Request for Information (RFI) quietly issued by the Bureau on July 7, the CFPB said it is “considering whether to propose a rule” requiring nonbank registration. To that end, the Bureau said it is exploring whether to procure a comprehensive and interactive online web-based registration system.

“The CFPB believes that obtaining information on such a system will aid its consideration on whether to propose a registration rule for nonbank financial institutions,” explained the RFI.

The 8-page RFI posted on the Federal Business Opportunity website seeks vendor feedback as it outlines the Bureau’s desired capabilities and services of the potential registration system.

Nonbank financial institutions that fall under the CFPB’s purview (as decided by the CFPB) would use the registration system to “apply for, amend, update, or renew a registration using a single set of uniform applications,” according to the RFI. “Such a potential registration system might also be used to collect financial and operational data as well as organizational structure data.”

The CFPB further noted that registration information collected “might” include business register data such as name, address, aliases, industry and ownership information. The system “might” also be used to integrate business data with other regulatory data, according to the RFI. Vendor responses to the RFI were due July 29.

The Bureau said that should it propose a nonbank registration rule, “it would provide notice and an opportunity for comment pursuant to the Administrative Procedures Act.” The CFPB added it “would issue a final rule only after giving careful consideration to all comments.”

A Huge Outcry

The trade group official, who asked to remain anonymous so as to speak candidly, predicts a huge outcry throughout the industry when the full import of the Bureau’s proposal is realized.

“From an industry viewpoint, I don’t think most people in the industry have a clue that this is even coming. They just don’t,” explained the official. “When they hear about it, they are going to say ‘What!’ They are going to be somewhat incredulous. Next, they will ask ‘How can they do this?’ Answer: It’s part of Dodd-Frank.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by a Democrat supermajority Congress in 2010 as a response to the 2008 financial crisis. The DFA mandates broad and stringent regulatory oversight of financial institutions. It created and empowered the CFPB with broad, discretionary authority to implement the DFA’s mandate.

Under Section 1022 of the Dodd-Frank Act, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person,” according to John D. Socknat of the Ballard Spahr law firm.

Socknat noted in a recent analysis that the Bureau had telegraphed its intent to broaden its rulemaking scope to envelop nonbanks, however obliquely, in its Fall 2015 and Spring 2016 rulemaking agendas.

“The Dodd-Frank Act also allows the CFPB to supervise any nonbank that it has reason to determine is engaging or has engaged in conduct that poses risks to consumers with regard to consumer financial products or services,” the Bureau states in its July RFI.

The trade group official predicts that the prospect of nonbank registration will be reinvigorate the debate over the CFPB’s authority.

“People will be saying, ‘I thought we were done with Dodd-Frank implementation. How much more is there?’ The answer is nobody knows,” said the trade group official. “But it’s great for the compliance lawyers.”

The CFPB and DFA commemorated its respective 5th and 6th anniversaries this past July. During its relatively short existence, the Bureau has made an indelible mark on the industry through its hyper-aggressive rulemaking and muscular enforcement typified by its use of broad sweeping civil investigative demands and short compliance deadlines.

Designed by Dodd-Frank authors to be impervious to direct congressional or even executive branch oversight, many throughout the financial services industry see the CFPB as a disruptive and heretofore unrelenting juggernaut with an ever-expanding grasp.

Judicial Relief?

In a July blog post citing its accomplishments over the half-decade, the Bureau boasted of some $11 billion in relief for more than 27 million harmed consumers – including legal action taken against mortgage companies.

One of those mortgage companies is challenging the CFPB head-on in court. In the process, it has come to represent the first, best hope of industry participants desperate to see a rogue government entity, as many see it, reigned in.

In April, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit heard arguments from New Jersey-based PHH Corp. in its effort to overturn a $109 million penalty issued by the CFPB in June 2015 over alleged violations of the Real Estate Settlement Procedures Act (RESPA).

PHH contends that the CFPB misinterpreted RESPA and ignored a three-year statute of limitations under the law. An administrative law judge ordered PHH to pay a $6.4 million penalty but CFPB Director Richard Cordray then unilaterally hiked that amount to $109 million.

PHH isn’t just appealing the RESPA fine. It’s taking the fight to the Bureau in launching the first significant, direct constitutional challenge of the CFPB itself. Lawyers for the mortgage company argue that with a single independent director accountable to neither Congress nor the president, the CFPB represents a violation of the U.S. Constitution’s separation of powers doctrine.

The three-judge panel was reportedly impressed with PHH’s argument. The court is expected to rule on the case sometime this fall but an appeal by the losing side to the full D.C. Circuit Court of Appeals and perhaps even to the U.S. Supreme Court is widely expected.

Nonetheless, even a limited adverse ruling against the Bureau could draw blood and shatter the CFPB’s image of invulnerability, according to financial institutions consultant and Cato Institute adjunct scholar Bert Ely.

“The courts, and specifically the D.C. Circuit Court of Appeals, may have the last say, and it could be a significant one, in the PHH case,” said Ely. The trade group official agrees “A lot of people are rooting for it. To finally show that there is a limit to the CFPB’s reach somewhere.”

Unpacking Rules/Election Countdown

Amid the run up to Election 2016 and the Obama Administration’s lame duck countdown to its end, industry officials also should expect to spend a significant amount of time and effort this fall unpacking, sorting and digesting a plethora of proposed and final mortgage rules released by the Bureau over the summer.

These include CFPB’s long awaited final amendments – 900 pages worth – to the mortgage servicing provisions of Regulations X and Z; proposed updates to the TILA-RESPA (Truth in Lending Act-Real Estate Settlement Procedures Act) Integrated Disclosure “Know Before You Owe” rule; and the Bureau’s Principles for the Future of Loss Mitigation, a three-page “policy paper” that outlines four overarching principles of loss mitigation in housing transactions.

“Taken together, the Bureau’s actions likely will impart new practices in the mortgage industry and affect disclosure, information sharing, and loss mitigation practices for both lenders and servicers,” noted an analysis by Davis Wright Tremaine.

Meanwhile, the CFPB has remains a potent election issue. As we’ve already told you, Democrat nominee Hillary Clinton has vowed to preserve and protect – if not expand – the CFPB should she be elected the nation’s 45th president.

By contrast, Republican nominee Donald Trump has vowed to “dismantle” the CFPB. Trump is bolstered by a GOP legislative proposal that would, among other things, replace the CFPB director with a bipartisan, five-member commission subject to congressional oversight and appropriations.

Although he expects Clinton to prevail in November, Ely says the CFPB – like any other government agency during the lame duck months of an outgoing administration – is poised to finalize and cement as many regulations, guidance and policy statements as possible before Jan. 20, 2017.

“I anticipate a lot of ‘tying up of loose ends’ before the next president is sworn in,” noted Ely.

This article was written exclusively for GoRion.

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This article has been exclusively written for GoRion by...

Charles Wisniowski

Charles Wisniowski

Charles Wisniowski is a freelance writer based in Frederick, Maryland, and has covered real estate finance for publications including Mortgage Banking magazine, Inside Mortgage Finance and MBA Newslink. In addition, he has reported on homebuilding, rental property management, health care, human resources, small business and police/criminal courts.

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