United States: Recent CFPB Developments - November 2015

MARKETING SERVICES AGREEMENTS. On October 8, 2015, the CFPB issued Compliance Bulletin 2015-05 which deals with RESPA compliance issues and the use of Marketing Services Agreements. A Compliance Bulletin is basically an expression of the CFPB's opinion regarding a certain subject. It is not a rule making and does not require any comment period. Nevertheless, it expresses the thinking of the CFPB and, in the case of Marketing Services Agreements ("MSA's"), their thoughts are highly critical.

The law involved is the Real Estate Settlement Procedures Act ("RESPA") which has been in effect since 1974 and, among other things, prohibits kickbacks or referral fees in connection with the provision of real estate settlement services. RESPA provides for both civil and criminal penalties.

"Settlement Services" under RESPA includes title searches, title insurance, the services of an attorney, document preparation, surveys, credit reports, appraisals, inspections, broker services, real estate agent services, loan origination activities, loan processing, and loan underwriting activities. So pretty much all real estate lending activities are covered.

The basic prohibition is contained in Section 8(a) of RESPA which prohibits any "fee, kickback or thing of value" to be given in return for the referral of a settlement service. It becomes complicated when RESPA goes on to say, "nothing in this section shall be construed as prohibiting ... the payment to any person of a bona fide salary or compensation or other payment for goods or facilities or for services actually performed."

So what does this mean?

The CFPB in its Compliance Bulletin lists a number of examples of Marketing Services Agreements or similar arrangements that have resulted in enforcement actions against a variety of settlement service providers. It points out that every case is potentially different and will involve a fact-intensive inquiry. It does not prohibit Marketing Services Agreements in every instance. And yet the Compliance Bulletin does not give even one example of a Marketing Services Agreement that would pass muster. In a telling assessment, the CFPB states, "nevertheless, any agreement that entails exchanging a thing of value for referrals of settlement services business involving a federally-related mortgage loan likely violates RESPA, whether or not an MSA or some related arrangement is part of the transaction." That language would seem to foretell the outcome of any regulatory agency inquiry into a joint marketing services arrangement.

The Compliance Bulletin provides a sample of instances that have led to enforcement actions in the past. The list is merely representative:

  • Steering of business in return for kickbacks and referral fees;
  • Failing to disclose an affiliate relationship with an appraisal management company;
  • Failing to tell consumers that they have the option of shopping for services before directing them to an affiliate;
  • Taking payments from settlement service providers without performing any contractually-obligated services;
  • A settlement service provider defraying marketing expenses of a mortgage lender; and
  • Marketing to settlement service providers in an effort to create more Marketing Services Agreements.

The CFPB concluded its guidance by stating that Marketing Services Agreements necessarily involve substantial legal and regulatory risk that is less capable of being controlled by careful monitoring than previously thought.

The result is a strong warning that Marketing Service Agreements, especially lucrative ones, are very likely to draw regulatory criticism and perhaps the civil and criminal penalties provided by RESPA.

ARBITRATION. In a separate move, the CFPB announced that it was considering proposing rules that would ban financial services providers from using arbitration agreements that block consumers from pursuing class action claims.

Nationwide, many credit card, loan and deposit account agreements contain arbitration agreements that allow either the consumer or the financial service provider to require that any dispute be resolved by arbitration instead of litigation. Class actions on behalf of numerous customers that are similarly situated are prohibited. The prohibition against the practice of joining numerous small claims into one massive lawsuit was what largely propelled the use of arbitration agreements. That was certainly the case in Mississippi a number of years ago.

The Dodd-Frank Act required the CFPB to perform a study of the use of arbitration agreements and gave the CFPB the power to issue regulations to address that practice. Although there are a few more steps that must be taken, it seems clear that the CFPB will require significant changes to the arbitration agreement process which may severely limit the benefits of arbitration.

It is possible that arbitration agreements may continue to exist, but will be required to specifically provide that they do not prevent or limit the filing of a class action lawsuit. While the arbitration of an individual claim that does not rise to class action status will continue to have many benefits, you have to wonder about the process of informing consumers, and their attorneys, that they can avoid the arbitration process by simply filing suit as a class action. Of course there are procedural protections that prevent frivolous class action claims, and in some cases a class action can actually serve to eliminate much of the risk of a multitude of small, individual claims being asserted. However, the very thought of "class action" in most cases proves frightening and in the past has been used as a tactic to try to force large and early settlement offers.

The CFPB is not all wrong when it says that many small claims just can't be pursued on an individual basis and that class actions are the only way for consumers to get relief. Nevertheless, it also seems clear that lawyers for class action plaintiffs are likely to be the biggest beneficiaries, and it may not lead to significant benefits to consumers if arbitration disappears from the consumer financial services sector.

We will keep you posted on the CFPB's final action.

HMDA FINAL RULE. Finally, the CFPB finalized its proposed Rule amending Regulation C which implements the Home Mortgage Disclosure Act. This change was also mandated by the Dodd-Frank Act and seeks to require disclosure of significantly more information about a covered bank's closed-end mortgage loan and open-end lines of credit secured by a dwelling.

This action continues a trend in recent years of increasing the number of data points required to reported, which can in turn be correlated to such discriminatory lending issues as race, national origin, age, and gender of a bank's customer base.

Among the new data points added are the applicant's or borrower's age, credit score, automated underwriting system information, unique loan identifier, property value, application channel, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features, interest rate, MLO identifier, and others. Changes are also made to the manner in which the borrower's ethnicity, race and gender data are collected and recorded.

This latest rule will have a significant impact on your compliance function since much more data must be collected, recorded, verified and reported. But the most important impact could come as a result of the expanded regression analysis that the regulators will be able to conduct when scoping your Fair Lending exams. That review will be complicated further when the regulators compare your data to that of a group of your "peer" banks. This will add to the real need for banks to know their numbers in advance and be able to explain them to the regulators or defend them if need be.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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