Ed. #56: Compliance for Thee?

Above the Law?

“No one is above the law.” You’ve probably heard that a million times[1]; perhaps a lot more in the last few years. But is it true? Is compliance with the law required of everyone or just a rough guideline for certain folks who get to make up their own rules? Likewise, was Spiderman's Uncle Ben Parker correct when he said "with great power comes great responsibility"?[2]

So, for example, if a former President and a former Vice-President are each separately found to have taken classified documents from the White House without authorization for private use[3], will both be prosecuted, will prosecution be selective based on partisan interests, or will whataboutism result in both guys getting a pass?[4] Personally, I find it inconceivable that documents clearly labeled as classified and secret on their face were “accidently” taken home from a secure government location like the White House along with other personal effects. Misuse of classified materials is typically prosecuted harshly when ordinary citizens are caught doing that, so I hope the nation’s top leaders are held to the same if not a higher standard.[5] I don't know if it is hubris or what, but at a minimum, compliance-challenged folks like the current and former Presidents could each use a big hug from my Dr. Rick of compliance guidance[6].

Government agencies above the law?

Similarly, regulatory agencies that get to make up rules that apply to businesses and individuals have their own set of laws they are supposed to comply with when they make those rules.[7]Historically, however, it’s been rare that courts have decided an agency has exceeded its authority in rulemaking.[8]As a result, many agencies have become quite brazen in moving forward on initiatives despite questionable authority to do so[9]. Nevertheless, while in Musing 34 (with Dr. Rick) I praised both CFPB and FTC for certain enforcement actions, today I am (again) frustrated by their efforts to develop new laws to enforce rather than focusing on pursuing clear violations of existing law.[10]

FTC’s non-compete clause rule

The FTC is seeking to impose a unified national standard upon state contract and employment law with its proposed rule to prohibit non-compete clauses. That proposed rule will have a huge impact on the mortgage industry, especially loan originator and branch compensation agreements and how bonuses are structured. Given how the FTC’s proposed rule will dramatically change the landscape for so many businesses and people throughout the country, one would hope they were on really firm ground in proposing it.

Yet, FTC relies on its rarely used authority to regulate unfair methods of competition by employers towards their workers. While some states like California and Wisconsin have limited non-compete contracts through individualized common law decisions and statutory employment law legislation, other states are more permissive. In seeking to create a single national law of non-competes, however, FTC has placed itself in the position of decisionmaker for all states and individuals as to what is fair competition on the subject of non-competes[11]. One of the 4 current[12]FTC Commissioners dissented, saying,

“The proposed Non-Compete Clause Rule represents a radical departure from hundreds of years of legal precedent that employs a fact-specific inquiry into whether a non-compete clause is unreasonable in duration and scope, given the business justification for the restriction. The Commission undertakes this radical departure despite what appears at this time to be a lack of clear evidence to support the proposed rule.”

So, 3 of the 4[13]current FTC Commissioners seem to think they know best what kinds of agreements people should be allowed to sign, and they are going to create a national standard for everyone to follow.[14] Paging Dr. Rick. I guess all of the state common law judges and state legislators who have enforced and/or enacted these provisions must have had cognitive dissonance. This FTC rule is going to face significant challenges that will keep a lot of Washington lawyers and lobbyists quite busy.

CFPB’s form contract waiver database rule

At least FTC has identified a specific contractual provision they take issue with. CFPB, on the other hand, in an unexpected[15]announcement of a proposed rule[16]demands that non-bank consumer financial services companies "boil the ocean" by identifying all form contract provisions that waive anyconsumer rights.

Motivations matter

What is motivating this need for this contract registry? According to CFPB,

“The Bureau proposes to establish the registry to monitor risks to consumers from the use of covered terms or conditions in form contracts in today’s marketplace and to inform its various functions, including supervision, enforcement, consumer education, and rulemaking. Most immediately, the information collected by the registry would facilitate the Bureau’s prioritization and implementation of examination work in its statutorily-mandated risk-based nonbank supervision program.”

In a nutshell, CFPB claims it needs a database of all contractual provisions that waive consumer rights to identify the specific issues that CFPB should regulate. But CFPB only needs one consumer complaint to identify an issue and can ask for specific contracts from any regulated company at any time. How is CFPB even going to be able review the overwhelming amount of data that will end up in this database to decide which waivers are important to regulate? Rather, cynicism tells me it is more likely CFPB’s plan is to look to see what isn’t there for enforcement purposes.

Full employment for consumer financial services lawyers

Ultimately, compliance with the CFPB’s proposed rule will require any non-bank financial company operating in one or more states that enters into greater than 1,000 form contracts[17]a year (that’s contracts, not transactions) to review all of its consumer form agreements and research up to 50 state laws to see if a consumer waived anyrights under those laws or federal law. If rights are waived, the company needs to register and file the form contract with the CFPB and explain the reason for each waiver. I can get paid alot to do that, so, if this rule is enacted, it’s going to be a full employment bill for me and my consumer financial lawyer peers[18], but it's also clearly going to be a gotcha compliance trap for our clients.

Enforcement by regulation?

Kindly, I would call CFPB’s stated purpose disingenuous.[19]CFPB likely already knows what contract provisions they don't like (arbitration is at the top of their list) but realizes that issuing a rule on that would likely be futile.[20]Likewise, if CFPB wants to issue a rule that a choice of law provision (or waiver of homestead rights) is unfair or unconscionable they can try to do that under their UDAAP authority right now and don’t need a database to figure that out. Meanwhile, I also found it notable that banks and credit unions were excluded from this asserted information gathering and risk assessment rule, despite CFPB authority over many such institutions. That, my dear readers, is what people who play poker call a “tell” about CFPB’s real intentions. If CFPB was really just interested in gathering information and risk assessment, they would subject every form contract to the rule, bank or non-bank.[21]

Perhaps we should call this move by CFPB enforcement by regulation[22]since the whole point as far as I can tell is to enable CFPB to punish industry with an unnecessarily burdensome and easy to violate compliance regime rather than to gather important information or do any risk assessments needed for regulation. Fortunately, just like FTC, CFPB will no doubt face significant legal and political challenges to implementation of this proposed rule.[23] Clearly, there are few folks at CFPB who could use a hug from my compliance focused Dr. Rick too.

With great power comes great responsibility

Finally, everyone knows that if you are the top dog in any competitive industry that you will have a target on your back. Mortgage company top dogs in particular[24], seem to attract all sorts of consumer protection regulatory attention in addition to the slings and arrows of competitors. For several years at least, United Wholesale Mortgage’s CEO Mat Ishbia made no secret of his goal to make UWM the #1 overall mortgage lender in the country. In November 2022, UWM issued a press release saying that goal of reaching the #1 slot was achieved, ahead of schedule. In December 2022, Mr. Ishbia and his brother Justin were announced as purchasing a controlling interest in the Phoenix Suns NBA basketball team for $4 billion dollars-the largest franchise purchase in NBA history. The purchase is subject to approval of the NBA board of governors following a vetting process.

Congratulations to UWM and Mr. Ishbia for both milestones. In light of the responsibilities of being the #1 lender (I don't know anything about the NBA vetting process) I would provide the unsolicited advice to be extra careful in testing compliance limitations. Based on some announcements in January 2023 about UWM's pricing policies, however, Mr. Ishbia and UWM’s compliance and legal team could (again[25]) use a hug from Dr. Rick. This time with respect to the CFPB’s 2013 Loan Originator Compensation Rule under TILA.[26]

LO Comp prohibits pricing based on profitability

Specifically, a couple of Mr. Ishbia’s recent weekly Fastbreak videos raised LO Comp questions about the pricing UWM is offering to brokers. In the January 2, 2023 edition, Mr. Ishbia said that UWM’s new price renegotiation policy would require brokers to also contribute to the cost reduction. Then, in his video on January 9, Mr. Ishbia seemed to offer up to 125 basis points of pricing control (40 bp per loan) to brokers (an initiative also reported in Housing Wire) and even mentioned something about “earning” the pricing flexibility in the future, suggesting a “point bank” type system could be in play.

Now, I have been clear in these Musings in saying that the LO Comp Rule is a misguided anticompetitive and anti-consumer rule . Regardless of my thoughts about that rule's purpose and effectiveness, every interpretation I have ever heard from lawyers who know the LO Comp Rule is that individual mortgage originators are not allowed to have pricing control. That is true whether those originators are employed or acting as independent mortgage brokers. Mr. Ishbia’s videos did not provide all of the details of UWM’s programs, and it’s possible I may have misunderstood something, but his statements implicate the LO Comp Rule’s so-called “proxy rule” (by providing originator control over terms and conditions) which squarely poses the question of prohibited steering based on loan profitability. Unfortunately, unlike the compliant RESPA narrative I offered for UWM’s promotional activities in Musings Edition #49, I am at a loss as to the compliant narrative under LO Comp for what I heard being offered by UWM’s CEO in those videos.

Don't use noncompliance to gain a competitive advantage

Unlike the excuses available to Presidents in their classified document handling, LO Comp Rule violations are “strict liability” TILA violations and not subject to any negligence (i.e., “we made a mistake”) type defense[27]. In addition to the CFPB’s enforcement resources, the LO Comp Rule is also enforceable by private rights of action, including class actions. So, given UWM’s new position as the leading mortgage lender in the country, I hope either I misunderstood the programs offered or modifications were made (or will be made) prior to implementation to ensure a compliant program and narrative.

[1]This one stood out to me a few years ago as particularly poignant: https://www.theguardian.com/us-news/2018/jun/06/paul-ryan-trump-should-not-pardon-himself.

[2]Actually, the French writer and philosopher Voltaire said that first, but he said it in French so Spiderman's Uncle Ben gets credit for the English language version (also Teddy Roosevelt).

[3] Joe Biden was elected largely on the strength of his not being Donald Trump. He seems to be struggling with that a bit now.

[4] Two wrongs don’t make a right. We don’t have all of the facts and the punishment(s) may not be the same, but the wrongness of taking classified material seems crystal clear to me. Sure, I’m ignoring the quantity of documents taken and the timing and nature of responses upon discovery, but the bottom-line offense is the same.

[5] Once all the special counsel investigations are completed, the person faced with determining whether to prosecute will be former DC Circuit Chief Judge, Obama Supreme Court nominee, and current chief US enforcement official, Attorney General Merrick Garland.

[6]You’re probably seeing a lot of Progressive Insurance’s Dr. Rick if you are watching the NFL playoffs.

[7]This is the body of jurisprudence known as Administrative Law which is underpinned by the Constitution. It’s been due for an overhaul to rein in the excesses of many agencies. I suspect at least 5 or 6 of the 9 current members of SCOTUS agree with me on that.

[8] The tide may be changing on that score as demonstrated by the recent SCOTUS decision against the EPA and the 5th Circuit’s takedown of the CFPB’s funding. I expect to see more on this topic in the coming SCOTUS term.

[9]I’ve discussed this in the context of regulation by enforcement and fair lending many times (see e.g., Ed. #50: Trident Gets Forked (mortgagemusings.com). Similarly, I saw that the Consumer Product Safety Commission is looking to ban gas stoves to limit air pollution.

[10] For example, I regularly get asked why written offers of payment for referrals are not prosecuted under RESPA or how questionable compensation practices can be offered as a competitive advantage. Did anyone really need to tell banks that opening accounts without authorization was an unfair, abusive or deceptive practice?

[11] I understand the arguments about people not reading or understanding agreements and that these provisions are often used in heavy handed ways, but sometimes that is just an excuse for people who knew exactly what they agreed to up front (like a person who gets a signing bonus to not leave for a period of time) but then doesn’t like the deal later.

[12] There is a vacancy for a Republican nominated commissioner.

[13] I have been known to stir the pot on Ivy League and top grad schools in these footnotes. See e.g., fn #4 in https://mortgagemusings.com/f/ed-48-having-trouble-concentrating. So, I feel compelled to point out that all 3 of the FTC Commissioners voting in favor of the proposed rule went to Yale Law School. Yale Law takes diversity about as seriously as any place on the planet, but despite Yale's diversity statement including ideology as a type of diversity, as evidenced by this vote, Yale Law struggles mightily with enabling diversity of thought.

[14] If the FTC is going impose a single standard on your ability to contract freely in the name of “fairness” they Better show their work.

[15]CFPB proceeded without issuing an Advance Notice of Proposed Rulemaking, so they knew what they wanted to do already in developing the rule and weren’t too interested in what the public had to say about it.

[16]Alan Kaplinsky and other attorneys at Ballard Spahr prepared an excellent summary of the proposed rule. For as long as I can remember, Mr. Kaplinsky has been an outspoken, respected and highly effective advocate for arbitration agreements and consumer finance law generally. He will no doubt have a lot more to say about this proposal. In particular, I look forward to his thoughts about how the CFPB’s proposed rule relates to the work the American Law Institute’s Restatement of the Law, Consumer Contracts for which Mr. Kaplinsky is a Council member. Listen to Ballard’s June 2022 podcast on the work of the Restatement committee here.

[17]They excluded forms promulgated by the government agencies (GSEs), but mortgage companies have lots of other form agreements they typically use which may waive consumer rights. Every form used, from application through closing and servicing that is not a GSE promulgated form, would need to be reviewed for the waiver issue.

[18]The American College of Consumer Financial Service Lawyers (www.accfsl.org) should also take a keen interest in this rulemaking.

[19] I have a New Year’s resolution to be more kind. I would call CFPB’s stated purpose a lot of other things if I wasn’t so inclined.

[20]CFPB, consumer groups, and the class action bar clearly don’t like arbitration agreements, but Congress and SCOTUS have consistently clipped their efforts in recent years, so we got this end run instead.

[21] They want to avoid turf wars with banking regulators on this one.

[22]So now we have regulation by enforcement and enforcement by regulation. Both reflect poorly on the operation of regulatory agencies and present opportunities for legal challenges.

[23]House Financial Services Chairman Patrick McHenry has already slammed the proposal.

[24]Just ask former top lenders Wells Fargo, Countrywide, and Rocket Mortgage about attention they received from the government.

[25] I have previously expressed my sympathy for UWM’s compliance and legal teams here and here.

[26] I fully understand UWM’s frustration and challenges with compliance with anticompetitive regulations such as RESPA and LO Comp. I am not suggesting, however, that they (or Mr. Ishbia) think they are above the law.

[27] Apparently the Justice Department’s legal standard applied by James Comey to Hillary Clinton’s “server” issue was a higher “gross negligence” standard, so that will probably apply to Biden and Trump.