Ed.#15: RESPA; Don't Argue with Success

August 25, 2020|CFPB, Regulation by Enforcement, RESPA

First, the kale verdict

Only half a dozen readers shared their anti-kale sentiment. While I was disappointed that I wasn’t able to galvanize more interest in my quixotic anti-kale crusade, I am grateful for our small community of hate. Meanwhile, just one brave reader attempted to defend kale. I appreciate that person’s engaged, yet entirely misguided and objectively incorrect thoughts.[1] Readers’ kale responses, however, paled to the crickets I got when I asked for the “wisdom of the crowd” in Edition #4 as to how and why on a business trip last February I had 7 out of 12 Uber drivers named “Michael”. As a reminder, participation counts for 10% of your grade in this class, and, based on these response rates, most of you are missing out on better marks.

Schoolhouse Rock Civics 101

Everyone knows about the three branches of government established by the US Constitution: the legislative branch makes the laws, the judicial branch interprets laws and the executive branch administers and enforces laws.[2] Of course, a lot of that has gotten jumbled with the rise of administrative agencies since the New Deal (and with the legislative inaction of an uncompromising Congress), but the supremacy of the courts to interpret laws remains unchallenged since 1803 when Marbury vs. Madison was decided by the US Supreme Court. That is, the Courts get the last word (in particular, the Supreme Court). That’s true for administrative agency actions and rules as well.

What does Marbury have to do with RESPA?

Brian Johnson, currently an attorney with Alston & Bird, who also served as policy director and chief financial institutions counsel on the House Committee on Financial Services and was most recently the deputy director of the CFPB, wrote an interesting article seeking CFPB clarity on RESPA issues. Mr. Johnson decried the flawed RESPA interpretation and enforcement by the CFPB in the Cordray era and the confusion that created.[3]Specifically, Johnson said, “The CFPB’s aggressive departure from settled law and long-standing agency guidance in RESPA enforcement actions violated due process and upended the rule of law.”

Mr. Johnson is 100% right about those concerns, but, being someone who tries not to argue with success, I respectfully disagree with his further tactical call for action. As I have noted in previous Musings, the courts (specifically the DC Circuit in the PHH case) have already been crystal clear that the CFPB’s RESPA interpretations were wrong. In fact, with respect to PHH, Johnson recognized that, “It is hard to conceive of a more thorough repudiation of both the CFPB’s interpretation of RESPA Section 8 and the way it sought to impose its misinterpretation retroactively”. Yet, Johnson asked the CFPB to take 7 specific actions to “restore the rule of law” and to demonstrate the CFPB’s commitment to providing “clear rules of the road” for industry.

CFPB rules are a chimera of safety

Unfortunately, asking for “clear rules” from a government agency is often just an exercise in “be careful what you wish for”. The CFPB, in particular, struggles mightily to balance the interests of clarity for industry with consumer protection goals when it writes regulations. What results either is a highly prescriptive “gotcha” rule which can stifle innovation and drive customer service down to the least common denominator (such as TRID or RESPA’s servicing rules) or you end up with rules that use a sledgehammer to solve one problem that create several others (such as the LO Comp Rule and recent fair lending enforcement efforts).

We don’t need no stinking clarity!

As Johnson rightly notes, the Cordray era CFPB RESPA interpretations and enforcement efforts were thoroughly repudiated by a court with the final say on RESPA, so do we really need CFPB to be further chastised and to promise not to do it again?[4] RESPA is a 40+ year-old statute that never contemplated the internet, TRID, social media and a host of other innovations in how settlement service providers interact with each other and refer customers. The lack of specific rules has enabled this innovation to occur and RESPA is still enforceable-even on social media and the internet.

Meanwhile, CFPB has demonstrated that it cannot be trusted to interpret RESPA properly[5]. In PHH, however, the DC Circuit has provided a powerful and unequivocal interpretation of the rule of law in accordance with its Constitutional powers. The case was not appealed to the Supreme Court and there are no federal Circuit splits to my knowledge. So, there is nothing left for CFPB to do or say about RESPA. The 2015 MSA memo does not need to be rescinded because PHH essentially declared it, along with (i) Cordray’s dim view of the Section 8 (c)(2) “services rendered” exception, and (ii) his wacky unlimited RESPA statute of limitations idea, to be flat out wrong.

Compliance malpractice? No.

This brings me back to something that has really troubled me since 2016. I discussed this in footnote #3 to Edition #13, but it deserves greater mention.[6]Specifically, when he was CFPB Director, Richard Cordray told a financial trade association that it would be “compliance malpractice” not to follow the “guidance” of the CFPB’s Consent Orders and other enforcement actions. In my view, that was an inappropriate (and legally incorrect) scare tactic to the compliance community by the nation’s top consumer regulator. To the contrary, the PHH decision concluded that if you had followed the RESPA “guidance” in the CFPB’s enforcement action against PHH, you would have misinterpreted RESPA. So, while it is true that it is important to know the CFPB’s enforcement priorities and how the agency might be interpreting laws, there is no constitutional, legal or malpractice basis to take enforcement “guidance” as an official binding interpretation of law. See again, my 2016 article noted in footnote #3 above.

The compliance pro's role

Directly opposite to Mr. Cordray’s assertion, the PHH decision stands for the proposition that viewing Consent Orders as binding compliance obligations could, in fact, be professional malpractice itself by providing incorrect advice to the client. PHH further serves as an admonition to bureaucrats against “regulation by enforcement”. Nevertheless, the vast powers granted to CFPB and other regulators can be misused and the cost of defense against regulatory action is almost never insignificant. As a result, many compliance professionals are fearful of operating under broad statutory permissions such as we now have with RESPA 8 (c)(2) without specific regulatory guidance. Still, recognizing those risks, a job of the compliance professional should be to develop compliant solutions for new and complicated fact scenarios applied to legal standards without detailed instructions from a government agency.

[1] Jeremy, on the other hand, offers objectively intelligent remarks about the mortgage business, technology and other thought provoking ramblings in his weekly “Saturday Cup of Joe from Detroit”.

[2] If you are unfamiliar with the 3 branches of government, but can sing the Preamble to the Constitution or know how a Bill becomes a law, it is because this was the lamest Schoolhouse Rock song ever, but the circus analogy is apt. Conjunction Junction ear worm anyone?

[3] I have written and spoken extensively on this topic as well. (See e.g., this article from Mortgage Banking Magazine in 2016).

[4]This is the cutest video ever. Feel free to substitute Richard Cordray as metaphor for her Barbie dolls.

[5] Also, given the time it generally takes to implement any regulatory action, the 2020 election could result in a change in CFPB leadership that is much less sympathetic to Mr. Johnson’s requests and thus rules that go in the wrong direction.

[6] This is like when I relegated a Roger Fendelman reference to footnote 4 of Edition 12 of the Musings. Oops, looks like I relegated him again to a number outside the top 3. Sorry, again Roger.