by Daniel M. Burstein
This article is adapted from a presentation made by the author at the Mortgage Bankers Association’s Legal Issues and Regulatory Compliance Conference in May 2017.
The deregulatory drumbeat has pervaded the first months of the Trump administration. Ten days after taking office, President Trump issued an Executive Order directing federal agencies to find regulations and regulatory costs to eliminate. Subsequent Administration statements and Executive Orders have particularly targeted the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB). CFPB Director Richard Cordray’s term expires in July 2018, and it is reasonable to expect that President Trump will replace him—either then or sooner—with a director who will pursue this deregulatory agenda.
The CFPB and other post-crisis financial regulators in the Obama administration have certainly given mortgage executives agita over the years through the adoption of new regulations and a perceived “regulation by enforcement” approach. So, the reaction among much of the mortgage community to the Trump administration’s apparent deregulatory mindset is naturally enthusiastic.
But will deregulation under the Trump administration make mortgage compliance easier and less costly? Should mortgage executives be rooting for deregulation and a defanging of the CFPB? The answer may not be so simple. The regulatory landscape in this country is a mosaic, and actions at the federal regulatory level can lead to reactions at the state regulatory level.
Reading the Tea Leaves
State financial regulators and attorneys general, particularly in the more consumer-protective states, have in several instances signaled that they view themselves as leaders of the resistance to deregulation at the federal level, and that they intend to pick up any slack left behind by federal regulators in the Trump administration. These state leaders have sent such signals largely in two forms: the preemptive approach, and the wait-and-see approach.
The preemptive approach to state action launched just days after President Trump’s inauguration. On January 23, 2017, the attorneys general from 16 states and the District of Columbia formally asked a D.C. appellate court for permission to intervene in the case of PHH v. CFPB. That case teed up the issue of whether the structure of the CFPB was unconstitutional and whether the director of the CFPB can be removed by the president without cause, which would empower President Trump to replace Director Cordray even before the expiration of his term. In their request to intervene, the attorneys general expressly cited President Trump’s election, stating the following as the principal basis for their interest in the case:
As president-elect, Donald Trump has expressed strong opposition to the Dodd-Frank reforms. According to numerous media accounts, the Trump administration is planning to fire and replace the current Director as soon as possible and take other steps that could directly impact how, and whether, this litigation proceeds… Given the position of the president-elect and the new administration, it is urgent that the State Attorneys General intervene in order to protect the interests of their States and their States’ citizens in an independent CFPB.
Although the court later blocked these attorneys general from participating in the PHH case, the attorneys general nevertheless delivered their message: They will be vigilant in countering President Trump’s deregulatory agenda, including through preemptive action.
The wait-and-see approach to state action has been espoused most directly by New York Department of Financial Services Superintendent (and my former boss) Maria Vullo, who recently weighed in on the Trump administration’s plans to eliminate regulations by telling Bloomberg BNA (emphasis added):
You can’t just throw something out—you have to look at it, and I’m hopeful that the process that has been started to actually think about these things in a substantive way will result in rational decisions. And I’ll respond if I need to.
Given the New York DFS’s reputation for aggressive regulation of financial institutions, this is a serious and powerful, albeit vague, warning shot to the Trump administration and those pushing for deregulation. Whether Superintendent Vullo is actually optimistic about the Trump administration’s regulatory review, or whether she is just being diplomatic, is a question that may only be answerable in the future with the benefit of hindsight.
Tools Available to the States Under Federal Law
Several federal consumer financial protection laws empower state regulators and attorneys general to bring their own enforcement actions for violations of federal law. Of particular note is section 1042 of the Dodd-Frank Act, which empowers state financial regulators and state attorneys general to bring civil lawsuits for violations of Title X of the Dodd-Frank Act. Title X is also known as the Consumer Financial Protection Act. It creates the CFPB and prohibits a range of practices, including the broadly written prohibition on “unfair, deceptive, or abusive acts or practices” known as UDAAP.
Under section 1042, state regulators and attorneys general can sue mortgage companies for violations of UDAAP (or other Title X provisions), and a Trump administration CFPB or other federal agency is largely powerless to stop such an action. In fact, several state regulators and attorneys general have already brought lawsuits pursuant to section 1042, including in New York, Illinois, Florida, New Mexico, Connecticut, Mississippi, and Pennsylvania. The CFPB is entitled to notice of the lawsuit and an opportunity to participate, but it may not seize control of the lawsuit or otherwise deprive the state official of the opportunity to pursue it. Indeed, the subject mortgage company need not even be a regulated entity to be sued by the state regulator, so long as the company is licensed to do business in the state. Certain restrictions apply to national banks and federal savings associations.
Other mortgage-related federal laws can also be enforced by state officials. Under the Truth in Lending Act (TILA), state attorneys general can enforce a variety of provisions, including those relating to the ability to repay, steering, prepayment penalties, escrows, appraisals, prompt crediting of payments, and payoff amount requests. Under the Real Estate Settlement Procedures Act (RESPA), state attorneys general and insurance commissioners can sue to prevent real estate settlement service providers from providing kickbacks as a means of obtaining customers. Under the Fair Credit Reporting Act (FCRA), state attorneys general can enforce furnishers’ obligation to provide accurate information. And under the Home Ownership and Equity Protection Act (HOEPA), state attorneys general can enforce HOEPA’s high-cost provisions.
Absent amendment of these provisions by an Act of Congress, the Trump administration alone cannot deprive state officials of the opportunity to enforce these provisions of federal law. As a result, state officials can and likely will continue to bring the types of enforcement actions available to them under federal law. A change in leadership or mission at the CFPB is likely to only accelerate the enforcement of federal law by the states.
Tools Available to the States Under State Law
Naturally, state financial regulators and attorneys general also have the full suite of powers granted to them under their respective state laws. In a deregulatory Trump administration, use of these state laws in consumer-protective states (such as those that intervened in PHH v. CFPB) can be expected to increase.
All 50 states and the District of Columbia have some form of an “unfair or deceptive acts or practices” prohibition, known as UDAP laws. UDAP laws are also sometimes called “Little FTC Acts,” after the federal law that created the Federal Trade Commission and also prohibits unfair and deceptive acts and practices. Note the difference between the single-A “UDAP” laws, which for purposes of this discussion are a function of state law, and the double-A “UDAAP” prohibition under the federal Dodd-Frank Act discussed above, where the additional “A” is an additional prohibition on “abusive” acts and practices and is therefore somewhat broader. Mortgage compliance professionals need to keep an eye on both laws; but, for purposes of this discussion, keep in mind that the state UDAP laws typically give state attorneys general broad discretion to pursue mortgage companies operating in their states for perceived unfair or deceptive conduct against the consumers of their states.
Beyond state UDAP laws, state mortgage regulators have the powers granted to them under state law to regulate and bring enforcement actions against regulated financial institutions. Compliance professionals are certainly aware that regulators can come into their institutions for either regular or surprise exams, and they can issue subpoenas and take testimony. Upon a finding of inappropriate conduct, those regulators are empowered to seek penalties ranging from warnings, to massive fines or civil penalties, all the way to license revocation.
Finally, given the political climate and the ire that President Trump inspires in blue-state voters and their elected state representatives, we can expect to see new state laws proposed in reaction to federal deregulation. New state laws, of course, can cover an enormous range of mortgage-related topics, from disclosure requirements, to redlining/discrimination provisions, to points and fees and loan officer compensation caps, to servicing requirements.
Federal Preemption of State Law Is Limited
Federal preemption refers to the legal doctrine whereby in a conflict between federal and state law, federal law wins, pursuant to the Supremacy Clause of the U.S. Constitution. Preemption is deserving of its own treatise, rather than just a short summary. However, as it pertains to this discussion of state authorities increasing their financial regulatory and enforcement efforts, section 1044 of the Dodd-Frank Act is particularly pertinent.
Section 1044 provides that a “State consumer financial law” is preempted and therefore invalid if (1) application of the law would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that State, (2) the law prevents or significant interferes with the exercise by the national bank of its powers, or (3) the law is preempted by another provision of federal law. A “State consumer financial law,” in turn, is defined as a law that “does not directly or indirectly discriminate against national banks and that directly and specifically regulates the manner, content, or terms and conditions of any financial transaction . . . with respect to a consumer.”
Notably, responsibility for applying section 1044 and determining whether a particular state law or regulation has a “discriminatory effect” or “prevents or significantly interferes” with national banks, lies with the federal Office of the Comptroller of the Currency (OCC), led by a presidentially appointed Comptroller. The Trump Administration’s OCC therefore will be well-positioned to determine how aggressively to assert its authority over what its leadership may see as overly aggressive state policy. The OCC’s determination in any case must be supported by substantial evidence.
Section 1044 focuses on national banks, but what about state-chartered financial institutions? Several states have “parity” or “wildcard” laws that give state-chartered institutions the same rights as national banks, to ensure that they are not disadvantaged by virtue of their state license. These laws vary by state, so it is worthwhile to discuss these issues with counsel.
What Does This All Mean for Mortgage Compliance?
Federal deregulation in the financial industry is not the panacea that many mortgage executives may be seeking. The potential for strong state action in the wake of federal deregulatory efforts may well lead to a splintering of regulatory law, where each state acts differently to fill the gap, perceived or real, left by these federal deregulatory initiatives. For example, a new CFPB director’s efforts to weaken the CFPB’s new mortgage disclosure rules or servicing rules may well lead some states to require their regulated mortgage companies to follow stricter rules. Certain states might re-impose the Obama-era CFPB rules, while other states could create entirely different guidelines for mortgage companies to follow. Absent a rare finding of federal preemption, mortgage companies may then have 30 or 40 or 50 different sets of rules to follow, and they will have to adapt their compliance systems to meet each set of rules.
Longer term, mortgage companies that already worked so hard to adapt their systems and adjust to new CFPB rules may find themselves having to overhaul their systems every four or eight years, depending on the whims of a new Administration.
At this point, mortgage executives can be forgiven for throwing up their hands and declaring life unfair. This discussion is not an effort to dissuade mortgage companies or their industry groups and lobbyists from becoming involved in these important policy discussions at the federal level. To the contrary, the best course of action is to watch carefully and advocate even more carefully, paying particular attention to how actions at the federal level can cause reactions at the state level.
The Trump administration is still young, and it is impossible to predict the policy decisions that are still to come. Although President Trump has issued several executive orders on deregulation, and his administration has issued reports pursuant to those orders identifying target areas for deregulation, it is too soon to know what actions the administration will ultimately take in the financial regulatory space. This article is speculative by design, anticipating possible reactions to possible federal actions that have not yet occurred. As this new administration and its key stakeholders progress and evolve, those of us in the mortgage compliance community will certainly be keeping a close eye on what happens.
Daniel M. Burstein is Senior Managing Director and head of the Financial Institutions Practice for Guidepost Solutions LLC, a regulatory compliance and investigations consulting firm. He can be reached at DBurstein@GuidepostSolutions.com