The homebuilding industry has long had to answer to regulators at the federal, state, and municipal levels. One of the most active regulators on the federal level is the Consumer Financial Protection Bureau (“CFPB”), but this may now change given the current political climate.
A recent example is the CFPB’s enforcement action in CFPB v. Prospect Mortgage, LLC, where the CFPB sued Prospect under the Real Estate Settlement Procedures Act (“RESPA”), alleging that Prospect, a mortgage lender, paid illegal kickbacks to real estate brokers and other service providers. More specifically, the CFPB alleged Prospect maintained various agreements with over 100 real estate brokers, including ReMax Gold Coast and Keller Williams Mid-Willamette, which served primarily as vehicles to deliver payments for referrals of mortgage business. As alleged, Prospect tracked the number of referrals made by each broker and adjusted the amounts paid accordingly. Prospect also had other, more informal, co-marketing arrangements that operated as vehicles to make payments for referrals. This investigation led to follow-on litigation by the CFPB against other homebuilders and real estate agents.
The CFPB’s activism in the homebuilding industry—and other industries—now hangs in the balance. President Trump has long promised to do a “big number” on the Dodd-Frank Act. The Treasury Department recently outlined a number of dramatic reforms it would make to strip the CFPB’s enforcement powers. And on Tuesday, June 6, 2017, the House of Representatives followed suit, passing the Financial CHOICE Act 2.0 (“Choice Act”), which carries forward President Trump’s promise to dramatically alter the consumer protection regulatory infrastructure. Although the Choice Act faces an uphill climb in the Senate, which requires a 60-vote majority before it can be signed into law, the Choice Act previews and illustrates the administration’s view and preferred approach to consumer protection enforcement.
Under the Choice Act, the CFPB will be rebranded as the “Consumer Financial Law Enforcement Agency.” This is not just a name change, but will also result in a significant curtailment of the agency’s regulatory reach. Under the Choice Act, the CFPB is stripped of its supervisory and rulemaking authorities, leaving it only with the power to enforce laws. The CFPB would retain, however, enforcement authority under a number of federal laws that apply to homebuilders, including RESPA, the Truth in Lending Act (“TILA”), and Fair Debt Collection Practices Act (“FDCPA”).
The Choice Act also eliminates the CFPB’s ability to prohibit unfair, deceptive, or abusive acts of practice (“UDAAP”) authority. The CFPB has long relied on its UDAAP authority to enact sweeping regulations while bypassing the slow and partisan legislative process in Congress. Indeed, lawmakers are apt to call on the CFPB to use its UDAAP authority to enact regulations it could not otherwise sign into law. Most recently, members of Congress called on the CFPB to police deceptive marketing and advertising for solar leases: “At the core of my concerns are reports that solar leasing companies may be overstating the economic benefits of signing a long-term solar lease while failing to disclose important information during the sales process,” remarked Rep. Ann Kirkpatrick (D-AZ).
The Choice Act would strip the CFPB of these broad UDAAP powers. The Choice Act would also dramatically alter the controversial, independent structure of the CFPB. Currently, the CFPB is overseen by a single director, Richard Cordray, who is currently serving a five-year term. Despite demands for Cordray to step down, the administration can only remove the director for cause. This has led to litigation in the D.C. Circuit Court of Appeals, PHH Corp. et al., v. Consumer Financial Protection Bureau, a case that many in the homebuilding industry are closely following.
Among other proposed structural reforms, the Choice Act would require congressional approval of its budget. Under the current structure, the CFPB is funded directly by the Federal Reserve, blocking Congress’s normal check-and-balance oversight through the annual appropriations process. The CFPB and Federal Housing Finance Agency are the only two federal regulators that are both unappropriated and have a single director who can only be removed for cause.
The effect of all of this is that the CFPB could ramp up its enforcement actions in the months ahead while its future hangs in the balance. In addition, any rollback of the CFPB’s authority could simply decentralize regulatory and enforcement action by spurring a wave of activity by state financial regulators and attorneys general that are eager to take up the consumer protection mantle. Homebuilders, developers, and other industry leaders are well advised to consult with in-house and outside counsel to prepare for what is certain to be a tumultuous year in consumer protection legislation.
Rich Benenson is a shareholder and Emily Garnett is an associate at Brownstein Hyatt Farber Schreck. They may be reached at bhfs.com.