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US Banking Agencies Issue Statement on Alternative Date in Credit Underwriting

On December 3, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration (the Banking Agencies) released interagency guidance related to the use of alternative data for purposes of underwriting credit (the Guidance).

The Guidance acknowledges that alternative data may “improve the speed and accuracy of credit decisions,” especially in cases where consumer credit applicants have “thin files” because they are generally outside the mainstream credit system. In order to comply with applicable federal laws and regulations when using such alterative data, including those related to unfair, deceptive, or abusive acts or practices, the Banking Agencies advise that lenders should responsibly use such information. Furthermore, the Guidance reminds lenders of the importance of an appropriate compliance management program that comports with the requirements of applicable consumer protection laws and regulations.

As a final recommendation, the Banking Agencies suggest that lenders consult with appropriate regulators when planning to use alternative data to underwrite credit.

The Guidance is available here.

ARTICLE BY Christina Grigorian of Katten Muchin Rosenman LLP.

More banking agency updates on the National Law Review Financial Institutions & Banking law page.

The Future of the CFPB: the Executive Branch and Separation of Powers

On October 18, 2019 the Supreme Court granted certiorari in Seila Law v. Consumer Financial Protection Bureau (CFPB). SCOTUS will answer the question of “whether the substantial executive authority yielded by the CFPB, an independent agency led by a single director, violates the separation of powers,” and the Justices requested that the parties brief and argue an additional issue: “If the Consumer Financial Protection Bureau is found unconstitutional on the basis of the separation of powers, can 12 U.S.C. § 5491(c)(3) [the for-cause removal provision] be severed from the Dodd-Frank Act?”

Origins of the Consumer Financial Bureau and Previous Constitutional Challenges

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) established the CFPB as an independent bureau within the Federal Reserve System designed to protect consumers from abusive financial services practices. The structure and constitutionality of the CFPB has been addressed before. In 2018, the D.C. Circuit held in PHH Corp. v. CFPB, No. 15-1177 (D.C. Cir. 2018) (PHH) that the current structure of the CFPB, which features a single director that cannot be removed by the president except for cause, “is consistent with Article II” of the Constitution.

The PHH opinion stated that Congress’ response to the consumer finance abuse that led up to the 2008 financial crisis purposely created the CFPB to be “a regulator attentive to individuals and families” because the existing regulatory agencies were too concerned about the financial industry they were supposed to supervise. It was determined that the CFPB needed independence to do its job, and the CPFB structure was designed to confer that independence. Neither PHH Corporation nor the CFPB filed a petition for certiorari to ask the Supreme Court to review the D.C. Circuit’s decision.

Background of the Seila Law Case

In Seila Law v. Consumer Financial Protection Bureau (CFPB) the Petitioner is a law firm that provides a variety of legal services to consumers, and as part of a CFPB investigation into whether Seila Law violated certain federal laws, the CFPB issued a civil investigative demand seeking information and documents. Seila Law objected to the demand on the ground that the CFPB was unconstitutionally structured and filed a petition to a federal district court for enforcement. The district court held that the structure of the CFPB did not violate the separation of powers and was constitutional, after which that district court decision was appealed. The Ninth Circuit affirmed, noting that the issues had been “thoroughly canvassed” in the DC Circuit it in PHH, and adopting the position of the PHH majority that the CFPB’s structure is constitutional. Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling, and here we are.

An Experienced Federal Agency Litigator’s Perspective

Mr. Anthony E. DiResta, is co-chair of Holland & Knight’s Consumer Protection Defense and Compliance Team, and a former Director of the Federal Trade Commission’s (FTC) Southeast Regional office. Mr. DiResta was kind enough to take some time with the National Law Review to discuss the upcoming Seila Law decision and its impact on the future of the CFPB.

_______________

NLR: Can you sum up the CFPB and separation of powers story to this point from your own viewpoint?

DiResta: The Supreme Court has decided to review this case because of the constitutionality of the CFPB’s structure, based on separation of powers. Any single leader in government who doesn’t serve at the pleasure of the President may simply have too much power, and people with certain jurisprudential philosophies about how government should be run find that an offensive situation. That’s the theory behind the certiorari decision and why SCOTUS is addressing the case – it’s really a question of constitutionality and the power of administrative agencies. Additionally, the Court will look at the severability of the CFPB in Dodd-Frank, whether it’s possible to just restructure the single leader structure, and then leave the Bureau intact to continue business as usual.

NLR: It seems many of these issues could’ve been avoided had the CFPB been structured more as a multi-member commission initially or if Congress had simply expanded FTC powers. Why do you think it was structured differently?

DiResta: That’s a matter of speculation – but I think it might have gone something like this: After the Recession in the early 2000s, many people felt that government was asleep at the wheel, letting devastating things in banking and finance and servicing to consumers run out of control, which led to serious blunders and mishaps. So it was decided that a new office was needed – and this was led by representatives in Congress like Elizabeth Warren.

Why they didn’t simply expand the power and resources of the FTC is also pure speculation – they could have merely expanded FTC’s jurisdiction and reach to achieve similar outcomes and intentions.

The Constitutionality of the CFPB

NLR: Do you think SCOTUS will rule in favor of the petitioner in Seila Law, and find the structure of the CFPB unconstitutional?

DiResta: I do. I suspect that SCOTUS will, in fact, find the structure unconstitutional on the basis of the separation of powers. But I also believe that an even more interesting part of that will be the discussion of the severability of the organization’s leadership, leaving the CFPB itself intact. If the structure is unconstitutional, how the Court recommends a remedy to correct that unconstitutionality could have far-reaching effects. This is so important – and we should all be excited that we get to watch this corrective process in action.

NLR: Is there a chance this would result in a complete restructure of CFPB, or even its possible dissolution?

DiResta: I really don’t think so – and the Court couldn’t do that anyway. The Court could recommend to Congress that a certain path for correction be followed, but it will be up to Congress to rearrange the CFPB (if that’s the result) in the best way. The legislative branch will just have to make sure it’s done, in a way that the Court recommends.

Some More Background on CFPB Constitutionality Litigation

Then-Judge, now Justice Kavanaugh was on the U.S Court of Appeals Court for the D.C. Circuit for the 2018 en banc ruling in the PHH Corp. v. CFPB case and on the 2016 three-judge decision. Judge Kavanaugh authored two opinions regarding PHH: declaring a certain aspect of the CFPB to be unconstitutional and in 2018, the dissenting opinion from the en banc U.S. Court of Appeals for the D.C Circuit’s decision overruling the 2016 panel opinion.

The 2016 panel opinion determined that the structure of the CFPB is unconstitutional stating: “The concentration of massive, unchecked power in a single Director marks a dramatic departure from settled historical practice and makes the CFPB unique among independent agencies.” And the 2016 panel also presented a view of the Constitution that vests with the president an extensive degree of unilateral authority over the executive branch’s enforcement of federal laws.

NLR: Since Justice Kavanaugh was a judge involved in a similar case – PHH Corp. v. CFPB – why is he allowed to rule on this matter again?

DiResta: I’m not an expert on judicial ethics but there does not appear to be improper bias in Kavanaugh reviewing this decision. Rather, his views in PHH reflect a philosophical perspective on separation of powers and the role of administrative agencies. In fact, I expect they’ll use his past ruling on PHH as part of their internal discussion.

Seila Law v CFPB and Election Politics

NLR: It’s difficult to ignore the political undertones of this case: a watchdog organization created, in part, with input from some high-profile democrats (most notably Elizabeth Warren, who is currently running as a candidate for president) is being challenged and that challenge is being echoed in support by largely conservative elements. In your view, is this case a litmus test for the Supreme Court delving into political issues, something it has largely tried not to do?

DiResta: No – I really don’t see this as political. Again, this is a purely constitutional question, a legal question, and it’s exactly the kind of case the SCOTUS should be deciding. If we’re honest, this is a perfect example of why we have SCOTUS in the first place: To examine how effective our public servants are behaving and performing their responsibilities under the constitutional structure revealed in the separation of powers doctrine.

Besides that, politically speaking, this could boomerang. Consider: if the Democrats win the White House in 2020, and the Court were to change the structure, that would offer any Democratic President the opportunity to appoint a new Director in 2021, and Kathleen Kraninger’s term isn’t up until 2023.

Informed Democracy at Work

While the situation with CFPB and its constitutionality is demonstrably important, DiResta touched on a few more salient – though no less important – points.

DiResta: Democracy isn’t supposed to be easy. Democracy is hard – it’s messy and complicated. It’s in its nature, and in the nature of different ideas.

In a free marketplace of ideas, people will clash when citizens are free to express themselves, and there will always be conflict – but it’s out of resolving those conflicts that democracy claims – and grows – its power and attraction. It’s so important that we – the people – see this and get to comment on it – to watch this happening.

NLR: Absolutely. In a world where the news cycle has compressed from days, to hours, to minutes – while attention spans have diminished in similar fashion – it’s increasingly important that these monumental workings in government are transparent, and that people see them.

DiResta: I couldn’t agree more. And – as a young lawyer, I had the privilege to work with some very dedicated and highly professional journalists who understood journalism as a public service, not as entertainment. These journalists saw themselves as educators, bringing light to the processes and prospects of government to citizens. And that’s how the media serves effectively as the Fourth Branch of government. A branch that presents a constant check to the power of government and its branches, and that gives the people the knowledge to make better decisions, and to vote for the best people and the best situations.

We sincerely appreciate Mr. DiResta for his thoughtful insights and for taking time out of his busy schedule to share them with the National Law Review.

ARTICLE BY William C. P. Thieme of The National Law Review / The National Law Forum LLC.

More on the CFPB on the National Law Review Financial Institutions & Banking law page.

CFPB Decision on “GSE Patch” Revives Debate About Prudent Underwriting

The Consumer Financial Protection Bureau (CFPB) recently announced that it will allow the so-called “GSE patch” to expire in January 2021.[1] This patch permits Government-Sponsored Entities Fannie Mae and Freddie Mac to buy loans even though the borrower’s debt-to-income (“DTI”) ratio exceeds the standard limit of 43%.[2]

The CFPB’s decision revives a long-standing debate about what constitutes a creditworthy loan. By eliminating the patch, the DTI ratio of 43% will become an absolute rule, making any loans with higher DTI’s ineligible for GSE funding.[3]

This type of bright-line rule—focused on a single component of a loan—has already drawn criticism as myopic.[4] Some have pointed out that, based on recent studies, DTI alone is a poor predictor for default of prime and near-prime loans.[5] For example, in each year since 2011, the 90-day delinquency rate for loans with DTI ratios over 45% has actually been lower than that for loans with DTI ratios between 30% and 45%.[6]

In fact, some studies indicate that adequate compensating factors can completely offset any minimal increase in risk associated with a higher DTI.[7] Yet, under this new rule, a borrower with a 44% DTI cannot qualify for a GSE loan, notwithstanding any number of other positive factors in the loan file.

It is entirely possible that this new decision could harm consumers, contrary to the CFPB’s mandate to protect them. Barring “high” DTI borrowers from accessing GSE loans could, at best, force such borrowers to obtain more expensive and riskier products, and at worst, preclude such borrowers from qualifying for any product at all.[8] Over the last six years, more than 10% of GSE-backed loans have relied on the patch.[9] Eliminating the patch is also likely to have a disproportionately adverse effect on minorities and others living in underserved communities.[10]

The creditworthiness of a loan, we firmly believe, must be evaluated by considering the loan as a whole. Simply isolating one aspect of the loan file such as DTI does not necessarily provide a thorough understanding of the risk profile. Instead, one typically must consider many characteristics beyond DTI–such as credit score and history, LTV and CLTV, asset and cash reserves, type and length of employment, and many more–to assess whether a loan should qualify for credit.[11]

Simply put, a loan typically cannot be considered a “bad” loan simply because of one feature. Instead, as some lawyers and courts have colorfully put it, each loan is a “snowflake” that must be considered independently and holistically on its own merits.

_{[1] See, for example.}

_{[2] The other criteria for a Qualifying Mortgage (QM) include: (1) a lack of negative amortization, interest-only, or balloon features; (2) fully-documented income verification; (3) a total of points and fees less than 3 percent of the loan amount; and (4) a fully amortized payment schedule no longer than 30 years, with a fixed rate for at least five years, and all principal, interest, taxes, insurance, and other assessments included. See “Qualified Mortgage Definition for HUD-Insured and Guaranteed Single-Family Mortgages,” 78 Fed. Reg., 75215 (December 11, 2013); “Loan Guaranty: Ability-to-Repay Standards and Qualified Mortgage Definition under the Truth in Lending Act,” 79 Fed. Reg., 26620 (May 9, 2014); “Single-Family Housing Guaranteed Loan Program,” 81 Fed. Reg., 26461 (May 3, 2016).}

_{[3] This rigid model stands in stark contrast to the FHA, VA, and USDA, which have no maximum DTI requirement. See, at page 2.}

_{[4] See, for example.}

_{[5] Id. at page 1; see also, e.g., Richard Green, “The Trouble with DTI as an Underwriting Variable—and as an Overlay,” Richard’s Real Estate and Urban Economics Blog, December 7, 2016.}

_{[6] See(see Table 2).}

_{[7] See page 10 and footnote 33.}

_{[8] Id. at page 7.}

_{[9] Mortgage Rule (see Table 1).}

_{[10] Mortgage GSE Patch.}

_{[11] (see Table 2) (noting that credit scores and LTV ratios might predict default more accurately than DTI ratios).}

This article was written by Kenneth Duvall and Philip R. Stein of Bilzin Sumberg.

For more CFPB regulation updates, see the National Law Review Financial Institutions & Banking Law page.

CFPB Proposes Additional Changes to the Prepaid Rule

On June 15, 2017, the CFPB announced that it is proposing for public comment certain modifications to its prepaid rule. The rule, which was issued in final form in October 2016, limits consumers’ losses for lost and stolen prepaid cards, requires financial institutions to investigate errors, and includes enhanced disclosure provisions.

The final rule unexpectedly granted Regulation E error resolution rights to consumers holding unregistered prepaid accounts, a provision that was not part of the CFPB’s original proposal. Financial institutions criticized this aspect of the final rule, arguing that providing error resolution rights to holders of unregistered accounts would invite and open new avenues for fraud. Financial institutions also argued that it would be difficult, if not impossible, to investigate alleged errors if they have little to no information about the purchasing customer. As a result, financial institutions have claimed that, if the CFPB retains error resolution rights for unregistered prepaid accounts, they would no longer provide immediate access to funds on such accounts.

To address these concerns, the current proposal would require consumers to register their prepaid accounts to qualify for Regulation E error resolution rights, including the right to recoup funds for lost or stolen cards. Under the CFPB’s proposal, however, Regulation E error resolution rights would apply to registered accounts even if the card was lost or stolen before the consumer completed the registration process.

The proposal also requests comment on provisions that would create an exception for certain digital wallets. Under the proposed exception, customers using digital wallets linked to a traditional credit card product would continue to receive Regulation Z’s open-end credit protections and would not receive the protections of the credit-related provisions of the prepaid rule.

As discussed in a prior post, in April 2017, the CFPB extended the compliance date for the prepaid rule from October 1, 2017, to April 1, 2018. In the latest proposal, the CFPB requests comment on whether it should extend the compliance date even further.

The proposal also includes other adjustments and clarifications regarding the definition of a prepaid account, pre-acquisition disclosure requirements, submission of prepaid account agreements to the CFPB, and unsolicited issuance of access devices. Along with its proposal, the CFPB has released an updated version if its Prepaid Rule Small Entity Compliance Guide.

Comments on the CFPB’s proposal are due 45 days after publication in the Federal Register.

This post was written by Lucille C. Bartholomew of Covington & Burling LLP.

Congress Attempts to Counsel Trump Concerning Removal of CFPB Director Cordray, While PHH Petition for Rehearing Remains Undecided

Today, Senators Chuck Schumer (D-NY), Sherrod Brown (D-OH), Elizabeth Warren (D-MA) and others voiced their opposition to any attempt by President-elect Donald Trump to oust Richard Cordray, the current Director of the Consumer Financial Protection Bureau (“CFPB”), before Cordray’s term ends in July 2018. They also sent a letter to Cordray outlining and praising his accomplishments as CFPB Director.

The Senators’ opposition to the prospect of Cordray’s removal is just the latest volley between members of Congress and the incoming Administration concerning the CFPB’s directorship.

On January 12, Sean Spicer, a senior spokesperson for President-elect Trump, told reporters that the President-elect had interviewed former Representative Randy Neugebauer (R-TX) for the position of Director of the CFPB. With Richard Cordray’s term as CFPB Director not scheduled to conclude until July 2018, this strongly suggested that the President-elect is considering an attempt to oust Cordray sooner. While in Congress, Rep. Neugebauer introduced legislation aiming to replace the CFPB’s single director with a five-member commission.

Spicer’s statement came on the heels of a January 10 statement from Senator Brown, the ranking member of the Senate Banking, Housing, and Urban Affairs Committee, urging the President-elect not to attempt to remove Cordray or abolish the CFPB. Senator Brown cautioned President-elect Trump that, “Under Richard Cordray’s leadership, the CFPB has returned $12 billion to servicemembers, seniors, and working Americans . . . Firing Cordray and abolishing the consumer bureau so the special interests can get their $12 billion back would shatter President-elect Trump’s promise to hold Wall Street accountable and protect working people.”

Also on January 10, minority members of the House Committee on Financial Services released a letter to President-elect Trump in the same vein, commending Director Cordray and counseling the President-elect against attempting to remove him.

On January 9, Senators Ben Sasse (R-NE) and Mike Lee (R-UT) released a letter to Vice President-elect Mike Pence urging the opposite: “Given the CFPB’s unconstitutional structure, removing Director Cordray would be consistent with President Trump’s oath to ‘preserve, protect, and defend the Constitution of the United States’ and his duty to serve as an independent guardian of the U.S. Constitution. Removing Director Cordray would also uphold the American idea of limited government, because Director Cordray has vigorously supported the unconstitutional independence of the CFPB and pursued a regulatory agenda that is harmful to the American people.”

The prospect of Director Cordray’s removal is top of mind following the D.C. Circuit Court’s decision in PHH Corp., et al. v. Consumer Financial Protection Bureau, which ruled unconstitutional the provision of the Dodd-Frank Act establishing that the CFPB Director could be fired only “for cause,” i.e., for inefficiency, neglect of duty, or malfeasance in office.

As discussed in a prior post, Senators Brown and Warren are among 21 current and former members of Congress who filed an amicus brief in support of the CFPB’s petition for rehearing en banc of the PHH decision. On December 22, PHH filed a response to the petition, arguing that there is no need for the D.C. Circuit to revisit its original decision. The United States also filed a response on December 22, arguing that the D.C. Circuit’s decision “departs from” Supreme Court jurisprudence regarding the separation-of-powers and the removal of executive agency heads. The court granted PHH until January 27 to respond to the United States’ brief. Any decision on the petition for rehearing will thus not be made until after President-elect Trump’s inauguration on January 20, raising the prospect that the United States’ brief could be withdrawn if the Department of Justice’s position changes under the incoming Administration.

ARTICLE BY Jamie A. Heine of Covington & Burling LLP

One Day Left to Share Your Comments about the Closing Process with the Consumer Financial Protection Bureau (CFPB)!

On January 3, the Consumer Financial Protection Bureau (“CFPB”) issued a notice and request for information in the Federal Register regarding the real estate closing process. Specifically, the CFPB is interested in knowing the consumer “pain points” associated with mortgage closing and how those pain points might be addressed by market innovations and technology.

The bureau wants input from consumers, mortgage lenders, housing attorneys, settlement closing agents, real estate agents, fair lending and consumer advocates – basically anyone and everyone with closing experience. This is your chance to share your perspective, whether good or bad, and help the closing process to be a smoother and more consumer friendly one for your future purchase, sale or refinance. The information collected during the comment period will be used to help the CFPB come up with future improvement initiatives. This is part of the larger “Know Before You Owe” project, which is intended to help consumers understand and navigate the home-buying process.

The CFPB has made it easy to share information by listing seventeen specific questions they would like responses to, including:

1. What are common problems or issues consumers face at closing? What parts of the closing process do consumers find confusing or overwhelming?

2. Are there specific parts of the closing process that borrowers find particularly helpful?

3. What do consumers remember about closing as related to the overall mortgage/home-buying process? What do consumers remember about closing?

4. How long does the closing process usually take? Do borrowers feel that the time at the closing table was an appropriate amount of time? Is it too long? Too short? Just right?

5. How empowered do consumers seem to feel at closing? Did they come to closing with questions? Did they review the forms beforehand? Did they know that they can request their documents in advance? Did they negotiate?

6. What, if anything, have you found helps consumers understand the terms of the loan?

7. What are some common errors you have seen at closing? How are these errors detected, if at all? Tell us about errors that were detected after closing.

8. What changes, diverging from what was originally presented at closing, often surprise consumers at closing? How do consumers react to changes at closing?

9. How, if at all, do consumers typically seek advice during closing? In person? By phone? Online?

10. Where and to whom do consumers turn for advice during closing? Whom do they typically trust?

11. What documents do borrowers usually remember seeing? What documents they remember signing?

12. What documents do consumers find particularly confusing?

13. What resources do borrowers use to define unfamiliar terms of the loan?

14. What, if anything, would you change about the closing process to make it a better experience for consumers?

15. What questions should consumers ask at closing? What are the most important pieces of information/documents for them to review?

16. What is the single most important question a consumer should ask at closing?

17. What is the single most important thing a consumer should do before coming to the closing table?

You can submit answers to these questions, along with your own additional comments, online by visiting this webpage: http://www.regulations.gov. But time is of the essence! The comment period closes tomorrow, February 7^th. Hurry and let your opinions be known!

Article by:

Brittany C. MacGregor

Of:

McBrayer, McGinnis, Leslie and Kirkland, PLLC

Consumer Financial Protection Bureau Issues New Rule Regarding Consumer Mortgage Transaction Forms

On November 20, 2013 the Consumer Financial Protection Bureau (CFPB) issued a rule that will simplify and improve disclosure forms for consumer mortgage transactions. This rule implements the Dodd-Frank Act’s directive to integrate mortgage loan disclosures required by the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). The two new disclosures are the Loan Estimate, which must be given three business days after application, and the Closing Disclosure, which must be given three business days before closing.

The Loan Estimate form replaces two current federal forms, the Good Faith Estimate designed by the U.S. Department of Housing (HUD) under RESPA and the “early” Truth in Lending disclosure required by TILA. The Closing Disclosure form replaces the current form used to close a loan, the HUD-1, which was designed by HUD under RESPA. It also replaces the revised Truth in Lending disclosure designed by the Federal Reserve Board under TILA.

These new rules apply to most closed-end consumer mortgages. They do not apply to home equity lines of credit, reverse mortgages or mortgages secured by mobile homes or by dwellings not attached to real property. To assist lenders, the final rule and official interpretations contain detailed instructions as to how these forms should be completed.

To permit time for lenders to come into compliance, the final rule will be effective on August 1, 2015.

Article by:

Jon G. Furlow

Of:

Michael Best & Friedrich LLP

Recent Consumer Financial Protection Bureau “CFPB” Mortgage Rules to Absorb and Implement

Barnes & Thornburg LLP‘s Financial Institutions Practice Group recently had an article, Recent Consumer Financial Protection Bureau “CFPB” Mortgage Rules to Absorb and Implement, featured in The National Law Review:

January 2013 was a very busy month for the Consumer Financial Protection Bureau in promulgating rules relating to consumer mortgage lending. The CFPB promulgated seven rules pertaining to consumer mortgage lending during January 2013:

Ability to Repay (ATR) and Qualified Mortgage (QM) Standards under TILA/Regulation Z
Escrow Requirements for Higher-Priced Mortgages Under TILA/Regulation Z
High-Cost Mortgage and Homeownership Counseling Amendments to TILA/Regulation Z and Homeownership Counseling Amendments to RESPA/Regulation X
RESPA/Regulation X and TILA/Regulation Z Mortgage Servicing
Appraisals for Higher-Priced Mortgage Loans (issued jointly with other agencies)
Disclosure and Delivery Requirements for Copies of Appraisals and Other Written Valuations Under ECOA/Regulation B
Loan Originator Compensation Requirements Under TILA/Regulation Z
With so many new CFPB rules, there is much to be learned and absorbed by loan originators, mortgage brokers, mortgage lenders, and mortgage servicers between now and the dates on which such rules will go into effect. With the exception of the High-Cost Mortgage and Homeownership Counseling Amendments to TILA/Regulation Z, the Homeownership Counseling Amendments to RESPA/Regulation X and the Escrow Requirements for Higher-Priced Mortgages rule, which will go into effect on June 1, 2013, and certain limited provisions contained in the Loan Originator Compensation rule, which will also go into effect on June 1, 2013, all of these rules have effective dates in January 2014, one year after their respective promulgation dates.

Although each of these rules is important and poses certain compliance challenges, we will summarize in this Alert two of the most significant rules (largely due to their very widespread applicability and their overall complexity). These are (1) the ATR and QM Standards rule; and (2) the Loan Originator Compensation rule.

ATR and QM Standards

The ATR and QM Standards rule, together with accompanying preamble, explanations and commentary, is over 800 pages long. The rule, among other things, implements a Dodd-Frank Act amendment to TILA requiring a consumer mortgage creditor, before originating a mortgage loan, to consider the borrower’s ability to repay. The new rule allows a creditor to satisfy this requirement by: (1) satisfying the general ATR standards, which would require the creditor to consider eight different and discrete factors relating to the borrower’s ability to repay (generally using reasonably reliable third-party records to verify the information considered); (2) refinancing a “non-standard mortgage” into a “standard mortgage”; (3) originating a “rural balloon-payment QM” if, but only if, the creditor qualifies under a rigorous standard under which few creditors would qualify (creditors must have less than $2 billion in assets, must originate no more than 500 first-lien mortgages, and must originate at least 50 percent of the first-lien mortgages in counties that are rural or underserved); or (4) originating a QM.

The advantage of meeting the QM standards is that, in general, the creditor will obtain an irrebuttable presumption of the borrower’s ability to repay the mortgage, which would block most lawsuits. However, if the mortgage is a “higher-priced mortgage,” the creditor obtains only a rebuttable presumption of the borrower’s ability to repay the mortgage, which makes such loans more easily challenged in court. A “higher-priced mortgage” is one which is priced 1.5 percentage points higher than a comparable loan in Freddie Mac’s Primary Mortgage Market Survey. This distinction will likely make “higher-priced mortgages,” or so-called subprime loans, less available. In this regard, some pundits have predicted that, in the future, only mortgages meeting the QM standards and that are not “higher-priced mortgages” or “high-cost mortgages” will be generally available.

To qualify as a QM the mortgage loan must satisfy the following standards:
- provide for regular periodic payments that are substantially equal (except for ARMs and step-rate loans) that do not result in negative amortization or allow the borrower to defer repayment of principal, or result in a balloon payment (except for balloon-payment QMs);
- have a term no greater than 30 years;
- have total points and fees that do not exceed the permitted percentage of the loan amount (which is generally three percent (3%), subject to a few exceptions and refinements);
- be underwritten taking into account the monthly payment and any mortgage related obligations, using the maximum interest rate that may apply during the first five years and periodic payments that will repay either (i) the outstanding principal and interest over the remaining term of the loan after the interest rate adjusts to the five-year maximum or (ii) the loan amount over the loan term;
- for which the creditor considers and verifies the income or assets, and current debt, alimony, and child support obligations; and
- for which the consumer’s debt-to-income ratio does not exceed forty-three percent (43%) when the loan is consummated.
Notwithstanding these stringent QM standards, on a temporary basis, and for a period not to exceed a maximum of seven years, the CFPB created a second category of QMs that meet some, but not all, of the general QM standards. Simply stated, to qualify under this second category, the loan must meet the general product feature prerequisites for a QM and also satisfy the underwriting standards for purchase, guaranty, or insurance (as applicable) of either (i) the GSEs, as long as they operate under Federal conservatorship or receivership, or (ii) HUD, the VA, the USDA, or the Rural Housing Service.

This rule also implements a provision of the Dodd-Frank Act that prohibits prepayment penalties, except for certain fixed-rate QMs where the penalty meets certain restrictions and the creditor offered the consumer an alternative mortgage loan without the penalty.

Loan Originator Compensation

In connection with the CFPB’s new Loan Originator Compensation rule, the CFPB published over 500 pages of background and prefatory material, explanations, and commentary. In this rule, the CFPB both expands and clarifies existing provisions in Regulation Z regulating loan originator compensation. Many, if not most, of the provisions in the final rule have substantially identical counterparts in current Regulation Z § 1026.36(d) and the related Official Staff Commentary.

However, the final rule has expanded treatment regarding the prohibited use of “proxies” for a term of a transaction in awarding loan originator compensation. In this regard, the final rule clarifies the definition of a proxy as a factor that consistently varies with a transaction over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transactions.

While retaining current Regulation Z’s general prohibition against subsequent downward adjustments to a loan originator’s compensation based upon changes in the transaction terms (e.g., to match or better the terms of a competitor), the final rule, unlike current Regulation Z, allows loan originators to reduce their compensation to defray certain unexpected increases in estimated settlement costs.

Although the final rule generally prohibits loan originator compensation based upon the profitability of a transaction or a pool of transactions, it makes certain limited exceptions to this general rule with respect to various kinds of tax-advantaged retirement plans and other profit-sharing plans. In this regard, mortgage-related business profits can be used to make contributions to certain tax-advantaged retirement plans and to provide bonuses and contributions to other plans that do not exceed 10 percent of the individual loan originator’s total compensation (but employers can elect whether or not to include contributions to tax-advantaged retirement plans in the “total compensation” calculations).

Regulation Z currently provides that, where a loan originator receives compensation directly from a consumer in connection with a covered mortgage loan, no loan originator may receive compensation from another person in connection with the same transaction. The Official Staff Commentary to current Regulation Z indicates, however, that this prohibition does not prohibit the employer of a loan originator from paying such loan originator a salary or an hourly wage in that instance. As a pleasant surprise, the final rule permits mortgage brokers to pay their employees or independent contractors a commission on the particular mortgage loan, so long as the commission is not based upon the terms of such mortgage loan.

The CFPB has elected not to issue a rule implementing a provision of the Dodd-Frank Act prohibiting consumers from paying upfront points or fees on a transaction if the loan originator’s compensation is paid by a person other than the consumer (either to the creditor’s own employee or to a mortgage broker). Instead, the CFPB elected to grant a temporary exemption from this prohibition while it explores the potential effects of such a prohibition.

The final rule also contains some provisions unrelated to loan originator compensation. Specifically, in furtherance of other provisions in the Dodd-Frank Act, the final rule (1) prohibits mandatory arbitration clauses in connection with both residential mortgage loans and HELOCS; (2) prohibits the application or interpretation of provisions in residential mortgage loans and HELOCS and related agreements that would have the effect of barring claims in a court in connection with an alleged violation of Federal law; and (3) prohibits the financing of any premiums or fees for credit insurance (such as credit life insurance) in connection with a consumer credit transaction secured by a dwelling (but allows for credit insurance to be paid on a monthly basis). These are the only provisions of the final rule which have a June 1, 2013, effective date.

Other provisions in the final rule address (1) the additional obligations imposed on depository institutions in ensuring that their loan originator employees meet character, fitness, and criminal background standards similar to existing SAFE Act licensing standards and are properly trained; and (2) expanded recordkeeping requirements pertaining to loan originator compensation applicable to both creditors and mortgage brokers.

Recess Appointment of Richard Cordray

The Jan. 25, 2013 decision of the D.C. Circuit Court of Appeals invalidating recess appointments to the National Labor Relations Board, calls into question the recess appointment of Richard Cordray as head of the CFPB. What impact this potentially invalid appointment will have on the CFPB regulations promulgated in January 2013 is undetermined at this time.

Congress Passes Bill Fixing Attorney-Client Privilege Waiver Problem for Consumer Financial Protection Bureau

The National Law Review recently published an article, Congress Passes Bill Fixing Attorney-Client Privilege Waiver Problem for Consumer Financial Protection Bureau, written by Phillip L. Stern and Michael C. Diedrich with Neal, Gerber & Eisenberg LLP:

The U.S. Senate has passed H.R. 4014, a House bill that adds the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) to the list of federal banking agencies with whom supervised entities may share information without effecting a waiver of the attorney-client privilege as to third-parties. President Obama is expected to sign the bill into law.

The bill, sponsored by Rep. Bill Huizenga of Michigan (R), is intended to address a perceived shortcoming in the original Dodd-Frank Act, which created the Bureau. Under Dodd-Frank, the new Bureau was given broad supervisory and enforcement powers over large swaths of the financial and credit services industries. The Act, however, did not provide – as is the case with other Prudential Regulators, including the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (see12 U.S.C. 1828(x)) – that the attorney-client privilege would not be waived when otherwise privileged information is shared by a supervised entity with the Bureau except with respect to its dealings with the Bureau.

The bill fixes this omission and adds the Bureau to the list of Prudential Regulators for whom the privilege is not waived as to material submitted in the course of any supervisory or regulatory process. Moreover, the Bureau can share the supervised entity’s privileged information with other Prudential Regulators without triggering a waiver of the supervised entity’s privilege except with respect to that Prudential Regulator. The law thus closes what many commentators and members of Congress felt was a loophole that would impede cooperation among supervised entities and the Bureau.

The Bureau had tried to address the omission through a bulletin it issued on January 4, 2012 (CFPB Bulletin 12-01) in which it stated that because its supervisory powers were equivalent to those of the Prudential Regulators, it had the power “to receive privileged information from supervised entities without effecting a waiver of privilege.” Due to the omission in the Act that created the Bureau, most commentators feared that the Bureau’s unilateral decree was insufficient to protect the privilege. Similarly, Congress expressed a preference for a statutory scheme to address inter-agency sharing of privileged material over any agency pronouncement or rule-making. SeeCongressional questioning of Raj Date, Deputy Director of the CFPB, on 7/19/12 before House Committee on Financial Services, Subcommittee on Financial Institutions and Consumer Credit.

In addition to adding the Bureau to the list of Prudential Regulators for the purpose of maintaining attorney-client privilege, the bill also adds the Bureau to a different statutory list (12 U.S.C. 1821(t)(2)(A)) of credit agencies among whom sharing of privileged information will not result in a waiver as to third-parties including the Farm Credit Administration, the Farm Credit System Insurance Corporation, the National Credit Union Administration, and the Federal Housing Finance Agency.

Though H.R. 4014 does close the gap as to sharing of information obtained through supervisory examinations and among government regulators, the law does not address a major concern of supervised entities – that material obtained through the course of an examination will be shared with the Bureau’s enforcement division and form the basis of an action. According to the Congressional summary of the bill, the provision prohibiting information gathered by the CFPB in its supervisory or regulatory capacity will not be construed as a waiver of privilege as to “any person or entity other than the CFPB…” (emphasis added). The concern as to the Bureau itself, and its two divisions, remains.

The Consumer Financial Protection Bureau – The New Sheriff in Town

The National Law Review recently published an article about The Consumer Financial Protection Bureau written by Andrew G. Berg, Karen Y. Bitar, Carl A. Fornaris, Laureen E. Galeoto, Ricardo A. Gonzalez, and Gil Rudolph of Greenberg Traurig, LLP:

Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (“Bureau” or “CFPB”). This Bureau is focused solely on consumer financial protection. The Bureau has six primary functions,¹ including the authority and responsibility to supervise covered persons for compliance with Federal consumer financial law² and take appropriate enforcement action to address violations of same. The Bureau does not supervise covered persons for safety and soundness the way bank regulators do; rather, its sole stated interest is the protection of financial consumers in particular.

One year old on July 21, 2012, this Bureau has spent its first year aggressively pursuing its mandate: to implement and enforce Federal consumer financial law. It has been actively issuing proposed and final regulations and guidance, as well as filing amicus briefs in various court proceedings. The Bureau has also been conducting and participating in exams of covered parties. Further, it has been gathering and analyzing consumer complaints. Notably, the Bureau’s collection of consumer complaints — which began in July 2011 and was first limited to credit cards — was expanded to handle mortgage complaints in December 2011, and expanded again in March 2012 to complaints concerning bank products and services, private student loans and other consumer loans.³ The Bureau expects to begin addressing complaints about other covered non-depository institutions by the end of 2012.⁴

To date the Bureau has collected and processed a staggering 45,000 complaints,⁵ over 37,000 of which have been forwarded to the target company for review and response. Some of these complaints have been referred by the Consumer Response Section of the Bureau to the Bureau’s Division of Supervision, Enforcement and Fair Lending and Equal Opportunity for further action.⁶ The Bureau recently acknowledged that it is currently conducting private investigations into alleged violations of the Federal consumer financial laws, and regulators have publically indicated that the Bureau will soon initiate enforcement actions.⁷

The issues that the Bureau is currently investigating are questions that management, compliance officers and Boards of Directors should be asking themselves now in order to begin to address potential issues before the Bureau enforcement begins. With enforcement risk looming, now is the time to pay attention and ensure compliance with the Bureau’s regulation and guidance, assess risks and establish best practices in areas of consumer protection compliance and consumer complaint management.⁸

Who Falls Under the Bureau’s Reach?

The Bureau’s consumer financial protection functions extend farther and wider than those of its transferor agencies.⁹ The Bureau’s regulatory authority and enforcement arm (including the power to require reports and conduct investigations) apply to large banks, large credit unions and their affiliates,¹⁰ andnon-bank entities that engage in offering or providing consumer financial products or services. Section 1024 of Title X authorized for the first time federal supervision over non-banks engaging in financial transactions, such as: mortgage brokers, originators and mortgage servicers, payday lenders, private education lenders, and credit card companies. In addition, the Bureau’s supervisory and enforcement authority applies to any “service provider”¹¹ of the large banks or large non-banks that provides a “material service” in connection with the offering or provision of a consumer financial product or service.¹² Thus, a whole new body of direct and indirect financial services providers are now subject to examination over, and compliance with laws that they never before had to be concerned with, in particular, Title X’s prohibition of unfair, deceptive and abusive acts or practices, the impact of which can have significant financial and reputational consequences for the service providers, banks and non-banks.

In recent guidance,¹³ the Bureau advised that it intends to exercise to the fullest extent its regulatory authority over service providers, including its authority to examine them for compliance with Title X’s prohibition of unfair, deceptive, or abusive acts or practices. Significantly, that guidance warned that depending on circumstances, “legal responsibility may lie with the supervised bank or nonbank as well as with the supervised service provider.” The message being conveyed is that a bank or non-bank cannot delegate its responsibility of complying with Federal consumer financial law by engaging a service provider for certain services. Accordingly, it will be important to have effective processes in place to manage the new risks of the service provider relationship created by the Bureau.¹⁴

What is on the Enforcement Horizon?

In addition to the authority to enforce “enumerated consumer laws,” the Bureau also has the authority to prohibit “unfair, deceptive, or abusive acts or practices.” As noted above, the Bureau is looking not only at covered banks and non-banks for their compliance but also their service providers to ensure that these prohibited acts and practices are not taking place.¹⁵ While the industry has been guided for years on what is unfair or deceptive by the FTC and Federal banking agencies,¹⁶ “abusive” is a new standard upon which compliance and enforcement risk hinges. The Bureau’s Supervision and Examination Manual (“Manual”), dated October 2011, provides guidance on what an “abusive” act or practice may look like.¹⁷ The description, however, of what is “abusive” is broad and leaves much to be interpreted. Moreover, a covered party may be in technical compliance with all other applicable Federal consumer protection laws, and still be in violation of UDAAP.¹⁸ Where will the Bureau be looking for possible violations of UDAAP? Recent guidance advises that “the presence of complaints alleging that consumers did not understand the terms of a product or service may be a red flag [of a UDAAP] indicating that examiners should conduct a detailed review of the relevant practice.”¹⁹ The Manual and related guidance further instructs the examiners that “every complaint does not indicate violation of law. When consumers repeatedly complain about an institution’s product or service, however, examiners should flag the issue for possible further review.”²⁰ It goes on to note that even a “single substantive complaint” may be enough to raise serious concerns that warrant further review.²¹ At bottom, consumer complaints are considered an “essential source”²² for identifying potential violations of UDAAP.

Covered parties need to be thinking today about how they are collecting, reviewing and responding to consumer complaints on financial products and services and alleged failures to comply with Federal consumer financial laws and regulations. After all, the Bureau has already looked at over 45,000 consumer complaints, and may be more aware than a covered party of possible violations occurring in its own institution. Publicly, the Bureau has also been actively looking at a broad spectrum of products and practices including reverse mortgages, debt collection, foreclosure related services, and forced place insurance products. Consequently, implementation of compliance with consumer protection laws and a consumer complaint management scheme before Bureau intervention will be key for the days ahead.

Are We in the Quiet Before the Storm?

Well-funded and headed by Richard Cordray, the former State Attorney General for Ohio, it is widely projected that his Bureau will be pro-active and aggressive in its enforcement of Federal consumer protection laws. Not surprisingly, Richard Cordray was recently quoted as stating that, “[T]here will be enforcement action this year.”²³ Moreover, it is publically known that the Bureau is privately conducting investigations. Thus, it is not a question of if, but of when.

What Does the Bureau’s Enforcement Power Look Like?

The Bureau has the power to conduct joint investigations, issue subpoenas and civil investigative demands, bring cease and desist proceedings, injunction proceedings and conduct hearings. Pursuant to its civil investigative demand power, the Bureau can require the subject to produce documents, produce tangible things, file written reports or answers, give oral testimony or a combination of the aforementioned.²⁴

In addition, the Bureau has the authority to commence civil proceedings in the U.S. District Courts, or in any court of competent jurisdiction of a state in a district where there defendant is located or resides or is doing business too seek relief, including civil penalties,²⁵ for violations of Federal consumer financial laws.

The Court in a civil action and the Bureau in an adjudication proceeding, respectively, have been given the jurisdiction and authority to grant legal and equitable relief.²⁶ Relief available includes monetary penalties that can pack a lot of punch — reaching up to $1 million per day for every day a covered party “knowingly” violates a Federal consumer protection law. The other relief available also includes the power to rescind or reform contracts, order refund of monies or return real property, restitution, disgorgement or compensation for unjust enrichment.

Is There Notice Before Enforcement?

In a bulletin released by the Bureau in November of 2011, the Bureau gave notice of some of the actions it may take, at its discretion, prior to commencing enforcement.²⁷ Most notably, the Office of Enforcement, may, prior to recommending that the Bureau commence enforcement, “give the subject of such recommendation notice of the nature of the subject’s potential violations and may offer the subject the opportunity to submit a written statement in response.” The primary focus of this responsive statement, also referred to as a NORA letter, should be on legal and policy matters relevant to the potential proceeding. However, if factual assertions are relied upon, the response must be made under oath by a person with personal knowledge of the facts.²⁸ A subject will have only 14 days from receipt of notice to respond. Understandably, notice by the Office of Enforcement may not always be appropriate, such as in instances of ongoing fraud or other situations that may require quick action.²⁹

A word of caution for covered parties is that the NORA letter may be discoverable by third parties.³⁰ The Bureau’s Rule on Confidential Treatment of Privileged Information, released on July 5, 2012, will become final on August 6, 2012.³¹ This Rule seeks to protect a covered entity’s submission of privileged information to the Bureau in response to a request for information during an examination. This Rule may not protect information voluntarily contained in a NORA.

What About the Federal Banking Agencies’ Enforcement Authority?

For all insured depository institutions and credit unions with assets in excess of $10 billion, or any affiliate thereof, the Bureau has primary enforcement authority with respect to compliance with federal consumer financial laws. The federal banking agencies that regulate such “large” institutions will continue to have enforcement authority under their long-standing enforcement powers under Section 8 of the Federal Deposit Insurance Act (the “FDI Act”) for violations of law generally. However, with respect to violations of Federal consumer financial laws specifically by such “large” institutions, if a federal banking agency wishes to trigger enforcement, the agency must first recommend that the Bureau initiate an enforcement action. If the Bureau does not initiate an enforcement action within 120 days of receipt of the recommendation, then the federal banking agency may initiate an enforcement action under its FDI Act enforcement powers.

For depository institutions with assets under $10 billion, the Bureau has no enforcement authority with respect to compliance with Federal consumer financial law. This means that the federal banking agencies have exclusive enforcement authority over these smaller institutions with respect to compliance with Federal consumer financial law.

At the End of the Day, What Does This All Mean?

It is a new day and there is a new Sheriff in town. Risk assessment, risk management, complaint management and robust compliance are top priorities. As the Bureau evolves and the meaning of “abusive” morphs into a more concrete meaning, covered parties can best protect themselves by engaging in best practices that comply with the Bureau’s guidance.

¹The Bureau’s Six Primary Functions include: 1) conducting financial education programs; 2) collecting, investigating, and responding to consumer complaints; 3) collecting, researching, monitoring, and publishing information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets; 4) supervising covered persons for compliance with the Federal consumer financial law, and taking appropriate enforcement action to address violations of Federal consumer financial law; 5) issuing rules, orders, and guidance implementing Federal consumer financial law; and 6) performing such support activities as many be necessary or useful to facilitate the other functions of the Bureau. See Sec. 1021 (c).

²See generally Sec. 1021, of Subtitle B — General Powers of the Bureau. See also Sec. 1002(14). Under Title X, “Federal consumer financial law,” includes: 1) the provisions of Title X, such as Sec. 1031’s prohibition of unfair, deceptive or abusive acts or practices (“UDAAP”); 2) the enumerated laws found at Sec. 1002(12), which include the Alternative Mortgage Transaction Parity Act of 1982, the Consumer Leasing Act of 1976, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Home Owners Protection Act of 1998, the Fair Debt Collection Practices Act, subsections (b) – (f) of section 43 of the Federal Deposit Insurance Act, sections 502 – 509 of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act of 1975, the Home Ownership and Equity Protection Act of 1994, the Real Estate Settlement Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act, the Truth in Savings Act, section 626 of the Omnibus Appropriations Act, 2009, and the Interstate Land Sales Full Disclosure Act; 3) the laws for which authorities are transferred under Subtitles F and H; and 4) any rule or order prescribed by the Bureau under Title X, enumerated consumer law or authorities transferred under subtitles F & H. Federal consumer financial law does NOT include the Federal Trade Commission Act. Title X should be reviewed and consulted for other exceptions.

³ See the CFPB’s Consumer Response Annual Report, dated March 31, 2012.

⁴ See Id.

⁵ See Id., and the CFPB’s Consumer Response: A Snapshot of Complaints Received, dated June 19, 2012.

⁶See the CFPB’s Consumer Response Annual Report, dated March 31, 2012. The complaint database, referred to in the report, is publicly viewable and is creating concerns by the consumer financial industry that it might result in making them a target of plaintiffs’ law firms or consumer protection groups which can utilize the public information for their own aims in unfair and deceptive practices actions. Under the process for complaint handling set-up by the Bureau, a company has 15 calendar days to respond to the complaint. The company can respond to the consumer via a secure portal; the consumer then has an opportunity to dispute the response. The Consumer Response section prioritizes for review and investigation those complaints where the consumer disputes the response or where the companies fail to timely respond. For more information on the CFPB’s complaint collection and processing see the report of the CFPB, on Consumer Response Annual Report, dated March 31, 2012 and CFPB’s Consumer Response: A Snapshot of Complaints Received, dated June 19, 2012. See also the Bureau’s proposed rule on Disclosure of Consumer Complaint Data, Federal Register, Vol. 77, No. 121, 6/22/12.

⁷See New York Times article, “New Agency Plans to Make Over Mortgage Market,” by Wyatt, E., 7/5/12. See also the statements made by Richard Hackett, Assistant Director, Office of Installment & Liquidity Lending Markets Research, Markets & Regulations CFPB, at the PLI Program on 4/24/12, titled “Title X & XIV of the Dodd-Frank Act: The New Consumer Financial Protection Bureau” (his statements were made with the caveat that his statements are his own and not those of the Bureau); and the CFPB Annual Report 2012, Fair Debt Collections Practices Act (“FDCPA”), at pp. 17, wherein the Bureau stated that it is “currently conducting non-public investigations of debt collection practices to determine whether they violate FDCPA or the Dodd-Frank Act.”

⁸Supervised entities are expected “to have an effective compliance management system adapted to it business strategy and operations.” See the Supervision and Examination Manual, CMR 1, dated October 2011.

⁹Consumer financial protection functions previously held by the Board of Governors, the FDIC, the Federal Trade Commission, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Department of Housing and Urban Development were transferred to the Bureau as annunciated in Section 1061 of Title X. The FTC and the Bureau have overlapping authority with regards to certain enumerated consumer laws; there is currently a Memorandum of Understanding in place between the two agencies with regards to the enforcement of the Fair Debt Collection Practices Act. See The CFPB Annual Report 2012, Fair Debt Collection Practices Act, at p. 21 and App. A.

¹⁰Section 1025 of Title X authorized the Bureau to supervise large insured depository institutions and credit unions with more than $10 billion in total assets. In addition, the Bureau has supervisory authority over all affiliates and service providers of a large bank and credit union. Section 1026 of Title X authorizes the Bureau to require reports from smaller insured depository institutions and to include its examiners at the prudential regulator’s examinations in order to assess compliance with the Federal consumer financial laws.

¹¹“Service Providers,” include any person who “provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person that — (i) participates in designing, operating, or maintaining the consumer financial product or service; or (ii) processes transactions relating to the consumer financial product or service (other than unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes).” Sec. 1002(26). Regarding examinations or requiring of reports by service providers, Sec. 1024(e) and 1025(d), state that the Bureau shall coordinate with the appropriate prudential regulator as applicable. Thus, under Title X, service providers are to be subject to the authority of the Bureau, “to the same extent as if such service provider were engaged in a service relationship with a bank, and the Bureau were an appropriate Federal banking agency under section 7 (c) of the Bank Service Company Act.

¹²Presently, the Bureau is focusing on third party debt collectors/service providers hired by the large banks and non-banks. In addition, it is anticipated, that on the finalization of the Bureau’s proposed “larger participant” rule this summer, that larger non-bank debt collectors will fall under the Bureau’s supervisory and enforcement authority per Sec. 1024 (a)(1)(B). Last, under Section 1024(a)(1)(C), the Bureau’s authority may extend to others whom the Bureau has reasonable cause to determine has engaged or is engaging in conduct which poses risks to consumers with regard to the offering or provision of consumer financial products or services.

¹³The CFPB Bulletin 2012-03, dated April 13, 2012, set forth guidance concerning service providers and the Bureau’s expectations with regards to banks and non-banks in managing the risks of the service provider relationships. Five specific steps that banks and non-banks should take to ensure their business arrangements do not pose “unwarranted risks to consumers,” include: 1) Conducting thorough due diligence to verify that the service provider understands and is capable of complying with Federal consumer financial law; 2) Requesting and reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contract or compliance responsibilities; 3) Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive, or abusive acts or practices; 4) Establishing internal controls and on-going monitoring to determine whether the service provider is complying with Federal consumer financial law; 5) Taking prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate.

¹⁴See Id. at p. 2.

¹⁵See Secs. 1021(c)(4), 1031(a), 1036 of Title X; and The CFPB Annual Report 2012, Fair Debt Collections Practices Act, p. 11.

¹⁶See FTC guidance under Sec. 5 of the Federal Trade Commission Act.

¹⁷The Supervision and Examination Manual, dated October 2011, mirrors the language of the Sec. 1031(d), in describing an abusive act or practice as one that: “Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes unreasonable advantage of — a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
¹⁸See CFPB, Guidance Documents, Supervision and Examination Manual, Version 1.0, Consumer Laws and Regulations: Unfair, Deceptive or Abusive Acts or Practices.

¹⁹Id.

²⁰The Supervision and Examination Manual, dated October 2011 at UDAAP 10.

²¹Id. at UDAAP 10.

²²CAP, Guidance Documents, Supervision and Examination Manual, Version 1.0, Consumer Laws and Regulations: Unfair, Deceptive or Abusive Acts or Practices.

²³See Richard Cordray’s, Director of the Bureau, statement, “[T]here will be enforcement action this year, and we have quite a bit of activity going on.” New York Times article, “New Agency Plans to Make Over Mortgage Market,” by Wyatt, E., 7/5/12.

²⁴See Sec. 1052(c).

²⁵See Sec. 1055(c), which provides that, “Any person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty pursuant to this subsection.” Three tiers of penalties are identified, including: a) For any violation of law, rule, or final order or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues. b) Notwithstanding paragraph (a), for any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues. c) Notwithstanding paragraphs (a) and (b), for any person that knowingly violations a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues.

²⁶See Sec. 1055 (a).

²⁷See CFPB Bulletin 2011-14 (Enforcement), Notice and Opportunity to Respond and Advise, dated November 7, 2011.

²⁸See Id.

²⁹See Id.

³⁰See Id.

³¹See Federal Register, Vol. 77, No. 129, 7/15/12, regarding 12 CFR Part 1070, Confidential Treatment of Privileged Information.

Tag: CFPB

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