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DOJ says CFPB structure is unconstitutional, but urges Supreme Court to deny writ since case is a “poor vehicle”
On December 10, the DOJ filed a brief in response to a Texas bank and two associations’ (petitioners) petition for writ of certiorari with the U.S. Supreme Court, challenging the constitutionality of the CFPB’s structure, with the DOJ arguing that the Bureau’s structure infringes on the president’s responsibility to ensure that federal laws are faithfully executed, but urging the court to deny the writ as the case is a “poor vehicle” for the constitutionality consideration. Specifically, the DOJ argues that the decision would warrant review by the full court, which would be unlikely due to newly appointed Judge Kavanaugh’s involvement in the January 2018 D.C. Circuit en banc decision in PHH v. CFPB (covered by a Buckley Sandler Special Alert). Additionally, the DOJ acknowledges that the petitioners’ standing to sue “is sufficiently questionable to present a significant vehicle problem,” as the Texas bank is supervised by the OCC and the two associations are not regulated by the Bureau. On the merits, however, the DOJ agrees with the petitioners that statutory restriction on the president’s authority to remove the Bureau’s director violates the constitution. Citing to Judge Kavanaugh’s dissent opinion in the PHH en banc decision, the DOJ asserts that not only does the for-cause removal restrict the president’s powers to ensure the laws are faithfully executed, a single-director lacks the attributes of a multi-member commission that would warrant a for-cause removal provision. The DOJ concludes that the proper remedy would be to sever the for-cause provision while leaving the remaining applicable portions of the Dodd-Frank Act intact. Lastly, the DOJ notes that since it would not argue in favor of constitutionality, it recommends that if the Court were to grant certiorari, it should wait until the Bureau’s new director, Kathy Kraninger, has an opportunity to decide if the Bureau would defend the judgment before appointing an amicus curiae.
As previously covered by InfoBytes, the petitioners asked the Court (i) whether the CFPB as an independent agency headed by a single director that can only be removed from office for cause violates the Constitution’s separation of powers; (ii) whether a 1935 Supreme Court case upholding removal restrictions on members of the FTC should be overturned; and (iii) whether the CFPB’s “perpetual, on-demand funding streams” are permitted under the Appropriations Clause. The petition for writ resulted from a June decision by the D.C. Circuit upholding summary judgment against the petitioners, based on the D.C. Circuit en banc decision in PHH v. CFPB, which concluded the Bureau’s single-director structure is constitutional.
On December 10, the CFPB released a new proposed policy on No-Action Letters (NAL) and a new federal product sandbox. The new NAL proposal, which would replace the 2016 NAL policy, is “designed to increase the utilization of the Policy and bring certain elements more in line with similar no-action letter programs offered by other agencies.” The proposal consists of six sections. Highlights include:
- Description of No-Action Letters. The letter would indicate to the applicant, that subject to good faith, substantial compliance with the terms of the letter, the Bureau would not bring a supervisory or enforcement action against the recipient for offering or providing the described aspects of the product or service covered by the letter.
- Submitting Applications. The proposal includes a description of the items an application should contain and invites applications from trade associations on behalf of their members, and from service providers and other third parties on behalf of their existing or prospective clients.
- Assessment of Applications. The Bureau intends to grant or deny an application within 60 days of notifying the applicant that the application is deemed complete.
- Issuing No-Action Letters. NALs will be signed by the Assistant Director of the Office of Innovation or other members in the office, and will be duly authorized by the Bureau. The Bureau may revoke a NAL in whole or in part, but before the Bureau revokes a NAL, recipients will have an opportunity to cure a compliance failure within a reasonable period.
- Regulatory Coordination. In order to satisfy the coordination requirements under Dodd-Frank, the Bureau notes it is interested in partnering with state authorities that issue similar forms of no-action relief in order to provide state applicants an alternative means of also receiving a letter from the Bureau.
- Disclosure of Information. The Bureau intends to publish NALs on its website and in some cases, a version or summary of the application. The Bureau may also publish denials and an explanation of why the application was denied. The policy notes that disclosure of information is governed by the Dodd-Frank Act, FOIA and the Bureau’s rule on Disclosure of Records and Information, which generally would prohibit the Bureau from disclosing confidential information.
Notable changes from the 2016 NAL policy include, (i) NALs no longer have a temporal duration—under the new proposal, there is no temporal limitation except in instances of revocation; (ii) applicants are no longer are required to commit to sharing data about the product or service covered by the application; and (iii) the letters are no longer staff recommendations, but issued by authorized officials in the Bureau to provide recipients greater assurance of the relief.
The proposal also introduces the Bureau’s “Product Sandbox,” which offers substantially the same relief as the NAL proposal but also includes: (i) approvals under one or more of three statutory safe harbor provisions of TILA, ECOA, or the EFTA; and (ii) exemptions by order from statutory provisions of ECOA, HOEPA, and FDIA, or regulatory provisions that do not mirror statutory provisions under rulemaking authority. The proposal notes that two years is the expected duration for participation in the Sandbox, but similar to the no-action relief above, the no-action relief from the Sandbox program can be of unlimited duration—if approved under the sandbox program, “the recipient would be immune from enforcement actions by any Federal or State authorities, as well as from lawsuits brought by private parties.”
Comments on the proposals are due within 60 days of publication in the Federal Register.
On December 10, the CFPB announced the beta release of the new HMDA Platform. The beta version enables financial institutions to become familiar with the platform and permits entities to establish log-in credentials, upload sample files, validate data, and confirm their submissions of test data. Entities can test and retest throughout the beta period, and any test data will be removed from the system when the 2018 filing period opens on January 1, 2019. The announcement reminds institutions that in order to use the beta version of the HMDA Platform as well as to file HMDA data collected in 2018, financial institutions must have a Legal Entity Identifier (LEI) and that LEI must be recognized by the HMDA Platform in order to create a new account or test data with an existing account.
On December 6, the CFPB announced the filing of a complaint and proposed final judgment in the U.S. District Court for the District of Nevada against a non-bank mortgage company for allegedly deceiving veterans about the benefits of refinancing their mortgages in violation of the Consumer Financial Protection Act. According to the complaint, during in-home presentations, the company would allegedly use flawed “apples to apples” comparisons between the consumers’ mortgages and an Interest Rate Reduction Refinancing Loan (a loan, guaranteed by the Department of Veterans Affairs, which allows veterans to refinance mortgages at lower interest rates). The Bureau alleges the presentations misrepresented the future cost savings of the refinance by (i) inflating the future amount of principal owed under the existing mortgage; (ii) overestimating the future loan’s term, which underestimated the future monthly payments; and (iii) overestimating the total monthly benefit of the loan after the first month.
If ordered by the court, the judgment would require the company to pay $268,869 in redress to consumers and a civil penalty of $260,000; it would also prohibit the company from misrepresenting the terms or benefits of mortgage refinancing.
CFPB’s latest fair lending report focuses on promoting fair, equitable, and nondiscriminatory access to credit
On December 4, the CFPB issued its sixth fair lending report to Congress, which outlines the Bureau’s efforts in 2017. According to the report, in 2017, the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities such as redlining, mortgage and student loan servicing, and small business lending. The report also addresses the Bureau’s risk-based prioritization approach to supervisory examinations and enforcement activity relating to underwriting, pricing, steering, servicing, and HMDA data integrity. Specifically, the report covers fair lending supervision and enforcement activities, guidance and rulemaking, and interagency coordination efforts, including (i) taking enforcement actions against a bank for alleged credit card lending discrimination, and a mortgage lender that allegedly failed to accurately report consumer application and loan data; (ii) issuing its first no-action letter to a company that uses alternative, non-traditional data and modeling techniques “to make credit and pricing decisions to support innovation and enable people with limited credit history, among others, to obtain credit or obtain credit on better terms”; (iii) collaborating with other federal banking regulators to issue, among other things, the “HMDA Examiner Transaction Testing Guidelines,” which present uniform guidelines for examiners when evaluating whether covered mortgage lenders are reporting accurate data; and (iv) communicating fair lending information to the public through various platforms. Notably, the report is silent regarding plans for upcoming fair lending activities in 2019, unlike previous reports that included future actions. (See InfoBytes coverage on the 2016 report here.)
On December 6, the U.S. Senate confirmed, in a 50 to 49 vote, Kathy Kraninger as the new Director of the CFPB for a five year term. Kraninger replaces acting CFPB Director Mick Mulvaney, under whom she served at the Office of Management and Budget (OMB) as the associate director for general government. Prior to OMB, Kraninger worked at the Department of Homeland Security and in Congress on the House and Senate Committees on Appropriations. In July, Kraninger testified before the Senate Banking Committee where she fielded questions covering a range of topics and notably stated that, “Congress, through [the] Dodd-Frank Act, gave the Bureau incredible powers and incredible independence from both the president and the Congress in its structure. . . . My focus is on running the agency as Congress established it, but certainly working with members of Congress. I’m very open to changes in that structure that will make the agency more accountable and more transparent.” (Detailed coverage on Kraninger’s hearing available here.)
While her views on consumer financial protection issues are largely unknown, Kraninger is expected to continue with Mulvaney’s initiatives, at least in the near term. Currently, the Bureau is, among other things, (i) expected to release a proposed rule reconsidering the ability-to-repay provisions of the rule covering Payday, Vehicle Title, and Certain High-Cost Installment Loans in January 2019 (covered by InfoBytes here); (ii) fighting three constitutional challenges to its single-director structure (InfoBytes coverage here and here and here); and (iii) receiving pushback from state Attorneys General on its reported decisions to no longer supervising financial institutions for compliance with the Military Lending Act (MLA) and reexamine the requirements and enforcement of the Equal Credit Opportunity Act (ECOA) (covered by InfoBytes here and here).
In a press statement released shortly after the vote, Mulvaney praised the Senate for confirming Kraninger and spoke of his time as acting Director, “[t]his last year has been an important step in the history of the Bureau as we take our place among the most notable regulatory bodies of our country -- and frankly the world. Like all transitions, it was not always as smooth as we would've all liked, but the Bureau has emerged stronger for it.”
On November 21, the CFPB released the latest quarterly consumer credit trends report, which examines how natural disasters affect consumers’ credit reports based on a sample of approximately 5 million credit records. The report notes that while financial institutions are not required to report natural disaster assistance information, in 2017, about 8.3 percent of consumer credit reports included information in a special comment code labeled “affected by natural or declared disasters,” which the CFPB states is similar to the Federal Emergency Management Agency’s estimate that roughly 8 percent of U.S. residents were affected by natural disasters in 2017. Additionally, the report summarizes the natural disaster reporting trends for consumers in the Greater Houston area affected by Hurricane Harvey. Highlights of the report include (i) almost 40 percent of consumers with a credit report in the Greater Houston area received a comment code regarding the hurricane after it hit; (ii) the most common type of tradeline to receive a natural disaster comment code are mortgage loans; and (iii) accounts that received the natural disaster comment code are associated with higher rates of delinquency prior to Hurricane Harvey.
On November 23, the CFPB, OCC, and the Federal Reserve Board published a final rule in the Federal Register, which increases the smaller loan exemption threshold for the special appraisal requirements for higher-priced mortgage loans (HPMLs) under TILA. TILA requires creditors to obtain a written appraisal based on a physical visit to the home’s interior before making a HPML, unless the loan meets or is less than the threshold exemption. Each year the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold for 2019 is $26,700, up from $26,000. This final rule is effective January 1, 2019.
On November 21, the CFPB and the Federal Reserve Board finalized the annual dollar threshold adjustments that govern the application of Regulation Z (Truth in Lending Act) and Regulation M (Consumer Leasing Act) to credit transactions, as required by the Dodd-Frank Act. Each year the thresholds must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The exemption threshold for 2019, based on the annual percentage increase in the CPI-W, is now $57,200 or less, except for private student loans and loans secured by real property, which are subject to TILA regardless of the amount.
Auto lender pays $11.8 million to resolve investigation into add-on product and loan extension program
On November 20, the CFPB announced a settlement with a Texas-based auto lender to resolve allegations that the lender violated the Consumer Financial Protection Act by deceptively marketing an auto-loan guaranteed asset protection (GAP) add-on product and misrepresenting the impact on consumers of obtaining a loan extension. Regarding the GAP add-on product, which was intended to cover a “gap” between the consumer’s primary auto insurance payout and the consumer’s outstanding loan balance in the event of a total vehicle loss, the CFPB alleged that the lender failed to disclose to consumers that if their loan-to-value was greater than 125 percent, they would not receive the “true full coverage” advertised with the GAP add-on product. Regarding extensions of auto loans, the CFPB alleged, among other things, that the lender failed to “clearly and prominently” disclose that interest accrued during a loan extension would be paid before principal when the consumer resumed making payments on the extended loan. Under the order, the lender must, among other things, (i) pay $9.29 million in consumer restitution; (ii) clearly and prominently disclose the terms of the GAP add-on product and loan extension; and (iii) pay $2.5 million in a civil money penalty.
- Jonice Gray Tucker to discuss "Trends in regulatory enforcement" at the American Bar Association Banking Law Committee Meeting
- Jessica L. Pollet to discuss "Your career is impacting your life..." at the Ark Group Women Legal Conference
- Jon David D. Langlois to discuss "Successors in interest updates" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo
- Brandy A. Hood to discuss "Keeping your head above water in flood insurance compliance" at the Mortgage Bankers Association National Mortgage Servicing Conference & Expo