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CFPB releases 2023 Ombudsman report
On November 30, the CFPB Ombudsman’s Office published its annual report, which detailed inquiries handled by the office, included a new FAQ section, and described the second year of the Ombudsman’s post-examination survey of supervised entities. The Ombudsman reviewed some pertinent topics the CFPB faced in the past year, including recognizing imposter scams, distinguishing between new and duplicate consumer complaints, assisting consumers with diminished capacity, and helping the public contact the CFPB.
In detail, and on recognizing imposter frauds, the Ombudsman provided CFPB resources and posted a blog on scam awareness in English and Spanish. On distinguishing between new and existing complaints, consumers expressed concern that the CFPB closed their cases without providing a reason or that the CFPB mistakenly identified complaints as duplicative. The report described the CFPB’s process for identifying duplicate complaints, noted consumers’ concerns, and indicated that the CFPB continues to review this issue. On assisting consumers with diminished capacity, the Ombudsman discussed challenges with third-party entities assisting with a case, as well as offering resources on power of attorney questions. And on helping the public contact the CFPB, the Ombudsman identified contact points that could improve, such as the CFPB’s website and telephone switchboard, and asked the CFPB to update the contact points.
FHFA announces increases in 2024 conforming loan limits
On November 28, FHFA announced that it will raise the maximum conforming loan limits (CLL) for mortgages purchased in 2024 by Fannie Mae and Freddie Mac from $726,200 to $776,550 (the 2023 CLLs were covered by InfoBytes here) for most of the United States. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the maximum loan limit for one-unit properties will be 1,149,825. According to the FHFA, due to rising home values (up 5.56 percent since 2022), CLLs will be higher for all but five U.S. counties.
FinCEN, IRS issue alert on Covid-19 employee retention credit fraud schemes
On November 22, FinCEN and the IRS issued an alert to financial institutions regarding Covid-19 Employee Retention Credit (ERC)-related fraud schemes. Authorized by the CARES Act, the ERC is a tax credit aimed at incentivizing businesses to retain employees on payroll during the Covid-19 pandemic, through which fraud and scams have been carried out, FinCEN explained. The alert offers insights into typologies linked to ERC fraud and scams, emphasizes specific warning signs to aid financial institutions in detecting and reporting suspicious activities, and reinforces these institutions' obligations to report under the Bank Secrecy Act (BSA).
According to the alert, “[d]uring the 2023 tax season, the IRS noted various scammers appeared throughout the [U.S.] using the false pretense of being tax credit experts to convince businesses to file for the ERC.” Third-party ERC promoters misled taxpayers about eligibility, aiming to profit from filing ERC claims without verifying qualifications, FinCEN added. As a result, the alert mentioned that victims risk claim denial or repayment, while scammers profit regardless of the claim's outcome, involving both willing and unaware businesses in these schemes. FinCEN added that businesses must meet specific ERC requirements, and those who received PPP loans cannot use the same wages counted in the PPP loan for the ERC application. Despite this, some may file amended tax returns misrepresenting their eligibility for the ERC by falsifying staff wages or claiming their operations were partially or fully suspended during the pandemic. FinCEN listed “red flags” indicative of ERC fraud that financial institutions should be cognizant of, including, among others, (i) a business account that receives multiple ERC check deposits over several days; (ii) small business accounts that receive ERC check deposits disproportionate to their size, employee count, and transaction volume; and (iii) a new account for an established business that only receives ERC deposits, suggesting possible identity theft using the business as a front for fraudulent claims. The alert also reminds financial institutions of their obligation to file suspicious activity reports and to keep a copy of the reports for five years from the date of the filing.
NY Fed highlights an increase in unsecured loans from fintech firms in report, primarily among subprime lenders
On November 21, the Federal Reserve Bank of New York released a report on the rise and then contraction of unsecured personal loans from 2019 to 2023 for nonbank or fintech companies, and the role of alternative data and underwriting in that growth.
The report looked at how the economic conditions from 2019 to 2022 “created an ideal environment for FinTech firms to increase their loan originations.” It specifically noted that the U.S. government-issued stimulus payments and student loan repayment moratorium enabled fintech companies to expand their services to low- and moderate-income borrowers, including those with subprime credit. The report also looked at fintech’s role in that growth, what consumer segments are utilizing unsecured personal loans, the overall growth of the products, and the subsequent tightening of credit. Finally, the NY Fed discussed various fintech models and analyzed which models service the needs of low- and moderate-income households.
CFPB’s Chopra testifies at Senate Banking Committee hearing
On November 30, the Director of the CFPB, Rohit Chopra, testified during the Senate Banking Committee’s hearing on the Bureau’s Semi-Annual Report to Congress. The Senate Banking Committee questioned Chopra on the Bureau’s oversight of financial institutions providing benefits under the Servicemembers Civil Relief Act (SCRA), medical debt collection, so-called “junk fees,” and the increasing popularity of buy now, pay later (BNPL) products.
In response to questions regarding SCRA, Director Chopra stated that the CFPB estimates that fewer than 10% of servicemembers receive the 6% pre-service rate cap on loans as required by the SCRA. In response to a question on BNPL popularity, Chopra noted there was a high amount of BNPL usage on Black Friday, and the CFPB plans on creating basic consumer protection standards.
Director Chopra stated that the CFPB is developing rules or researching potential activity in several areas, including: (i) reporting certain medical debts to the credit bureaus; (ii) BNPL standards; and (iii) protecting consumer data, particularly in the context of credit reporting.
CFPB releases its spring 2023 semi-annual report
The CFPB recently issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2022 and ending March 31, 2023. The report, which is required by Dodd-Frank, includes, (i) a list of significant rules and orders (including final rules, proposed rules, pre-rule materials, and upcoming plans and initiatives); (ii) an analysis of consumer complaints, (iii) lists of public supervisory and enforcement actions, (iv) assessments of actions by state regulators and attorneys generals related to consumer financial law; (v) assessment of fair lending enforcement and rulemaking; and (vi) an analysis of efforts to increase workforce and contracting diversity.
Fed releases paper on debt substitution dynamics
On November 21, the Fed released a paper concluding that when mortgage rates rise on cash-out refinancings, households do not significantly increase overall borrowing, but instead switch to alternative borrowing options (i.e. credit cards, personal loans, HELOCs, and second liens). Analyzing rate increases and using monetary policy surprises from 2006 to 2021, the paper finds that changes in cash-out refinancing are balanced by shifts to alternative borrowing.
The paper’s findings further reveal that higher mortgage rates and the amount borrowed through cash-out refinancing have a positive correlation. The parallel showcases a pattern where borrowers are choosing the most cost-effective borrowing option based on the size of their liquidity need, the paper noted. The paper suggests that the way borrowers react to changes in monetary policy, like interest rate adjustments, can depend on whether they have existing mortgages and what interest rates they have on those mortgages. The paper also suggests that while some borrowers might change their mortgage terms when interest rates shift, others might choose different types of loans that don't change their original mortgage rate. This offsets the impact of changing monetary policies on refinancing decisions, the paper explained.
CFPB approves pilot program for construction loans
On November 21, the CFPB announced it approved an application from a community banking trade organization to pilot disclosures for construction loans. The application was submitted pursuant to the CFPB’s trial policy programs under Section 1032(e) of Dodd-Frank. According to the community banking trade organization, the application aims to increase the number of affordable loans that combine a construction phase loan with a mortgage, all within a single set of closing costs, i.e., a single-close construction-to-permanent loan. The community banking trade organization hopes to increase the number of these specific loans because first-time homebuyers in rural and small-town communities are more likely to build their first home than purchase existing ones. The community banking trade organization also stated that the current loan disclosure requirements offered by the CFPB were designed for either standard home purchase or refinance mortgage loans. The Bureau states that it wishes to receive applications for this pilot disclosure from lenders rather than single-market participants.
DOJ and DOE share success after first year of student loan bankruptcy discharge process
On November 16, the DOJ and DOE announced a successful first year of their new student loan bankruptcy discharge process during 2022. The discharge process extinguishes a borrower’s obligation to pay back either some or all of a student loan in bankruptcy based on undue hardship. The DOJ cites two previous standards used by bankruptcy courts to determine if a borrower’s repayment would cause an undue hardship: the Brunner and Totality Tests. The DOJ’s guidance simplified the current standards to enhance “consistency and equity in the handling of these cases” and applies in both Burner and Totality Test jurisdictions. The guide permits a court to grant a discharge if three conditions are satisfied: (i) “the debtor presently lacks an ability to pay the loan”; (ii) “the debtor’s inability to pay the loan is likely to persist in the future”; and (iii) “the debtor has acted in good faith in attempting to repay the loan.”
The DOJ reported the success of their new guidance with several findings: (i) there were 632 cases filed in the first 10 months of the new process, a significant increase from recent years; (ii) this process was used by 97 percent of all borrowers; (iii) 99 percent of borrowers received either full or partial discharges; and (iv) two bankruptcy courts adopted this process. The DOJ is optimistic that some or all these trends will continue.
Regulators address concerns at Senate Banking Committee hearing, receive written concerns regarding Basel III
On November 14, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing where regulators, Fed Vice Chair for Supervision Michael Barr, FDIC Chair Martin Gruenberg, NCUA Chair Todd Harper, and acting Comptroller of Currency Michael Hsu, testified regarding the Basel III Endgame proposal. Gruenberg’s prepared remarks noted that Basel III reforms are a “continuation of the federal banking agencies’ efforts to revise the regulatory capital framework for our nation’s largest financial institutions, which were found to be undercapitalized and over-leveraged during the Global Financial Crisis of 2008.” The proposal would raise capital requirements for large banks (covered by InfoBytes here).
Concerning Basel III, Senator Tester (D-MO) mentioned he has “some concerns about the proposed changes and how its impact will be on workers’ and households’ and small businesses’ access to credit and overall vibrancy of our capital markets.” “These rules don’t affect any banks in Montana, but they do affect the big guys that affect Montana,” he noted.
Among other testimonies, Senator Warner (D-VA) expressed concerns regarding the timeline of the comment period and potential changes to the proposal. Specifically, Sen. Warner mentioned that comments may not be received until after the rule is close to finalization. Fed Vice Chair Barr noted that the regulators have yet to evaluate comments on the proposal, as most are expected to come through mid-January, and that depending on the substance of some comments, they are open to making appropriate changes to the proposal. Acting Comptroller of the Currency Hsu’s written testimony echoed Barr’s remarks, stating “[w]e will consider all comments, including alternative approaches.”
Moreover, on November 12, a group of Republican lawmakers of the committee also sent a letter to the OCC, FDIC, and the Fed. In the letter, the senators argued that the proposal would restrict billions of dollars in capital, resulting in costlier and more limited access to credit for millions of consumers, impacting affordable housing, mortgage lending, small business lending, and consumer access to credit cards and home equity lines. The proposal was also criticized for its potential to disadvantage U.S. companies globally and harm middle-market private entities and small businesses. Moreover, the letter suggested that the proposal could negatively impact pension funds, increase fees for risk hedging, and decrease returns for retirees.
Also on November 12, several banking industry groups sent a letter to the Fed, FDIC, and the OCC requesting them to issue a revised proposal. The letter alleges violations of the Administrative Procedures Act because the data used to inform the interagency proposal is not publicly available. The groups also argued that the proposed rule repeatedly utilizes non-public analyses based on the agencies’ “supervisory experience” to support different aspects of the rule. Regarding sensitive data, the groups say, “Nothing prevents the agencies from releasing such data and analyses in a manner that is anonymized or aggregated to the extent necessary to protect bank or other party confidentiality.” The senators also believe the proposal would impose “significant harm” throughout the economy “particularly in the face of current economic headwinds and tightening credit conditions.”