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CFPB Finalizes Multiple Rules Governing Enforcement Activities, Issues New Interim Rule
On June 6, the CFPB released final versions of three rules governing aspects of the CFPB’s enforcement activities and issued a new interim rule. The three rules set forth, respectively, the CFPB’s (i) authority and procedures for conducting investigations, (ii) practices for adjudication proceedings, and (iii) procedures through which state officials update the CFPB on state enforcement activities. While the rules have been in effect since July 2011 (in interim form), the final versions include some changes in response to public comments received. For example, the final investigations rule (i) specifies the CFPB staff members that have authority to initiate or close an investigation, (ii) adds to the CID process a conference between the parties within 10 calendar days of service, (iii) provides CID recipients a number of procedural options when additional time is needed to respond, and (iv) clarifies the rights of witnesses and which objections are appropriate for counsel to make during investigations. Additionally, the CFPB issued a new interim final rule to implement the Equal Access to Justice Act and will accept public comments for 60 days after publication in the Federal Register.
Fourth Circuit Holds West Virginia Consumer Credit and Protection Act Statute of Limitations Begins to Run on Acceleration Date
On May 31, the U.S. Court of Appeals for the Fourth Circuit held that the one-year statute of limitations under the West Virginia Consumer Credit and Protection Act (WVCCPA) begins to run on the date the loan is accelerated, and not the date the loan is scheduled to mature. Delebreau v. Bayview Loan Servicing, LLC, No. 11-1139, 2012 WL 1949371 (4th Cir. May 31, 2012). At issue was whether the borrowers claim under the WVCCPA, alleging the servicer improperly added fees to their account, was time barred by the WVCCPAs one-year statute of limitations, which runs from the due date of the last scheduled payment of the agreement of the parties. The servicer argued that the due date of the last scheduled payment of the agreement was the loan acceleration date declaring the entire loan amount due. The borrowers contended that it was the loan maturity date designated in the loan documents, which in this case was twenty-three years after the acceleration date. Affirming the district courts judgment, the court held that the acceleration date was the operative date, reasoning that no further payments were scheduled after that date. Therefore, the borrowers claims were dismissed as time barred.
CFPB, Prudential Regulators Release Supervisory Coordination Memorandum
On June 4, the CFPB and the federal banking prudential regulators the Federal Reserve Board, the National Credit Union Administration, the Federal Deposit Insurance Corporation, and the Office of Comptroller of the Currency jointly released a Memorandum of Understanding (MOU) meant to facilitate coordination of supervisory activities. The Dodd-Frank Act grants the CFPB exclusive authority to examine insured depository institutions and insured credit unions with more than $10 billion of total assets (and their affiliates) for compliance with federal consumer financial laws. The prudential regulators retained supervisory authority for all other applicable laws for such institutions, and all supervisory responsibilities for institutions with $10 billion or less in total assets. The Dodd-Frank Act also requires the CFPB and the prudential regulators to share supervisory information and work to minimize regulatory burden by coordinating examinations. The recent MOU seeks to implement those statutory requirements by establishing guidelines for simultaneous examinations and a framework for sharing certain supervisory information. The MOU also sets forth, among other things, a process by which covered institutions can request separate examinations.
D.C. Federal Court Holds FCRA Credit Report Notice Requirements Apply to Auto Dealers Engaging in Third Party Financing Transactions
On May 22, the U.S. District Court for the District of Columbia rejected the National Automobile Dealer's Association's (NADA) challenge to an FTC determination that an automobile dealer that executes a credit contract based on a third party financing source "uses a consumer report" under FCRA, and, thus, must provide prospective buyers with a risk-based pricing notice. National Automobile Dealers Assoc. v. Federal Trade Commission, No. 11-cv-01711, 2012 WL 1854088 (D.D.C. May 22, 2012). A risk-based pricing notice must be provided to buyers who, based upon information contained in their consumer reports, are offered credit at terms materially less favorable than the most favorable terms available to a substantial proportion of consumers. The notice is intended to alert buyers to the existence of negative information in their credit reports to enable them to correct any inaccuracies. The FTC's 2011 amendments to the Fair Credit Risk-Based Pricing Regulations clarified that even in the context of a third-party transactionwhere the auto dealer is not the ultimate source of financing and does not physically obtain a consumer's credit reportthe auto dealer must provide a risk-based pricing notification. According to NADA, the FTCs interpretation placed an unreasonable burden on auto dealers who outsource financing to banks or other entities. NADA also argued that the interpretation was arbitrary and capricious and that it was not entitled to Chevron deference. In its ruling, the court rejected these challenges, stating, among other things, that the FTC's determination was "eminently reasonable" and consistent with the overall regulatory scheme of FCRA because auto dealers are able to obtain credit report information and are best suited to convey that information to consumers. NADA intends to appeal the decision.
Fannie Mae Postpones Effective Date for Servicer Insurance Requirements
On May 23, Fannie Mae announced the postponement of its June 1, 2012 effective date for lender-placed property insurance requirements applicable to servicers (Fannie Maes initial announcement was reported in InfoBytes, Mar. 16, 2012). The May 23 announcement does not provide a new effective date. Until Fannie Mae announces a new effective date, it is encouraging servicers to implement the requirements as practically feasible.
CFPB Seeks Comments on GPR Prepaid Cards
On May 24, the CFPB made an advance notice of proposed rulemaking (ANPR) to solicit comments that it will use to evaluate general purpose reloadable (GPR) prepaid cards. According to the ANPR, the CFPB intends to issue a proposal to extend Regulation E requirements to GPR cards. This would mean that issuers of GPR cards would be subject to many of the requirements currently applicable to ATM transactions, POS terminal transfers, telephone bill-payment services, and other electronic fund transfer systems. Comments on the ANPR are due by July 23, 2012.
CFPB Proposes Rule for Supervising Nonbanks Posing Risks to Consumers
On May 24, the CFPB announced a proposed rule outlining procedures for establishing supervisory authority over nonbanks that it has “reasonable cause” to believe pose risks to consumers. According to the proposed rule, the CFPB’s determination regarding whether and when to issue a “Notice of Reasonable Cause” will be based on complaints “collected by the Bureau” or on information from “other sources.” The proposed rule outlines the procedures by which the CFPB will notify nonbanks that they are being considered for supervision and how they can respond to the CFPB’s notice. Once a nonbank is subject to supervision, it can petition to end the supervision after two years and annually thereafter, unless the CFPB and the nonbank agree to a longer term. Once supervised, the nonbank is also subject to the CFPB’s authority to require reports and conduct examinations. The comment period will be open for 60 days after the proposed rule is published in the Federal Register.
Spotlight on Auto Finance (Part 3 of 3): Expanded Coverage for Vehicle and Consumer Loans
Consumers have a larger platform to submit complaints against vehicle and consumer finance companies directly to regulators. The CFPB has set up an online database that allows the CFPB to receive consumers' complaints against their lenders and take action or transfer those complaints to another, appropriate regulator. "We are advising our clients to be aware of this increased focus on individual complaints," says John Redding, Counsel in BuckleySandler's Southern California office. "Because of this new database, companies need to be aware of their customer service response times and make each customer complaint a top priority." He suggests:
- Provide prompt responses to consumer complaints
- Work with consumers to resolve issues before they become complaints to the CFPB or other regulatory agencies
- Monitor social media outlets, but don't overreact to comments or complaints and use care when considering any type of response
"Companies need to recognize that consumers have been given a new outlet that they have not had before," says Redding. "Consumers now have a greater voice with the regulatory agencies and, as a result, lenders have to be aware of all issues raised by their customers." Regulators have made it clear that they are closely reviewing consumer complaints and that they are likely to have a strong impact on regulatory actions. "The CFPB is likely to focus on standards, like fairness and risk to consumers, as well as specific rules" says Redding. "The regulators are looking to address practices that may cause harm to consumers."
Two Largest U.S. Cities Adopt Responsible Banking Ordinances
On May 15, the cities of New York and Los Angeles adopted ordinances that will require banks doing business with those cities to report certain information about their banking and lending activities. In New York, the City Council adopted a Local Law that, once approved by the mayor or passed over the mayor’s veto, will establish a community investment advisory board comprised of city officials, banking industry representatives, community development or consumer protection groups, and small business owners. The board will assess the banking needs of the city and evaluate the performance of the city’s depository banks in meeting those needs. To conduct the assessment and evaluation, the board will collect from depository banks information regarding each institution’s efforts to, among other things, (i) meet small business credit needs, (ii) conduct consumer outreach and other steps to provide mortgage assistance and foreclosure prevention, and (iii) offer financial products for low and moderate income individuals throughout the city. The board will be required to publish the information collected and prepare an annual report, which city officials can consider in deciding with which institutions the city will place its deposits. The ordinance adopted by the Los Angeles City Council establishes a monitoring program headed by the City Treasurer. Under the program, a depository bank doing business with the city or wishing to do so will be required to report each year information regarding its small business, mortgage, and community development lending, as well as information about its participation in foreclosure prevention and principal reduction programs. Investment banks will be required to file a statement describing their corporate citizenship in areas such as participation in charitable programs or scholarships and internal policies regarding the utilization of subcontractors designated as women-owned, minority-owned, or disadvantaged businesses. The disclosures will be posted online for public viewing within 30 days of the beginning of each new fiscal year. The cities of Cleveland, Pittsburgh, Philadelphia, and San Diego already have laws in place designed for the same general purposes, and other cities are considering similar laws.
Federal Prudential Regulators Issue Final Stress Test Guidance
On May 14, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued guidance on stress tests for banks with more than $10 billion in total consolidated assets. The final guidance provides, in a manner largely consistent with the proposed guidance, principles for banks to follow when conducting stress tests, including: (i) a stress testing framework, (ii) general stress testing principles, (iii) stress testing approaches and applications, (iv) the importance of stress testing in assessing the adequacy of capital and liquidity, and (v) the need for internal governance and controls over the stress testing framework. The regulators amended the final guidance to clarify certain issues raised during the comment period, including changes to (i) incorporate an additional principle for stress testing, (ii) clarify application of the guidance to U.S. branches and agencies of foreign banking organizations, (iii) clarify the role of a bank’s liabilities and operational risk in conducting a stress test, (iv) explain that senior management should have the primary responsibility for stress testing implementation and technical design, and (v) clarify that a banking organization’s minimum annual review and assessment should ensure that stress testing coverage is comprehensive, tests are relevant and current, methodologies are sound, and results are properly considered. In a separate announcement, the banking regulators explicitly addressed concerns raised by community bankers by explaining that community banks are neither required nor expected to conduct the stress tests described above. However, the statement stresses that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse outcomes on their financial condition.