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Industry Groups Voice Concern that the CFPB's Arbitration Proposal Fails to Provide Protection for Consumers
On August 22, the American Bankers Association, the Consumer Banks Association, and the Financial Services Roundtable sent a letter to CFPB Director Cordray regarding the agency’s proposed arbitration rule. According to the Associations, the CFPB’s proposal seeking to impose certain restrictions on the use of mandatory pre-dispute arbitration clauses is inconsistent with the agency’s March 2015 study of consumer arbitration and fails to meet the Dodd-Frank requirements that it provide consumer protection and satisfy the public interest. Arguing that consumers will “truly suffer if the proposed rule becomes final,” the letter highlights the following concerns: (i) due to the “surge” of additional class actions, consumers, as tax payers, will be forced to pay for the increased costs to the court systems; (ii) as litigants, they will face backlogs as court systems experience delays in administering and resolving the class action suits; (iii) as customers of financial service providers, they will be subject to increased prices and/or reduced services because “the billions of dollars in class action litigation costs will be passed through them in whole or in part”; and (iv) consumers will lose the benefits of arbitration, including efficiency, convenience, and fewer costs. The Associations contend that the proposal, if passed, would be particularly restricting for small dollar “non-classable” claims. The Associations further their argument against the proposal by pointing to various inconsistencies with the conclusions outlined in the CFPB’s March 2015 study. Moreover, the letter asserts that the CFPB’s 2015 study was “incomplete” because it failed to address and analyze several key issues that would further demonstrate the proposed rule’s shortcomings with respect to public interest, including, among other things, consumer satisfaction with arbitration and the potential impact the removal of arbitration would have on consumers and the public. The Association’s recommendation that the CFPB not proceed with finalizing its proposal is one of many submitted to the agency, including a recent letter from various House Republicans expressing concern that the proposal “will choke off access to products and services that help consumers manage their creditworthiness, monitor changes in their credit reports, and protect themselves against identity theft.” The influx of comments on the proposal came at the close of its comment due date, August 22, 2016.
HUD OIG Sends Letter to House Committee on Financial Services Regarding Funding Arrangements in Certain Housing Finance Agency Down Payment Assistance Programs
On July 26, HUD OIG (OIG) Inspector General David A. Montoya sent a letter to Jeb Hensarling, chairman of the House Committee on Financial Services, regarding OIG’s continuing opposition to certain down payment assistance (DPA) programs. The letter reiterates OIG’s previously stated position that certain DPA programs used for loans sold on the secondary market violate the National Housing Act (NHA) and the Housing Economic and Recovery Act (HERA) by reimbursing prohibited parties for providing part of the required minimum investment funds. According to the letter, more than 60,000 FHA loans are originated per year using this borrower-reimbursed funding arrangement. HUD had previously investigated the OIG criticisms of these loans made in conjunction with local HFAs and had determined that these programs do not violate relevant HUD requirements. In the letter, Montoya critiques that determination and attempts to continue this disagreement between HUD program officials and the OIG.
Republicans Attempt to Replace the Dodd-Frank Act with the Financial CHOICE Act
On June 7, House Financial Services Committee Chairman Jeb Hensarling (R-TX) released details of the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act, a Republican proposal to dismantle the Dodd-Frank Act. According to Chairman Hensarling’s remarks delivered to the Economic Club of New York, “Dodd-Frank has failed.” The goals of the proposed plan are: (i) to promote economic growth through competitive, transparent, and innovative capital markets; (ii) to provide the opportunity for every American to achieve financial independence; (iii) to protect consumers from fraud and deception as well as the loss of economic freedom; (iv) to end taxpayer bailouts of financial institutions and too big to fail institutions; (v) to manage systemic risk; (vi) to simplify in order to prevent powerful entities from taking advantage of complexity in the law; and (vii) to hold Wall Street and Washington accountable. Importantly, Section Three (“Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors”) proposes, among other things, to replace the current single director structure of the CFPB with a five-member, bipartisan commission subject to congressional oversight and appropriations. Section Three further proposes to repeal indirect auto lending guidance. As part of its goal to end “too big to fail” institutions and bank bailouts, Section Two of the Act proposes to retroactively repeal FSOC’s authority to designate firms as systematically important financial institutions. Finally, in an effort to “unleash opportunities for small businesses, innovators, and job creators by facilitating capital formation,” Section Six of the Act proposes to repeal the Volcker Rule, along with other sections and titles of Dodd-Frank that limit capital formation.
U.S. House Passes SAFE Transitional Licensing Act to Give Greater Job Mobility to Mortgage Loan Originators
On May 23, the U.S. House of Representatives unanimously passed by voice vote H.R. 2121, the SAFE Transitional Licensing Act of 2015. Congressman Steve Stivers (R-OH) introduced H.R. 2121 in April 2015 with the purpose of “providing regulatory relief for loan originators in an effort to make a smooth employment transition between bank and non-bank entities.” As passed, H.R. 2121 would amend the SAFE Mortgage Licensing Act of 2008 to give eligible mortgage loan originators (MLOs) the ability to continue originating loans while awaiting a decision on their application for a state originator license. This temporary authority would apply when MLOs switch jobs (i) from a depository institution, where a state originator license is not required, to a state-licensed non-bank lender, where such a license is required; or (ii) from a state-licensed lender in one state to a state-licensed lender in another state, where a new state originator license is required. In both cases, this temporary authority would expire upon the grant, denial, or withdrawal of the license application, or, if an application is deemed incomplete, 120 days after the application was submitted.
U.S. House Members Seek Information Related to Financial Institution-Fintech Relationship
On May 24, twelve U.S. congressmen – eleven Republican – sent a letter to the Government Accountability Office (GAO) requesting information on how the U.S. financial system’s regulatory structure affects the relationship between financial firms and fintech companies. This request follows a separate April 18 letter from three Democratic senators requesting that the GAO complete a study on the fintech industry, and comes after a GAO report, which was published in February but publicly released in March, that assessed the U.S. financial system’s regulatory structure, including the impacts of fragmentation and overlap in financial regulation. The most recent letter requests that the GAO supplement its February report by providing information concerning: (i) how the GAO’s findings of fragmentation and overlap in financial regulation “slowed or otherwise harmed innovation, and restricted the ability of financial firms . . . from pursuing new technological ventures”; (ii) how collaboration between financial firms and fintech companies has “helped financial firms streamline processes and become more efficient in delivering products and services”; (iii) “what challenges . . . both financial institutions and fintech companies have with the existing regulatory structure”; and (iv) how federal regulators can “streamline” collaboration between financial firms and fintech ventures, and what best practices U.S. regulators can consider to foster a “culture of collaboration” – such as the “regulatory sandbox” offered by the U.K. Financial Conduct Authority’s Project Innovate.
Congressman Luetkemeyer Proposes Bill to Eliminate "Abusive" in CFPB's UDAAP Authority
Recently, Representative Blaine Luetkemeyer (R-MO) introduced H.R. 5112, the Unfair or Deceptive Acts or Practices Uniformity Act, to make the authority of the CFPB and FTC more consistent and similar, and to encourage greater communication among regulators. Specifically, the Act would amend Section 1031 of the Dodd-Frank Act by removing the CFPB’s ability to regulate “abusive” conduct from its current authority to regulate “unfair, deceptive or abusive” acts or practices (UDAAP). In addition, the bill would insert the following language at the end of Section 1031: “[i]n prescribing any rule under this subsection, the Bureau shall comply with the requirements of section 18 of the Federal Trade Commission Act (15 U.S.C. 57a) applicable to the Federal Trade Commission when the Commission prescribes rules and general statements of policy under that section with respect to unfair or deceptive acts or practices in or affecting commerce.”
House Passes Private Flood Insurance Bill by Unanimous Vote
On April 28, the U.S. House of Representatives passed the Flood Insurance Market Parity and Modernization Act (H.R. 2901) by a unanimous vote of 419-0. The bill, which was introduced in June 2015 by Rep. Dennis Ross, R-Lakeland, and co-sponsor Patrick Murphy, D-Jupiter, is intended to encourage the use of private flood insurance. The bill, among other changes:
(i) Amends the definition of “private flood insurance” to, among other changes, remove the requirements that a private flood insurance policy include deductibles, exclusions, conditions, cancellation provisions, and mortgage interest (i.e., loss payee) clauses comparable to National Flood Insurance Program (“NFIP”) policies. The amended definition of “private flood insurance” would only require that the policy (1) be issued by an insurance company that is approved to provide insurance in the state where the building is located, and (2) provide flood insurance in compliance with that state’s laws.
(ii) Removes amendments made by the Biggert-Waters Flood Insurance Reform Act that required the federal banking agencies to adopt regulations requiring lenders to accept private flood insurance policies if they met the definition of “private flood insurance,” and replaces such provisions with a definition of the minimum amount of private flood insurance necessary to satisfy the mandatory purchase requirements (which is the same as the minimum amount of NFIP insurance necessary to satisfy the mandatory purchase requirements--i.e., coverage that is at least equal to the insurable value of the building, the outstanding principal balance of the loan, or the maximum coverage available under the NFIP);
(iii) Requires federal agency lenders (i.e., federal agencies that make direct loans secured by improved real estate or a mobile home) to accept private flood insurance policies meeting the scaled-back definition of “private flood insurance” as long as such policies provide the minimum amount of required insurance;
(iv) Requires Fannie Mae and Freddie Mac to accept private flood insurance policies meeting the scaled-back definition of “private flood insurance” as long as (a) such policies meet Fannie Mae and Freddie Mac’s requirements relating to the financial strength of the private insurance company, and (b) the financial strength requirements do not affect or conflict with state laws, regulations, or procedures regulating the business of insurance; and
(v) Ensures that borrowers who purchase private flood insurance policies will not lose eligibility for subsidies under the NFIP as long as coverage remains continuous.
Although the bill has received support from a broad range of industry and consumer groups, some believe that it may undermine the ability to ensure that the terms of private flood insurance policies provide sufficient protection.
House Financial Services Committee Advances Legislation that would Amend the Dodd-Frank Act
On April 13, the House Financial Services Committee voted by a 33-20 margin to advance H.R. 1486, the “Taking Account of Bureaucrats’ Spending Act.” The Act would amend the Dodd-Frank Act to strike provisions that allow for direct funding from Federal Reserve earnings to the CFPB. Supporters of the Act comment that it simply holds the CFPB accountable to Congressional oversight, subjecting it to the more conventional appropriations process, while those in opposition to the Act argue that it aims to defund, or dismantle, the CFPB.
Congress Passes Bill to Extend Foreclosure Protection Element of the SCRA
On March 21, the U.S. House of Representatives passed S.B. 2393, which extends through 2017 the provision of the Servicemembers Civil Relief Act’s (SCRA) that protects servicemembers against foreclosure without a court order or waiver for one year following completion of their service. On January 1, 2016, the foreclosure protection provision reverted back to the period of active duty military service plus 90 days, rather than the period of active duty military service plus one year. Upon the President’s signature, the SCRA’s protection against foreclosure without a court order or waiver will return to the period of active duty military service plus one year through December 31, 2017.
Obama Administration's FY 2017 Budget Proposal Makes Room for Small Dollar Loan Program
This week, the Obama Administration released the Fiscal Year 2017 Budget Proposal. President Obama’s proposed budget for the Department of the Treasury would, through the Community Development Financial Institutions (CDFI) Fund, reserve at least $10 million until September 30, 2018 to provide grants for loan loss reserve funds and to provide technical assistance for small dollar loan programs under section 1206 of the Dodd-Frank Act. The Small Dollar Loan Program, according to the budget proposal, “will support broader access to safe and affordable financial products and provide an alternative to predatory lending by encouraging CDFIs to establish and maintain small dollar loan programs.” Earlier this year, Senator Sherrod Brown (D-OH), in a letter to the President, requested that the FY 2017 budget proposal prioritize funding for small dollar loan programs, as outlined in Title XII – Improving Access to Mainstream Financial Institutions – of the Dodd-Frank Act.
On a similar note, the House Financial Services Committee held a hearing titled, “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty,” on February 11, which examined the short-term, small dollar credit marketplace. During the hearing, House members expressed concern that the CFPB and other government agencies are “overextending their efforts” in regulating the industry, thus limiting consumers’ access to credit. Per the CFPB’s 2015 Regulatory Agenda, the agency is “in the process of developing a Notice of Proposed Rulemaking to address concerns in markets for payday, auto title, and similar lending products.” This stimulated conversations on how the potential rule would affect consumers and existing state and tribal law. CFPB Acting Deputy Director David Silberman was present at the hearing; Silberman maintained that the CFPB’s regulatory efforts are to ensure that small dollar loans are affordable and that consumers are not “spiraling into continual debt.”