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CFPB Delays Release of "Ability-to-Repay" Rule
On May 31, the CFPB announced that it has reopened the comment period for the proposed “ability-to-repay” rule that would require creditors to verify a consumer’s ability to repay prior to making a consumer credit transaction secured by a dwelling. The rule would also define a “qualified mortgage” that has a presumption of compliance with the ability-to-repay requirement. The CFPB is specifically seeking comments on new loan data provided to the CFPB by the Federal Housing Finance Agency. According to the CFPB, the loan data, which contains loan-level information on the characteristics and performance of all single-family mortgages purchased or guaranteed by Fannie Mae and Freddie Mac, can be used to analyze the impact of certain variables on a consumer’s ability to repay such as debt-to-income ratio. The CFPB is also seeking comments regarding the potential risk of litigation in connection with the proposed rule. The CFPB specifies that it has not reopened for comment any other aspect of the proposed rule. Comments are due by July 9, 2012. In its press release, the CFPB states that it expects to issue its final rule before the end of 2012. For more information on the proposed rule, see InfoBytes, Apr. 22, 2011.
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."
CFPB To Collect Information on Compliance Costs, Hold Hearing on Prepaid Cards
On May 15, the CFPB published a notice and request for comment regarding its collection of information concerning the costs expected to be incurred by institutions required to comply with CFPB rules. The notice identifies specifically the need to collect information about costs to mortgage and remittance industry participants in connection with upcoming CFPB rules. The notice further states that the CFPB seeks to understand the effect of compliance costs on financial service providers and consumers, but that it is particularly interested in the impact of regulations on the unit costs of delivering specific consumer products and services. The CFPB plans to use structured interviews, focus groups, written questionnaires, and other methods to collect the needed information, and will attempt to collect a representative sample of providers from affected markets. The public is invited to comment on the notice through June 19, 2012. On May 17, the CFPB announced that it will hold a public hearing to discuss issues in the prepaid cards market. The hearing is scheduled to take place on May 23, 2012 inDurham,NC, and will include remarks from Director Cordray.
Spotlight on Auto Finance (Part 2 of 3): New Database to Combat Fraud Against Military and Veterans
The federal government is increasing scrutiny of financial services companies practices affecting active military members, veterans and their families. Earlier this year, the CFPB along with the FTC, the Department of Defense and the New York Attorney General announced the launch of the Repeat Offenders Against Military (ROAM) database, which will track enforcement actions against companies and individuals who repeatedly scam military personnel, veterans and their families. According to John Redding, Counsel in BuckleySandlers Southern California office, this new effort is an important development that the financial services industry needs to be aware of. He says the firm has been advising clients on how to refine their policies and procedures for doing business with servicemembers and their families. "We are suggesting they be aware of the increased focus on SCRA [Servicemembers Civil Relief Act] issues and, in part because of the new database and other efforts surrounding increased protections, need to review their practices to ensure continued compliance." According to the CFPB, law enforcement officials across the country, including state attorneys general, US attorneys, and judge advocates from all five branches of the armed forces, will be able to search the ROAM database for information about completed civil and criminal actions against businesses that have scammed military personnel, veterans, and their families.
CFPB Outlines Potential Mortgage Loan Originator Compensation and Qualification Rules
On May 9, the Consumer Financial Protection Bureau (CFPB) outlined in its outreach materials to small business representatives its proposals to implement the loan originator compensation provisions of the Truth in Lending Act (TILA). These proposals will amend the rules applicable to compensation in mortgage loan transactions, and they would also "help level the playing field" in connection with regulation of mortgage loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The CFPB intends to finalize rules on these topics by January 21, 2013.
Under the Dodd-Frank Act, restrictions were placed on the ability of creditors and consumers to compensate mortgage loan originators (which includes employee loan officers, mortgage brokerages, and employees of mortgage brokerages). This restriction is similar to the restrictions implemented by the Federal Reserve Board (Board), effective April 2011, that prohibit a creditor from compensating a loan originator based on the terms and conditions of the transaction.
The Dodd-Frank Act generally provides that loan originators may be compensated only by consumers, unless two conditions are met: (i) the loan originator must not receive any compensation directly from a consumer; and (ii) the consumer must not make an upfront payment of discount points, origination points, or fees, other than bona fide third-party fees that are not retained by the creditor, the loan originator, or either company's affiliates.
The CFPB has the authority to create exemptions to the second "points and fees" provision if it finds that an exemption is "in the interest of consumers and in the public interest." In its proposal, the CFPB states that it is considering using this exemption authority to permit consumer payment of upfront points and fees under certain circumstances, and the CFPB is further considering whether to propose particular conditions for payments to affiliates. The CFPB is considering a number of proposals that would carry out this restriction:
- No-Discount-Point Loan Option: Under the CFPB's proposal, the loan originator would be required to offer a no-discount-point transaction. Offering this option, according to the CFPB, would enable the homebuyer to better compare competing offers from different lenders.
- Interest-Rate Reductions When Consumers Pay Discount Points: The CFPB's proposal would mandate that any "discount point" be a "bona fide" discount point that actually reduces the interest rate by at least a minimum amount.
- Origination Charges Must Not Vary with the Size of the Loan: The CFPB proposes that mortgage brokerage firms and creditors would be allowed to charge only flat origination fees instead of fees that vary with the size of the loan. The CFPB proposes that upfront fees may be paid to affiliates, provided that these fees are likewise flat and so do not vary with the size of the loan (except for title insurance payments).
In connection with these proposals, the CFPB indicates that it may allow (i) certain payments and bonuses to loan originator based on profitability, (i) certain payments to mortgage brokerage employees when the consumer pays the brokerage, and (iii) certain types of pricing concessions to be covered by the loan originator's compensation. The CFPB's proposal also considers whether to permit certain types of "point banks," and whether to impose record-retention requirements on loan originators directly. Further, the CFPB is considering whether to "sunset" any potential partial exemption from the statute that it implements.
Significantly, the CFPB's proposal would restrict the ability of a lender to charge its own up-front origination fees, except for a fixed fee that does not vary based on loan size. Under the Board's rules, compensation to loan originators is restricted, but lenders may charge origination fees and discount points without restriction. This proposal, if implemented, would require lenders to make significant adjustments to their fee schedules. Further, the CFPB interprets the Dodd-Frank Act's amendments as imposing a ban on loan originator compensation that varies based on loan terms (except principal balance) even in transactions in which the consumer pays compensation directly.
Although the Dodd-Frank Act requires the CFPB to draft rules related to the anti-steering provisions of the loan originator compensation rules, the CFPB indicates that it will address those provisions at a later date.
In a second major aspect of the outline, the CFPB indicates its intention to carry out its authority under TILA to ensure that loan originators be "qualified." Currently, the SAFE Act imposes registration or licensing requirements on loan originators, but these requirements vary widely based on whether the loan originator is an employee of a depository institution or of a non-bank institution.
Under the CFPB's proposal, loan originators-regardless of employer-would be subject to certain qualifications:
- All loan originators would be subject to the same standards for character, fitness,
and financial responsibility;
- Loan originators would be subject to a criminal background check; and
- Loan originators would be required to undertake training commensurate with the size and mortgage lending activities of the employer. This training would be analogous to the continuing education requirement that applies to individuals who are subject to SAFE Act licensing.
As a result of these proposals, registered mortgage loan originators would be subject to some of the same requirements as licensed loan originators.
The CFPB proposal was created in connection with the CFPB's compliance with the Small Business Regulatory Enforcement Fairness Act (SBREFA), which mandates that the CFPB convene a Small Business Review Panel anytime a proposed rule may have a significant impact on a substantial number of small entities. This panel meets with selected representatives of small businesses, and these representatives provide feedback to the panel on the potential economic impact of the proposal. In addition to the outline, the CFPB also issued a press release, a fact sheet, and a set of discussion questions for the panel.
FTC, CFPB, DOJ File Brief in Suit Challenging FCRA Constitutionality
On May 8, the FTC announced that it had joined the CFPB and the DOJ to file a brief supporting the constitutionality of the Fair Credit Reporting Act (FCRA). The brief was filed in a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania in which a consumer alleged that a consumer reporting agency (CRA) violated FCRA by reporting on arrest records that were more than seven years’ old. Responding to these allegations, the CRA argued that the Supreme Court’s decision in Sorell v. IMS Health, Inc., 131 S. Ct. 2653 (2011), rendered FCRA’s seven-year limitation unconstitutional under the First Amendment. The federal entities’ brief counters that Sorell does not alter the test for commercial speech restrictions established in Central Hudson Gas and Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). It goes on to argue that, under this test, the government has a substantial interest in protecting individuals’ privacy and that FCRA protects this interest while accommodating businesses’ competing interest in obtaining complete information about potential borrowers.
Fourth Circuit Reverses Dismissal of TILA Claim
On May 9, Fannie Mae announced new requirements for document custodians with respect to compliance audits and certification practices. In Servicing Guide Announcement SVC-2012-08, Fannie Mae states that document custodians must engage third-party auditors to conduct an annual assessment of eligibility and operational compliance. Custodians that had a Fannie Mae on-site review prior to August 1, 2011 must engage an independent third-party auditor and complete the first annual audit by July 31, 2013, while custodians that had or will have a Fannie Mae audit between August 1, 2011 and July 31, 2012 will have until December 31, 2013. All custodians must also develop and implement a monthly quality control review by September 30, 2012.
Spotlight on Auto Finance (Part One of Three): A New Road for Auto Finance Companies
Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.
“The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”
Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices. The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.
“This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.
The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.
Redding suggests the following steps auto finance companies can take to prepare for the CFPB:
- Evaluate the institution’s risk profile and prepare an operations and compliance strategy
- Update policies and procedures (review CFPB exam guidelines)
- Monitor, address, and retain records regarding consumer complaints
- Monitor third-party sources of complaints
- Appoint an ombudsman
- Conduct internal audits
- Consider patterns and practices that emerge regarding operations
- Focus on areas that may lead to consumer harm, as well as technical violations
- Include the compliance team to monitor, analyze and advise on specific proposals