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Federal Register Publishes Proposed Rule On CFPB Oversight Of Nonbank Auto Finance Companies
On October 8, the CFPB published a rule proposing oversight of larger nonbank auto finance companies for the first time at the federal level. The proposed rule will “amend the regulation defining larger participants of certain consumer financial product and service markets by adding a new section to define larger participants of a market for automobile financing.” Under the new section, a market would be defined to include: (i) grants of credit for the purchase of an automobile, refinancings of such credit obligations, and purchases or acquisitions of such credit obligations (including refinancings); and (ii) automobile leases and purchases or acquisitions of such automobile lease agreements. Previously, on September 17, the CFPB released information regarding its resolve to supervise and enforce auto finance companies’ compliance with consumer financial laws, including fair lending laws. Comments on the proposed rule must be received on or before December 8, 2014.
CFPB Finalizes Rule To Oversee Larger Nonbank International Money Transfer Providers
On September 12, the CFPB finalized a rule that allows it to supervise larger participants in the international money transfer market. In particular, this rule, which finalizes the proposed rule the CFPB issued in January 2014, allows the CFPB to supervise nonbank international money transfer providers that provide more than $1 million in international transfers annually, for compliance with the Remittance Rule under the Electronic Fund Transfer Act. The final rule will be effective December 1, 2014.
The CFPB will seek to ensure that these providers comply with a number of specific consumer-protection provisions, including the following:
- Disclosures: The CFPB will examine providers to determine that consumers receive the Remittance Rule-required disclosures in English as well as in any other language the provider uses to advertise, solicit, or market its services, or in any language in which the transaction was conducted. These disclosures inform consumers of the exchange rate, fees, the amount of money that will be delivered abroad, and the date the funds will be available.
- Option to Cancel: The CFPB will examine transfer providers to ensure that consumers receive at least thirty minutes to cancel the transfer if it has not yet been received, and that consumers receive a refund regardless of the reason for the cancellation.
- Correction of Errors: The CFPB will insist that remittance transfer providers properly investigate certain errors, and, if a consumer reports an error within 180 days, the CFPB will examine providers to determine that they have investigated and corrected certain types of errors. The CFPB will also examine providers to ensure that they are held accountable for the actions of any agents they use.
The CFPB used the authority granted to it in the Dodd-Frank Act to supervise “larger participants” in consumer financial markets, and this is the Bureau’s fourth larger participant rule. The CFPB indicates that it will use the same examination procedures for nonbank providers as it does for bank remittance providers, and the CFPB intends to coordinate with state examiners in its supervision.
The CFPB estimates that nonbank international money transfer providers transfer $50 billion each year, and 150 million individual international money transactions occur each year through these institutions, with seven million U.S. households transferring funds abroad each year through a nonbank.
Senate Passes Nonbank Remittance Supervision Bill
On August 1, the U.S. Senate passed by unanimous consent H.R. 4386, which will permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs. The bill also covers other non-bank financial institutions such as gaming establishments and jewel merchants. The bill passed the House by voice vote in May. The President, who sought this authority for FinCEN in budget requests, is expected to sign the bill.
House Passes Nonbank Examination Bill; House Committee Approves Mortgage-Related Bills
On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.
FHFA OIG Assesses Risks From Smaller Lenders And Nonbank Mortgage Companies
On July 17, the FHFA Office of Inspector General (OIG) published a report on risks to Fannie Mae and Freddie Mac (the Enterprises) related to purchasing mortgages from smaller lenders and nonbank mortgage companies. The report states such lenders present elevated risk in the following areas: (i) counterparty credit risk—smaller lenders and nonbank lenders may have relatively limited financial capacity, and the latter are not subject to federal safety and soundness oversight; (ii) operational risk—smaller or nonbank lenders may lack the sophisticated systems and expertise necessary to manage high volumes of mortgage sales to the Enterprises; and (iii) reputational risk—the report cites as an example an institution that was sanctioned by state regulators for engaging in allegedly abusive lending practices. The report notes that in 2014 the FHFA’s Division of Enterprise Regulation’s plans to focus on Fannie Mae’s and Freddie Mac’s controls for smaller and nonbank sellers, which will include assessments of the Enterprise’s mortgage loan delivery limits and lender eligibility standards and assessment of the counterparty approval process and counterparty credit risk resulting from cash window originations. The report also notes FHFA guidance to the Enterprises last year on contingency planning for high-risk or high-volume counterparties, and states that the FHFA plans to issue additional guidance on counterparty risk management. Specifically, the Division of Supervision Policy and Support plans to issue an advisory bulletin focusing on risk management and the approval process for seller counterparties. The OIG did not make any recommendations to supplement the FHFA’s planned activities.
Special Alert: CFPB Issues Guidance On Supervision And Enforcement Of Mini-Correspondent Lenders
This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”
The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act.
Background
The CFPB explains that generally, a correspondent lender performs the activities necessary to originate a mortgage loan—it takes and processes applications, provides required disclosures, sometimes underwrites loans and makes the final credit approval decision, closes loans in its name, funds them (often through a warehouse line of credit), and sells them to an investor. The CFPB’s focus here is on mortgage brokers who are attempting to move to the role of a correspondent lender by obtaining a warehouse line of credit and establishing relationships with a few investors. The CFPB believes that some of these transitioning brokers may appear to be the lender or creditor in each transaction, but in actuality have not transitioned to the mini-correspondent lender role and are continuing to serve effectively as mortgage brokers, i.e. they continue to facilitate brokered loan transactions between borrowers and wholesale lenders.
RESPA (Regulation X) and TILA (Regulation Z) include certain rules related to broker compensation, including RESPA’s requirement that lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement, and TILA’s requirements that broker compensation be included in “points and fees” calculations, and its restrictions on broker compensation and prohibition on steering to increase compensation. Those requirements do not apply to exempt bona fide secondary-market transactions, but do apply to table-funded transactions, the difference between which depends on the “real source of funding” and the “real interest of the funding lender.”
The CFPB states that the requirements and restrictions that RESPA and TILA and their implementing regulations impose on compensation paid to mortgage brokers do not depend on the labels that parties use in their transactions. Rather, under Regulation X, whether compensation paid by the “investor” to the “lender” must be disclosed depends on determinations such as whether that compensation is part of a secondary market transaction, as opposed to a “table-funded” transaction. And under Regulation Z, whether compensation paid by the “investor” to the “creditor” must be included in the points-and-fees calculation and whether the “creditor” is subject to the compensation restrictions as a mortgage broker depends on determinations such as whether the “creditor” finances the transaction out of its own resources as opposed to relying on table-funding by the “investor.”
CFPB’s Factors For Assessing Mini-Correspondent Lenders
The guidance advises lenders that in exercising its supervisory and enforcement authority under RESPA and TILA in transactions involving mini-correspondents, the CFPB considers the following questions, among others, to assess the true nature of the mortgage transaction:
- Beyond the mortgage transaction at issue, does the mini-correspondent still act as a mortgage broker in some transactions, and, if so, what distinguishes the mini-correspondent’s “mortgage broker” transactions from its “lender” transactions?
- How many “investors” does the mini-correspondent have available to it to purchase loans?
- Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
- Is the warehouse line of credit provided by a third-party warehouse bank?
- How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
- Does the mini-correspondent have more than one warehouse line of credit?
- Is the warehouse bank providing the line of credit one of, or affiliated with any of, the mini-correspondent’s investors that purchase loans from the mini-correspondent?
- If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans to, is the warehouse line a “captive” line (i.e., the mini-correspondent is required to sell the loans to the investor providing the warehouse line or to affiliates of the investor)?
- What percentage of the mini-correspondent’s total monthly originated volume is sold by the mini-correspondent to the entity providing the warehouse line of credit to the mini-correspondent, or to an investor related to the entity providing the warehouse line of credit?
- Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
- What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
- What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
- Which entity (mini-correspondent, warehouse lender, or investor) is performing the majority of the principal mortgage origination activities?
- Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
- What percentage of the principal mortgage origination activities, such as the taking of loan applications, loan processing, and pre-consummation underwriting, is being performed by the mini-correspondent, or an independent agent of the mini-correspondent?
- If the majority of the principal mortgage origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent, and, if so, what conditions must be met to make this transition (e.g. number of loans, time)?
The CFPB cautions that (i) the inquiries described in the guidance are not exhaustive, and that the CFPB may consider other factors relevant to the exercise of its supervisory and enforcement authorities; (ii) no single question listed in the guidance is necessarily determinative; and (iii) the facts and circumstances of the particular mortgage transaction being reviewed are relevant.
* * *
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Clinton R. Rockwell, (310) 424-3901, crockwell@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
- Joseph M. Kolar, (202) 349-8020, jkolar@buckleyfirm.com
- Jeremiah S. Buckley, (202) 349-8010, jbuckley@buckleyfirm.com
New York DFS Superintendent Promises Scrutiny Of Nonbank Servicer Affiliates, Previews Originator Licensing Changes
On May 20, New York DFS Superintendent Benjamin Lawsky spoke during the Mortgage Bankers Association’s National Secondary Market Conference and extended his recent focus on nonbank mortgage servicers. As detailed in excerpts from the remarks he delivered, Mr. Lawsky specifically addressed concerns about ancillary services offered by nonbank mortgage servicer affiliates—e.g. vacant property inspections, short sales marketed through online auctions, foreclosure sales, and debt collection. He asserted that such arrangements put borrowers and investors at risk of becoming “fee factories” and promised to expand DFS’s investigation of ancillary services. Though not reflected in the excerpts released by the DFS, Mr. Lawsky also previewed changes intended to streamline the DFS’s application process for mortgage originator licenses and branch locations in an effort to reduce burden on licensees and improve processing times.
CFPB Report Highlights Nonbank Supervisory Findings
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending:
Consumer Reporting
Following its adoption of its larger participant rule for consumer reporting agencies (CRAs) in July 2012, CFPB examiners reviewed CRAs’ dispute handling processes and CMS, and found among other things that (i) some CRAs lacked a formal or adequate CMS, and/or their boards and senior managers exercised insufficient oversight of the CMS; (ii) some CRAs failed to establish sufficient FCRA compliance policies, including with regard to dispute-handling procedures, and (iii) some failed to adequately supervise vendors, including call center and ancillary product vendors. CFPB examiners also found that (i) at least one CRA did not monitor or track consumer complaints; (ii) at least one CRA failed to forward all relevant consumer dispute materials to the furnisher, as required by FCRA; and (iii) at least one refused to accept disputes from certain consumer submitted online or by phone.
Debt Collection
The CFPB finalized its debt collector larger participant rule in October 2012 and since that time its examiners have observed debt collectors engaged in the following allegedly illegal or unfair and deceptive practices: (i) intentionally misleading consumers about litigation; (ii) making excessive calls to consumers; and (iii) failing to investigate consumer credit report disputes.
Short-term, Small-dollar Lending
The Dodd-Frank Act grants the CFPB supervisory authority over payday lenders without having first to adopt a larger participant rule. The CFPB launched its payday lender supervision program in January 2012 and reports that its examiners have found, among other things, that in seeking to collect payday loan debt some lenders engaged in the following allegedly unfair or deceptive practices: (i) threatening to take legal actions they did not actually intend to pursue; (ii) threatening to impose additional fees or to debit borrowers’ accounts, regardless of contract terms; (iii) falsely claiming they were running non-existent promotions to induce borrowers to call back about their debt; and (iv) calling borrowers multiple times per day or visiting borrowers’ workplaces.
Comptroller Curry Discusses Nonbank Supervision, Regulatory Capture
On May 14, Comptroller of the Currency Thomas Curry spoke to the Conference of State Bank Supervisors, urging state regulators to, among other things, avoid regulatory capture and ensure balanced supervision of nonbanks and banks. Mr. Curry stated that “[r]egulatory capture is a real threat” to federal and state banking agencies and the system more broadly, and that regulators should never employ chartering authority to compete for “market share.” He also cautioned about the potential rise of the “shadow banking system”—the shift of assets from regulated depository institutions to less-regulated, non-depository institutions—as bank regulators become more rigorous in pursuing enhanced safety and soundness and consumer protection at depository institutions. He specifically identified the transfer of mortgage servicing rights as an example of that shift of assets, which “could carry with it the seeds for the next financial crisis.” He called on state regulators to make nonbank supervision, including with regard to mortgage servicing, a top priority.
CSBS Publishes Annual Report
On May 1, the Conference of State Bank Supervisors (CSBS) published its 2013 annual report, which aggregates and reviews the organization’s activities in the prior year, identifies future goals for the organization, and outlines specific priorities for 2014. Those priorities include, among others, continuing to coordinate with federal regulators on cybersecurity and with the CFPB on complaint sharing. The report also includes more detailed reports on past and future activities by various CSBS divisions and boards, including a report from the Policy and Supervision Division that reviews the CSBS’s legislative and regulatory policy positions, and its bank supervision and consumer protection and non-bank supervision activities.