We have expanded CFPB Monitor. This new blog—Consumer Finance Monitor—includes all the news in the CFPB Monitor. It also features a Federal CFS Monitor for analysis on the many other federal agencies that regulate our industry and a State CFS Monitor,  which covers state agency and attorney general developments. News is segmented by topic and agency on the right. A full compilation is below. Thank you for visiting and we hope you enjoy our new blog.

At the Auto Finance Risk and Compliance Summit held this week, Calvin Hagins, CFPB Deputy Assistant Director for Originations, stated that the CFPB is increasingly asking lenders about ancillary product programs during examinations, particularly about the percentage of consumers buying these products.

In June 2015, when the CFPB released its larger participant rule for nonbank auto finance companies, it also issued auto finance examination procedures in which ancillary products, like GAP insurance and extended service contracts, received heavy attention.  We commented that by giving so much attention to these products, the CFPB was signaling its intention to give lots of scrutiny to these products in the auto finance market.  Mr. Hagins’s comments confirm that the CFPB is in fact looking closely at these products in exams.

Speaking at the Summit as a member of a regulatory panel, Mr. Hagins indicated that companies should expect to get questions from CFPB examiners about ancillary products.  He indicated that the CFPB specifically looks at how the product is offered to the consumer, when in the contracting process is it offered, how disclosures are being provided to the consumer, and the acceptance rate.  As an example, he indicated that a 95% acceptance rate would cause CFPB examiners to raise questions about how the rate was achieved.

At the Summit, Colin Hector, an FTC attorney, indicated that the FTC is also interested in ancillary products, particularly whether there is a potential for consumer deception in how they are sold.  He commented that, in its enforcement work, the FTC has focused on ancillary product sales that occur at the end of the sales process when consumers may be led to believe they must purchase the products to obtain financing and the seller has increased leverage because the consumer is more invested in completing the transaction.

 

In a recent Bloomberg interview, Senate Majority Leader Mitch McConnell expressed skepticism about the Senate’s ability to pass meaningful Dodd-Frank reform.  After months of inactivity, the House Financial CHOICE Act finally moved out of committee to the House floor where a vote by the full House is expected in June.

Several other bills aimed at reforming the CFPB have been introduced by various Republican lawmakers in the House and Senate.  This legislative action would seem to suggest that CFPB reform was a real possibility.  Senator McConnell, however, cast renewed doubt on the prospects of reform, to the disappointment of many in the banking and finance industry.

Many factors stand in the way of significant Dodd-Frank reform in the Senate.  As Senator McConnell acknowledged, Republicans would need the support of at least some Democrats on the Banking Committee and in the full Senate.  According to Bloomberg, Democrats and Republicans appear to agree on the need for community banking reform, but little else.  Of course, the two parties do not necessarily agree on what counts as a small, community bank, as both have pushed differing size thresholds in the past.

The slim Republican majority in the Senate is not the only thing standing in the way of meaningful reform.  Even if it passed the House, the revised CHOICE Act was likely to face stiff resistance in the Senate.  Unfortunately, the revised version dropped the proposal for a five-member commission in favor of a single director removable at will.  Industry has long viewed a commission as a more appropriate structure, to bring stability and predictability to the agency over the long run.

Although the more modest Senate proposals, such as reforming the CFPB’s funding mechanism, had a greater chance at passage, the recent turmoil in Washington, of course, will make passage of any legislation difficult, and make grand reforms much less likely.  At the end of the day, meaningful change to the CFPB is more likely to come from within the agency itself when a new director is appointed in July 2018.

 

The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016.  The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers.  The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:

  • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default.  According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
  • Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
  • Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
  • Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting.  The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
  • Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.

The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers.  The CFPB also urged policymakers and industry to consider various actions, including enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment.

In the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.”  It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.

Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards.  The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”

 

Based on the President’s executive order 13772 on The Core Principles for Regulating the United States Financial System, the American Bankers Association (ABA) submitted a white paper to Treasury Secretary Mnuchin that criticizes the revised Home Mortgage Disclosure Act (HMDA) rule adopted by the CFPB.

The executive order requires the Treasury Secretary, based on the core principles laid out in the executive order,  to identify the federal laws that promote and inhibit the regulation of the United States financial system.  In the white paper, the ABA “offers these views” to the Treasury Secretary in relation to the executive order’s directive:

  • Expanded data collection adds nothing but volumes of irrelevant data, distracting from achievement of HMDA’s purposes.
  • Regulators have failed to protect expanded HMDA data from breaches of security and privacy.
  • Expanded data collection will feed banker regulatory worries about meeting customer needs outside of the norm.
  • Data expansion should be suspended until security and privacy concerns are fully addressed.
  • Bureau regulatory expansion of data beyond the statute should be rescinded.
  • Dodd-Frank expansion of HMDA data fields should be repealed.

The comment regarding security and privacy addresses industry concerns that (1) the greatly expanded nonpublic personal information on consumers presents data security risks and (2) the public release of various new HMDA data elements will result in nonpublic personal information on consumers becoming readily available to the public.  As we have reported previously, the CFPB has provided little insight into its decision making on what data will be released, and does not appear to be too concerned with data security or privacy issues.  The ABA notes that it is “concerned that the Bureau has not initiated a public rulemaking to address the significant consumer privacy dangers and data protection threats that the expanded HMDA data collection poses.”  The ABA concerns are based on the “probability that manipulation of the expanded data points will make it easier for unfriendly parties to unmask identities of borrowers and their personal financial profiles, and the wholesale risks common to an age where harmful data breaches of government-held information are real, frequent, and therefore must be anticipated.”

We share the ABA’s concerns that the expanded HMDA data categories presents, both with regard to the risk of unauthorized access to the data, and the public release of various data elements by the CFPB.

The New York Department of Financial Supervision (DFS) has filed a complaint in a New York federal district court to stop the Office of the Comptroller of the Currency (OCC) from implementing its proposal to issue special purpose national bank (SPNB) charters to fintech companies.  The lawsuit follows the filing of a similar action earlier this month by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.

Like the CSBS lawsuit, the DFS lawsuit challenges the OCC’s proposal on the grounds that:

  • The National Bank Act (NBA) does not allow the OCC to charter non-depository financial services
  • The OCC’s decision to issue SPNB charters to fintech companies, by enabling non-depository charter holders to disregard state law, violates the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police power to regulate financial services and products delivered within a state

In defending its authority to charter SPNBs that do not take FDIC-insured deposits, the OCC has relied on 12 C.F.R. Section 5.20(e)(1) which allows the OCC to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money.  Similar to the CSBS lawsuit, the relief sought by the DFS lawsuit includes a declaration that the OCC lacks authority under the NBA to issue SPNB charters to fintech companies that do not take deposits, a declaration that 12 C.F.R. Section 5.20(e)(1) is null and void because it exceeds the OCC’s authority under the NBA, and an injunction prohibiting the OCC from issuing SPNB charters as proposed.

We have commented that because the OCC has not yet finalized the licensing process for fintech companies seeking an SPNB charter, the CSBS is likely to face a motion to dismiss on grounds that include a lack of ripeness and/or no case or controversy.  The DFS is likely to also face a motion to dismiss on similar grounds.  Perhaps anticipating an argument that it lacks standing to bring the lawsuit because it cannot show actual harm, DFS alleges not only that the OCC proposal would undermine its ability to protect New York consumers but also that the OCC’s actions will “injure DFS in a directly quantifiable way.”  DFS alleges that because its operating expenses are funded by assessments levied on New York-licensed financial institutions, every company that receives an SPNB charter “in place of a New York license to operate in this state deprives DFS of crucial resources that are necessary to fund the agency’s regulatory function.”

This allegation does not seem sufficient to overcome the lack of ripeness and/or no case or controversy problem that the DFS lawsuit presents.  Indeed, the DFS filed its lawsuit after the architect of the SPNB charter proposal, former Comptroller of the Currency Thomas Curry, was replaced by Acting Comptroller Keith Noreika.  Mr. Noreika has not yet taken any public position with respect to the SPNB charter.  It will not be until the next Comptroller of the Currency is nominated by President Trump, confirmed by the Senate, and takes a position on the SPNB charter that we will be able to realistically assess whether the OCC will continue to pursue the SNPB charter proposal, let alone finalize it.

 

 

 

The New York Department of Financial Services (DFS) announced last week that it is migrating the administration of its non-mortgage related licenses to the Nationwide Multistate Licensing System (NMLS), joining more than 60 other state financial services regulatory agencies that already administer their non-mortgage licenses via the NMLS.  Effective July 1, new applicants for a money transmitter license will be able to apply via the NMLS, and existing licensees will be able to transition their licenses to the NMLS.  DFS has indicated that ultimately it will manage all non-depository licenses via the NMLS.

The announcement also expressed support for Vision 2020, the Conference of State Bank Supervisors’ recently launched initiative to modernize state regulation for non-banks.

It is no secret that the DFS is not reluctant to launch its own initiatives if it believes that there is a gap in regulation, examination or oversight – their cybersecurity regulations – so the DFS embracing the NMLS is a positive for the industry as it relates to uniformity of the licensing application process.

 

 

On May 10, the Conference of State Bank Supervisors (CSBS) announced a series of initiatives (branded as Vision 2020) designed to modernize state regulation of non-banks.  The announcement specifically calls out financial technology firms and appears to be an attempt by state regulators to provide an alternative to the special purpose national bank charter the OCC has proposed to make available to financial technology companies (“fintech charter”).

The CSBS claims that by 2020 state regulators will have adopted “an integrated, 50-state licensing and supervisory system, leveraging technology and smart regulatory policy to transform the interaction between industry, regulators and consumers.”  The CSBS further claims that the Vision 2020 initiatives “will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties.”  Lofty goals to say the least, and ones that the financial services industry most certainly will support.  It remains to be seen, however, whether Vision 2020, which actually includes initiatives that are already in use or have been underway for some time, will move us further towards these goals by 2020, or even later.

Among others, Vision 2020 purports to include the following: 1) a redesign of the Nationwide Multistate Licensing System (NMLS); 2) harmonization of multi-state supervision; 3) formation of a fintech industry advisory panel focused on lending and money transmission, with the goal of identifying challenges related to licensing and multi-state regulation and providing feedback on state efforts to modernize the regulatory structure; 4) enhancing the CSBS regulatory agency accreditation program; 5) facilitate banks providing services to non-banks; 6) increasing efforts to address de-risking; and 7) supporting federal legislation facilitating coordinated supervision of bank third party service providers by state and federal regulators.

It bears noting that the redesign of the NMLS (called NMLS 2.0) has been underway (even if not formally) for some time, and long before the OCC first proposed offering a fintech charter.  Moreover, 62 (and counting) state agencies over more than 40 states and territories already use the NMLS for the administration of non-mortgage licenses. While migration by states to the NMLS for administration of its non-mortgage licenses will no doubt continue, the driver for that was not the need to find a way to regulate fintech companies, but rather the need for significant improvements to NMLS’s functionality and utility.

The CSBS has also been focusing on the harmonization of multi-state supervision for many years.  In the mortgage industry, for example, these efforts have included formation of the Multi-State Mortgage Committee, publication of a model mortgage exam manual, publication of model examinations guidelines, and promotion of model state laws.  Despite these efforts, those in the mortgage industry can attest to the fact that harmonization and uniformity is still more aspirational than a reality.

Some have suggested that Vision 2020 is intended to entice fintech companies to elect state regulation over seeking a fintech charter.  Whether or not that is the case, Vision 2020 certainly is an attempt by the CSBS to make the case that state regulators are in the best position to regulate fintech companies and that they are prepared to modernize and harmonize their laws and regulations.  Given the significant harmonization and modernization work that still remains to be done in the mortgage industry after many years of effort, I have significant reservations about the likelihood of “an integrated, 50-state licensing and supervisory system” by 2020.

 

 

The FDIC announced last week that it had entered into settlements with Bank of Lake Mills and two non-bank “institution-affiliated parties” through which the bank originated loans for allegedly engaging in unfair and deceptive practices in violation of Section 5 of the FTC Act.  The settlements should serve as a reminder to non-banks entering into arrangements with FDIC-supervised banks that they can become subject to FDIC enforcement authority.

The FDIC did not release the underlying stipulations and consent order and only released the orders requiring payment of restitution and civil money penalties.  The orders require the bank and two non-banks, Freedom Stores, Inc. (FSI) and Military Credit Services, LLC (MCS), to pay approximately $3 million in restitution to eligible borrowers and civil money penalties of, respectively, $151,000, $54,000, and $37,000.

The orders describe eligible borrowers as having received loans from the bank through “FSI and MCS channels.”  It would appear that, because the non-banks originated loans on behalf of the bank, the FDIC deemed the non-banks to be “institution-affiliated parties” under 12 U.S.C. section 1813(u)(1) which defines an “institution-affiliated party” to include any ” agent for an insured depository institution.”

According to the FDIC’s press release, the bank, FSI, and MCS violated Section 5 by practices that included:

  • Charging interest to borrowers who paid off their loans within six months when the loans were promoted as interest free for six months;
  • Selling add-on products without clearly disclosing the terms of those products; and
  • Failing to provide borrowers the opportunity to exercise the monthly premium payment option in conjunction with the purchase of optional debt cancellation coverage

In December 2014, FSI and MCS entered into a consent order with the CFPB to settle allegations that the companies had engaged in unlawful debt collection practices in violation of the CFPA UDAAP prohibition.

On May 4 H.R. 10, the Financial CHOICE Act (the Act) introduced by House Financial Services Committee Chairman Jeb Hensarling, R-Texas, obtained enough votes to move the bill on to the House of Representatives floor.  The Act seeks to rollback or modify many of the regulatory and supervisory requirements imposed by the Dodd-Frank Act.

On May 8, my colleague, Barbara Mishkin blogged about provisions of the bill that would overhaul the CFPB’s structure and authority, and a variety of other provisions.  I will blog about the provisions in the bill that relate to mortgage origination and servicing.  The passage of the bill in its current form would result in significant changes for that industry.  The most significant changes are addressed below.

S.A.F.E. Act Transitional Authority.  If certain conditions are met, the Act would create, under the S.A.F.E. Mortgage Licensing Act, temporary authority for a loan originator to continue to originate loans in cases in which (1) a registered loan originator moves from a depository institution to a non-depository institution mortgage lender and (2) a licensed loan originator moves from a non-depository institution in one state to another non-depository institution in a different state.  The temporary period would run from the date the loan originator submits an application for a license until the earlier of the date (1) the application is withdrawn, denied or granted, or (2) that is 120 days after submission of the application, if the application is listed in the Nationwide Mortgage Licensing System and Registry (NMLSR) as being incomplete.

Points and Fees.  The definition of points and fees for purposes of the Regulation Z ability to repay/qualified mortgage requirements and high-cost mortgage loan requirements would be revised to exclude charges for title examinations, title insurance or similar purposes, regardless of whether the title company is affiliated with the creditor.  Currently, for such charges to be excluded from points and fees, the title company must not be an affiliate of the creditor.  The Act also would make a conforming change to exclude escrowed amounts for insurance from points and fees.  Currently, escrowed amounts for taxes are excluded from points and fees.  Both changes were included in bills introduced in prior years that never were enacted.

Ability to Repay/Qualified Mortgage.  The Act would create a safe harbor against lawsuits for failure to comply with the Regulation Z ability to repay requirements for mortgage loans made by depository institutions that are held in portfolio from the time of origination and comply with a limitation on prepayment penalties.  Mortgage originators working for depository institutions would have a safe harbor from a related anti-steering provision if they informed the consumer that the institution intended to hold the loan in portfolio for the life of the loan.

Higher-Priced Mortgage Loan Escrow Requirements.  The Act would exempt certain small creditors from the escrow account requirements under Regulation Z for higher-priced mortgage loans if the small creditor held the loan in portfolio for at least three years after origination.  A creditor would qualify for the exemption if it has consolidated assets of $10 billion or less.

Small Servicer Exemption.  For purposes of the exemption for small servicers from various servicing requirements, the Act would require an increase in the limit on loans serviced to be considered a small servicer.  Currently the limit is 5,000 loans serviced by the servicer and its affiliates, and the servicer and its affiliates must be the creditor or assignee of all of the serviced loans.  The Act would require the adoption of a limit of 20,000 loans serviced annually.  The Act does not expressly refer to loans serviced by affiliates or whether the servicer and its affiliates must be the creditor or assignee of the loans.

HMDA Reporting Threshold.  The revised Home Mortgage Disclosure Act (HMDA) rule adopted by the CFPB establishes uniform volume thresholds to be a reporting institution at 25 closed-end mortgage loans in each of the prior two years or 100 open-end lines of credit in each of the prior two years.  The uniform thresholds will become effective January 1, 2018, although the 25 loan threshold for closed-end mortgage loans became effective January 1, 2017 for depository institutions.  The bill would increase the thresholds to 100 closed-end mortgage loans in each of the prior two years and 200 open-end lines of credit for each of the prior two years.

HMDA Information Privacy.  The revised HMDA rule adopted by the CFPB significantly expands the data on the consumer and loan that must be collected and reported, including the credit score and age of the consumer.  The mortgage industry has raised concerns about how much information the CFPB will make public under HMDA, as parties can use the publicly released data as well as other publicly available data to determine the identity of the consumer.  The CFPB is still assessing what elements of the reported data it will release to the public.  The Act would require the Comptroller General of the United States to study the issue and submit a report to Congress.  The Act also would provide that reporting institutions are not required to make available to the public any information that was not required to be made available under HMDA immediately prior to the adoption of the Dodd-Frank Act.  This aspect of the Act does not address that, under the revised HMDA rule, the CFPB, and not each reporting institution, would make reported information available to the public.

It is likely that the H.R. 10 as currently structured will not be adopted, but various provisions may find their way into law.  We will continue to monitor developments.

The CFPB’s final prepaid card rule has survived Republican efforts to nullify the rule under the Congressional Review Act (CRA).  The CRA establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  While a CRA joint resolution of disapproval must be approved by both Houses of Congress, it cannot be filibustered in the Senate and can be passed with only a simple majority.  In February 2017, joint resolutions were introduced in both the Senate and the House to disapprove the final prepaid card rule under the CRA.

According to Politico, May 11th was the last day for the Senate to pass the Senate resolution with a simple majority.  It was also reported that the House is not expected to vote on the House CRA resolution.

Last month, the CFPB issued a final rule to delay the final prepaid card rule’s effective date by six months, from October 1, 2017 to April 1, 2018.  In the final rule delaying the effective date, the CFPB indicated that it intends to propose changes to the prepaid card rule’s provisions dealing with linking credit cards to digital wallets that are capable of storing funds and error resolution and limitations on liability for unregistered prepaid accounts.  It also indicated that it is continuing to evaluate other concerns raised by industry and other stakeholders, and might address other topics in its proposal.