On April 20, the CFPB finalized a proposed rule to delay the effective date of the final rule governing Prepaid Accounts (Prepaid Account Final Rule) by six months, from October 1, 2017 to April 1, 2018 (Effective Date Final Rule).  According to the CFPB, the delay was adopted “to facilitate compliance with the Prepaid Account Final Rule, and to allow an opportunity for the Bureau to assess whether any additional adjustments to the Rule are appropriate.”

The preamble to the Effective Date Final Rule previews that the CFPB will propose rules for “at least two issues that have been identified as areas where the Prepaid Accounts Final Rule may be posing particular complexities for implementation,” and at that time, a further delay may be proposed as well.  The two issues relate to: (1) the linking of credit cards to digital wallets that are capable of storing funds; and (2) error resolution and limitations on liability for unregistered prepaid accounts.

Over the past few months, the Prepaid Account Final Rule has faced attacks from industry representatives, such as the American Bankers Association, and from Congress under the Congressional Review Act – Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, and Senator David Perdue (R-Ga) introduced Senate Joint Resolution 19.  The Senate Joint Resolution was recently brought out of Committee and to the floor for consideration by way of a discharge petition filed by Senate Banking Chairman Mike Crapo.  The Prepaid Account Final Rule has also been defended by attorney generals from 17 states and the District of Columbia.

We will continue to monitor the status of the Prepaid Account Final Rule in relation to the substantive changes previewed by the CFPB and the progress of the congressional joint resolutions.

On April 13, 2017, the CFPB proposed substantive changes and technical corrections to the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule (Final Rule) amending Regulation C.  The proposal, which is discussed in more detail here, would clarify certain key terms under the Final Rule, including temporary financing, automated underwriting system, multifamily dwelling, extension of credit, income, and mixed-use property.

The proposal also (1) describes the CFPB’s plans to create an online geocoding tool to avoid errors in the reporting of census tracts and provide protection from HMDA or Regulation C liability if the tool is used as intended, (2) provides clarification regarding the selection and reporting of ethnicity and race information; (3) clarifies reporting issues with respect to Regulation Z disclosures, (4) provides guidance on reporting multiple credit scores, (5)  clarifies how the reporting thresholds apply and expressly permits voluntary reporting by financial institutions that do not meet the reporting thresholds, and (6) establishes transition rules for the loan purpose and loan originator identifier data points.

Most of the proposed amendments would take effect on January 1, 2018.  Interested parties should assess if programming and operational changes that would be necessary based on the proposals can be appropriately completed by January 1, 2018.

The CFPB has adopted changes to its “Policy on Ex Parte Presentations in Rulemaking Proceedings,” which generally requires anyone who communicates with the CFPB about a pending rulemaking to submit a written copy of the presentation (or a summary of an oral presentation) to the CFPB and public rulemaking docket within a specified period after the communication to the CFPB.

In addition to various non-substantive changes, the updated policy makes the following substantive changes:

  • As originally adopted, the policy required copies or summaries of presentations to be submitted to the CFPB within three business days of the presentation.  The CFPB has changed the policy to extend that period to ten business days.  In addition, the policy had directed persons submitting ex parte presentation materials to also file them directly with the public rulemaking docket at www.regulations.gov.  The updated policy only requires the materials to be submitted electronically to the CFPB, which will post them on the public rulemaking docket.
  • The updated policy creates an exemption from its requirements for ex parte presentations “by State attorneys general or their equivalents, State bank regulatory authorities, or State agencies that license, supervise, or examine the offering of consumer financial products or services, including their offices or staff, when acting in their official capacities.”  For purposes of the policy, “State” means “any State, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States or any federally recognized Indian tribe.”  According to the CFPB, it created the exemption because, in its experience, “communications from these entities have at times been sensitive, and the CFPB believes that these entities are likely to provide more frank and robust feedback if communications are not subject to the disclosure requirements of the Policy.”

 

Since the CFPB issued its final rule for general purpose prepaid accounts on October 5, 2016, it has faced challenges from Congress and criticism from industry participants.  In recognition of the numerous compliance difficulties posed by the rule, the CFPB has indicated that it is amenable to making substantive changes to the rule, and on March 9, the CFPB proposed to delay the rule’s implementation date in response to feedback from the prepaid industry.

On April 3, the American Bankers Association (ABA) joined the chorus, urging the CFPB in a comment letter to adopt a more objective definition of “prepaid account” to further clarify the distinction between checking accounts and prepaid accounts.  The ABA noted that a bank could face significant compliance risk and civil liability if a bank’s checking account were perceived to fall under the definition of a prepaid account and be subject to the rule’s requirements.  The ABA also asked the CFPB to clarify whether “model safe accounts” and other checkless checking accounts are covered under the rule, cautioning the CFPB that this ambiguity could discourage the use of these innovative products and cause consumers to “lose choices.”  The ABA proposed an alternative definition of prepaid accounts, and urged the CFPB to encourage card issuers to start complying with the rule prior to the effective date.

In the meantime, members of Congress continue to pursue nullification of the final 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.  In February, joint resolutions were introduced in both the Senate and the House to disapprove of the final rule under the CRA – Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, and Senator David Perdue (R-Ga) introduced Senate Joint Resolution 19.  The Senate Joint Resolution was then referred to the Senate Committee on Banking, Housing and Urban Affairs for consideration.  On March 30, Senators led by Senate Banking Chairman Mike Crapo issued a petition to discharge the resolution from further consideration, thereby bringing it out of Committee and to the floor for consideration without a report from the Committee, and one step closer to enactment.

On March 24, the CFPB announced a proposal to amend Regulation B requirements related to the collection of consumer ethnicity and race information, in order to resolve the differences between Regulation B and revised Regulation C.  These proposed rule amendments are effective on January 1, 2018, the same effective date as the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule.

First, the proposal would give persons who collect and retain race and ethnicity information in compliance with Regulation B the option of permitting applicants to self-identify using the disaggregated race and ethnicity categories required by the 2015 HMDA Final Rule.  Aligning these rules would allow HMDA-reporting entities to comply with Regulation B without further action, while entities that do not report under HMDA but record and retain race and ethnicity data under Regulation B could either use existing aggregated categories or the new disaggregated race and ethnicity categories.

Second, the proposed amendment would remove the outdated 2004 Uniform Residential Loan Application (URLA) as a model form, and provide a new, one-page data collection model form, which is substantially similar to section X of the 2004 URLA.  Eventually, non-HMDA reporting entities will be free to use the 2016 URLA prepared by Freddie Mac and Fannie Mae to collect race and ethnicity information, as previously discussed in the CFPB’s September 2016 Approval Notice.  Fannie Mae and Freddie Mac have not implemented the 2016 URLA yet, and have not indicated a precise start date, and so the CFPB proposes that the 2004 URLA be removed on the cutover date the enterprises designate for use of the 2016 URLA or on January 1, 2022, whichever comes first.  Note that a Demographic Information Addendum, which is identical in form to section 7 of the 2016 URLA, and which is as a replacement for section X (Information for Government Monitoring Purposes) in the current URLA, dated 7/05 (revised 6/09), has been available for use since January 1, 2017.

Third, the proposed rule would allow creditors to collect ethnicity, race and sex information from mortgage applicants in certain cases where the creditor is not required to report under HMDA and Regulation C, including creditors that submit HMDA data even though not required to do so, and creditors that submitted HMDA data in any of the preceding five calendar years.  This change would primarily benefit institutions that may be required to report under HMDA and Regulation C in some years and not others, or may be uncertain about their reporting status. The CFPB believes that “allowing voluntary collection will reduce the burden of compliance with Regulation C on some entities and provide certainty regarding Regulation B compliance over time.”

Note that the CFPB is not proposing a mandatory requirement for Regulation B-only creditors to permit applicants to self-identify using disaggregated race and ethnicity categories.  The CFPB believes that permitting (rather than requiring) the use of disaggregated ethnicity and race categories avoids placing costs and heightened compliance burdens on Regulation B-only creditors.  Nevertheless, the CFPB believes that “many that are not subject to revised Regulation C are nevertheless likely to adopt the 2016 URLA at some point because of business considerations unrelated to Regulations B and C.”

The CFPB is seeking comments on these proposed amendments for 30 days after its publication in the Federal Register.

Earlier today, at the Practicing Law Institute’s (“PLI”) 22nd Annual Consumer Financial Services Institute in New York City, Alan Kaplinsky (who is co-chairing the event) moderated a panel entitled “The CFPB Speaks,” that featured three senior CFPB lawyers: Anthony (“Tony”) Alexis (Assistant Director for Enforcement), Diane Thompson (Deputy Assistant Director, Office of Regulations), and Peggy Twohig (Assistant Director for Supervision Policy).  Ballard Spahr attorney James Kim, a former senior CFPB enforcement lawyer who now represents industry, was also a panel member.

In response to questions posed by Alan and audience members, the CFPB lawyers discussed regulatory, supervisory and enforcement developments and upcoming initiatives.  Particularly noteworthy comments were:

  • Ms. Twohig stressed the importance of an entity’s response to a PARR letter – a notice of Potential Action and Request for Response – in the supervisory process.  She commented that there have been instances where the CFPB has decided not to cite a company for a violation based on its response to a PARR letter.
  • Mr. Alexis and Ms. Twohig discussed the CFPB’s process for deciding whether the CFPB will use a supervisory or an enforcement action to address violations found in an examination.  Ms. Twohig indicated that the decision whether to refer a matter to enforcement is made by an Action Review Committee (ARC), which considers various factors such as the severity of the violation, the entity’s cooperation with the CFPB, and policy factors that include the need for the CFPB to send a public message of deterrence.  Mr. Alexis indicated that if a matter is referred to enforcement, the Enforcement Division will consider similar factors as well as input from witnesses obtained through CIDs.  Enforcement will then decide whether to proceed with an enforcement action, return the matter for supervisory resolution (which Mr. Alexis called a “reverse ARC” process), or drop the case.  Mr. Alexis acknowledged that a supervisory resolution through an MOU or similar agreement is the only vehicle available to the CFPB to enter into a non-public settlement.  Accordingly, if a company is not subject to CFPB supervision, a settlement can only be entered into through a public consent order.
  • Mr. Alexis indicated that the constitutional challenge to the CFPB’s use of an administrative judge in the PHH case has not caused the CFPB to direct more enforcement matters to lawsuits filed in federal district court rather than administrative proceedings.  He noted that the CFPB’s decision of which forum to use is frequently driven by the facts involved in a matter, with a district court lawsuit more likely to be filed when the CFPB is in need of more discovery to support its case.  He also indicated that the panel’s rejection in PHH of the CFPB’s position that it is not bound by statutes of limitation in administrative enforcement actions has not changed the CFPB’s approach to enforcement matters.
  • Mr. Alexis indicated that he saw no need to advocate for the CFPB’s adoption of a matrix for assessing civil money penalties similar to those used by the prudential regulators because the factors are laid out in Dodd-Frank.
  • Ms. Thompson declined to estimate when the CFPB is likely to issue a final arbitration rule or a final payday/small dollar loan rule, stating that it was “too speculative” for her to do so and that the CFPB was continuing to consider the unprecedented number of comments received on both rules.  She also indicated that the CFPB was in the early stages of developing a proposed rule to implement Dodd-Frank Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.)  According to Ms. Thompson, the CFPB is attempting to address the absence of good sources of data on small business lending.
  • Ms. Twohig indicated that the CFPB’s next larger participant rule will deal with consumer installment lending and auto title loans and that the CFPB is continuing to consider creating a registration system for non-bank lenders to assist the CFPB in identifying market participants.  She also indicated that to address the widespread use of compliance technology solutions by entities it supervises, the CFPB has stood up the National Information Systems Supervision Program (NISSP).  Through the NISSP, the CFPB uses specialized managers to inform and focus supervisory reviews of entities’ compliance-related information systems, some of which are designed in-house but many of which rely upon third parties to develop and maintain.
  • Ms. Twohig defended the CFPB’s proposed rule that would amend the CFPB’s information disclosure rules to allow it to share confidential supervisory information with any federal or state agency (including state attorneys general) regardless of whether the agency has jurisdiction over the company whose CSI is shared as long as the CSI is “relevant” to the agency’s authority.
  • Mr. Alexis stated that the CFPB’s decision to assert that the non-bank, and not the tribal-affiliated lender, was the “true lender” in the pending CashCall case was fact specific and dependent on how that case unfolded.  Mr. Alexis said that the CFPB would consider using the “true lender” theory and the predominant economic interest test in other cases if it is appropriate.  Mr. Kim remarked that the CFPB’s application of the “true lender” theory requires states to cooperate by alleging that the non-banks, who service or collect on the loans, are violating state usury and licensing laws.

 

 

A Democratic congressman has raised concerns about potentially discriminatory lending practices used by fintech companies that extend credit to small businesses, calling on the CFPB “to vigorously investigate whether [such fintech companies] are complying with all anti-discrimination laws, including the Equal Credit Opportunity Act.”

In a letter to Director Cordray dated March 15, 2017, Representative Emanuel Cleaver, II, stated that fintech companies “geared toward lending to small businesses by using certain biased algorithms for creditworthiness have the potential of charging disproportionately higher rates to minority-owned businesses.”  He asserted that, as a result, it is important “to determine if minority-owned small businesses are being charged higher rates, or if they have been subject to predatory fees” by fintech companies.

In addition to urging the CFPB to launch an investigation, Rep. Cleaver requested responses to a series of questions that included when the  CFPB anticipates “finalizing regulation and guidance to fully implement” Dodd-Frank Section 1071.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The CFPB has not yet proposed a rule to implement Section 1071.  In its Fall 2016 rulemaking agenda, the CFPB estimated a March 2017 date for prerule activities.

For more on Rep. Cleaver’s letter, see our legal alert.

The CFPB has proposed to delay the effective date of the final rule governing Prepaid Accounts from October 1, 2017 to April 1, 2018. The CFPB’s action is a direct response to ongoing dialogue between companies in the prepaid industry and the CFPB staff. The CFPB proposal to delay the effective date has a twenty-one (21) day comment period from publication of the proposal in the Federal Register.

The Prepaid Account Rule covers a broad range of products – from reloadable cards offered through retail locations to digital-only accounts. One of the specific industry concerns cited by the CFPB in their proposal is challenges with the “pull and replace” of non-compliant packaging of card product in retail locations. The CFPB also noted that industry participants have “raised concerns about what they describe as unanticipated complexities arising from the interaction of certain aspects of the rule with certain business models and practices.”

The Prepaid Account Rule is also facing numerous challenges from Congress. We wrote last month that Senator David Perdue (R-Ga) had introduced a joint resolution that could lead to nullification of the rule. In addition, Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) have introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, disapproving of the final rule.

On March 1,2017, by a vote of 241 to 104, the House passed the “OIRA Insight, Reform, and Accountability Act” (H.R. 1009), which would subject independent regulatory agencies such as the CFPB to the regulatory review process of the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget.  The bill has been referred to the Senate Committee on Homeland Security and Governmental Affairs.

Currently, under Executive Order 12866, federal agencies, other than those defined as an “independent regulatory agency” by 44 U.S.C. Sec. 3502(5), must submit proposed and final regulations constituting a “significant regulatory action” to OIRA for review prior to publication in the Federal Register.  A key component of OIRA review is an evaluation of the agency’s analysis of a regulation’s anticipated costs and benefits and its determination that the regulation’s anticipated benefits justify its anticipated costs as well as the agency’s identification and assessment of feasible alternatives.  The Executive Order defines a “significant regulatory action” as any regulatory action that is likely to result in a rule that may (a) “have an annual effect on the economy of more than $100 million or more,” (b) “adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, tribal governments or communities,” or (c) raise other coordination, budgetary, or policy issues, such as creating a serious inconsistency with another agency’s action.

Executive Order 12866 also contains requirements that apply to both executive and independent agencies, such as the preparation of a semi-annual rulemaking agenda and an annual regulatory plan to be published in the Unified Regulatory Agenda and participation in a regulatory working group convened by OIRA.  In addition to generally codifying these and other requirements of the Executive Order, H.R. 1009 codifies the Order’s definition of “significant regulatory action” and its requirement for OIRA review of new regulations that constitute a “significant regulatory action” but makes the review requirement applicable to both executive and independent agencies.

According to the report on the bill issued by the House Committee on Oversight and Government Reform, the exclusion of independent regulatory agencies from OIRA review in Executive Order 12866 “means that numerous controversial and extremely costly regulations are issued without the second look by regulatory experts that OIRA review provides.”  In addition to the CFPB, the other independent regulatory agencies currently excluded from OIRA review by Executive Order 12866 include the Federal Reserve, the FCC, the FDIC, the FTC, and the OCC.

 

 

In a new white paper, “An Overview of the Analytical Flaws and Methodological Shortcomings of the CFPB’s Survey of Consumer Experiences with Debt Collection,” ACA International takes aim at the report released by the CFPB in January 2017 that presented the findings of the CFPB’s national debt collection consumer survey.

In our blog post about the survey, we commented that the CFPB’s current leadership would likely attempt to use the survey to justify the CFPB’s current regulatory focus and lay the groundwork for future enforcement and rulemaking priorities.  In its white paper, ACA charges the CFPB with “potentially manipulating inconclusive results to promote the incorrect perception of debt collectors as predatory.”  ACA concludes that because “the data obtained by the CFPB through the consumer survey is insufficient at best and fundamentally flawed at worst,” it “cannot be used as the basis to properly inform the Bureau’s debt collection rulemaking efforts” and the CFPB “must conduct further study and analysis of the debt collection market before it will be positioned to issue evidence-based, comprehensive rules to regulate this complex industry.”

The analytical flaws and methodological shortcomings of the survey described by ACA include the following:

  • The survey was touted by the CFPB as representing “the first comprehensive and nationally representative data on consumers’ experiences and preferences related to debt collection.”  ACA calls the CFPB’s overall sample of individuals with experience with the debt collection industry “remarkably small,” with only 682 (32%) of the 2,132 survey respondents reporting that he or she was contacted by a debt collector.  ACA states that the CFPB’s claims about the representativeness and overall quality of the data are “undermined by an array of caveats found throughout the report.”  For example, the CFPB minimizes the survey data by describing the report as a “descriptive” exercise to “highlight patterns that may be of policy interest” and “to sketch, from consumers’ perspectives, the broad experience of debt collection.”  In addition, ACA observes that the CFPB leaves the reader without any basis for determining the degree to which the findings are representative of the population as a whole by acknowledging that the report “does not present standard errors or statements about the statistical significance of the differences [across groups of consumers.]”
  • The CFPB’s focus on percentages, coupled with a near-total absence of raw numbers or sample sizes for individual questions provides a limited context for interpreting responses or situating them within the larger sample.  For example, the CFPB reported that “almost one-third of consumers (32 percent) reported being contacted over the past year by a creditor or debt collector about a debt.”  ACA points out that “the inclusion of raw numbers enables a reader to clearly see that the percentage represents roughly 682 consumers out of the 2,132 surveyed.”
  • Many of the findings highlighted in the CFPB’s press release about the survey and Director Cordray’s related remarks relied “on the presentation of a percentage that obscures the total number of responses for a given question.”  For example, the CFPB’s press release highlighted the survey’s finding that “three-in-four consumers report that debt collectors did not honor a request to cease contact.”  According to ACA, “a more accurate description of this finding would note that the 75% of consumers who reported repeated contact after a request to cease communication are a subset of the 42% who requested contact cease [(about 215 consumers)]; this 42% is itself a subset of the 32% of the total sample that have been contacted about a debt in collection [(about 286 consumers)].”  Accordingly, ACA calls the “CFPB’s public statement that ‘three-in-four consumers’ were continuously contacted by debt collectors after requesting contact be ceased… an overt exaggeration.”  In ACA’s view, the CFPB has “implied harassing behavior on the part of debt collectors” by using “a tactic that serves to characterize the debt collection industry as problematic.”

In July 2016, in anticipation of convening a SBREFA panel, the CFPB issued an outline of the proposals it was considering for a rule covering “debt collectors” subject to the FDCPA.  At that time, the CFPB stated that it expected to conduct a separate SBREFA proceeding for a rule covering first-party creditors collecting their own debts and others engaged in debt collection not covered by the proposals.  The CFPB’s Fall 2016 rulemaking agenda indicated that the CFPB expected to convene a second SBREFA proceeding in 2017 and gave a February 2017 estimated date for further prerule activities (which would likely include testing of model validation notices and other disclosures.)

 

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