CFPB Rulemaking

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On September 21, the CFPB finalized its 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 (the “Final Rule”).  This Final Rule is effective on January 1, 2018, the same effective date for most of the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule.  The amendment removing the existing “Uniform Residential Loan Application” form is effective January 1, 2022.

Generally, the amendments set forth in the Final Rule are being adopted as proposed.  The Final Rule institutes four primary changes to Regulation B:

  1. Applicant Information Collection for Regulation B Creditors. The Final Rule gives 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 allows 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 may either use existing aggregated categories or the new disaggregated race and ethnicity categories.  The flexibility may be helpful for institutions that move in and out of being a HMDA reporting entity.
  2. Applicant Information Collection for HMDA Reporters. The Final Rule allows 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 also may benefit institutions move in and out of being a HMDA reporting entity, and institutions that may be uncertain about their reporting status.
  3. Regulation B Model Forms. The Final Rule removes the outdated 2004 Uniform Residential Loan Application (URLA) as a model form, and provides a new, one-page data collection model form that can be used to collect the revised HMDA demographic data until the 2016 URLA prepared by Freddie Mac and Fannie Mae is implemented.  As we reported previously, last year the CFPB added the 2016 URLA as a model form to Regulation B.
  4. Voluntary Collection Authorizations. The Final Rule authorizes a financial institution that is subject to only (1) the requirement to report closed-end loans, to voluntarily report home equity lines of credit (HELOCs), and (2) to the requirement to report HELOCs, to voluntarily report closed-end loans.  Moreover, the CFPB is adopting two recommendations from industry commenters that were not contained in the proposed rule.  First, a financial institution may collect applicant demographic information for dwelling-secured business loans that are not reportable because the loans are not for the purposes of home purchase, refinancing, or home improvement.  Second, the Final Rule permits, but does not require, creditors to collect applicant demographic information from a second or additional co-applicant.  The HMDA rule requires the collection of the information for the applicant and first co-applicant.

In a press release issued earlier this week, Senator Elizabeth Warren argued that the CFPB’s arbitration rule should not be repealed under the Congressional Review Act because consumers recovered “in only 9 percent of the disputes that arbitrators resolved” and the average award “is only 12 cents for every dollar they claimed.”  Senator Warren attributed those statistics to a “fact sheet” published on August 1, 2017 by the Economic Policy Institute (“EPI”) titled “Correcting the Record — Consumers fare better under class actions than arbitration.”  Unfortunately, these statistics obfuscate the record, rather than correcting it, and create the misimpression that consumers fare very poorly in arbitration compared to class action litigation.  That is not the case.  Let’s look at the math:

  1. In its 2015 study of consumer arbitration, the CFPB examined a total of 1847 consumer financial services arbitrations administered by the American Arbitration Association filed between 2010 and 2012.
  2. For purposes of analyzing substantive arbitration outcomes, the CFPB eliminated cases filed in 2012, leaving a total of 1060 arbitrations filed in 2010-2011.
  3. Of these 1060 arbitrations, 246 arbitrations (23.2%) settled, 362 arbitrations (34.2%) ended in a manner consistent with settlement and 111 arbitrations (10.5%) ended in a manner inconsistent with settlement although it is possible that settlements occurred. The CFPB did not include these “settlement” arbitrations in its analysis of substantive arbitration outcomes because “[t]here are almost no consumer financial arbitrations for which we know the terms of settlement.”  However, there were six credit card arbitrations where the CFPB did know the settlement terms.  One settlement provided for a monetary payment to the consumer, and three settlements provided for an amount of debt forbearance.
  4. In the remaining 341arbitrations, arbitrators made a determination regarding the merits of the parties’ disputes. Of those 341 arbitrations, there were 161 arbitrations in which an arbitrator rendered a decision with respect to a consumer’s affirmative claim against a company.  This means that 180 of the 341 arbitrations involved disputes in which consumers did not assert affirmative claims — i.e., debt collection claims by a company against a consumer.
  5. In three of the 161 arbitrations, CFPB could not determine the results. Of the remaining 158 arbitrations, arbitrators provided some kind of relief in favor of consumers’ affirmative claims in 32 cases (20.3%).  In these 32 cases, the average award to the consumer was about $5,400.
  6. Let’s turn now to the assertion by Senator Warren and EPI that consumers recovered in only “9 percent” of the disputes. No explanation was given for that number, but it apparently was derived by dividing the number of cases in which consumers obtained relief on their affirmative claims (32) by the 341 cases in which the arbitrator made a determination regarding the parties’ disputes. That was Mistake # 1.  180 of the 341 arbitrations were debt collection arbitrations by companies against consumers, so they were not arbitrations in which consumers were even seeking affirmative relief from the company.  Leaving those 180 cases in the equation is mixing apples and oranges.  To compare apples to apples, the 32 cases in which the arbitrator actually provided affirmative relief to consumers should have been divided by the 158 cases in which the consumer was actually seeking affirmative relief.  That percentage is 20.3%, as the CFPB indicated in its study.  So the statement that consumers recovered in only “9 percent” of the disputes is incorrect.
  7. Mistake # 2 was omitting any consideration of the 719 consumer arbitrations that settled or may have settled, according to the CFPB. Just because a case settles does not mean that the consumer did not come away with a monetary payment or some amount of debt forbearance.  In fact, the opposite is likely true — a case settles because the parties found a way to compromise their positions and resolve their dispute.  In fact, as noted above, the CFPB was able to identify six credit card arbitration settlements, and in four of them consumers did receive either a monetary payment or an amount of debt forbearance.  Indeed, all of the CFPB’s statistics on class actions in its arbitration study were derived from class action settlements, since none of the class actions studied by the CFPB actually went to trial.
  8. This means that the data field for measuring consumer success in arbitrations was actually 749 arbitrations — 32 arbitrations in which consumers actually obtained relief on affirmative claims, plus 717 arbitrations that settled (719 minus the two credit card settlements in which consumers did not obtain relief). Therefore, of the 1060 arbitrations filed in 2010-2011, consumers either did or may have come away with a monetary payment or some amount of debt forbearance in as many as 71% of the arbitrations.
  9. Notably, Professor Christopher Drahozal, who served as a Special Advisor to the CFPB in connection with its arbitration study, also conducted a study of more than 300 American Arbitration Association arbitrations in 2009 for the Northwestern University Searle School of Law.  He concluded that consumers won relief in 53.3% of the arbitrations.

With respect to the statement in the press release that the average consumer award “is only 12 cents for every dollar they claimed,” once again no consideration was given to amounts received by consumers in settlement, which certainly would have increased this calculation.   Notably, the CFPB did conclude that in arbitrations in which the consumer asserted an affirmative claim against the company and the arbitrator reached a decision on the merits, consumers recovered 57 cents for every dollar claimed.  The CFPB also concluded that consumers obtained debt forbearance in 19.2% of disputes in which debt forbearance was sought and the arbitrator made a decision.  The average debt forbearance was $4,100, which was 51 cents of each dollar of debt forbearance claimed.  None of these statistics was mentioned in Senator Warren’s press release or the EPI fact sheet.

Another statistic in the press release and fact sheet that bears scrutiny is that when companies bring arbitration claims against consumers, “they win 93 percent of the time.”  While that number is consistent with the CFPB’s findings, it is taken completely out of context.  These claims were debt collection claims by companies in which the consumer either defaulted or had no defenses or very weak ones.  What the press release and fact sheet fail to state is that the result would not have been any different in court.  This precise point was made by the Maine Bureau of Consumer Protection in a 2009 report to the Maine Legislature on consumer arbitrations:

[I]t is important to keep in mind that although credit card banks and assignees prevail in most arbitrations, this fact alone does not necessarily indicate unfairness to consumers.  The fact is that the primary alternative to arbitration (a civil action in court) also most commonly results in judgment for the plaintiff.  Although certainly there are cases in which a consumer has a valid defense to the action, it is also correct to say that most credit card cases result from a valid debt and a subsequent inability of the consumer to pay that debt.

(Emphasis added).  Also, the success rate in debt collections claims by companies is irrelevant to the question of whether class actions are better for consumers than arbitration because such debt claims are completely individualized and not susceptible to class action treatment.   The fact that companies “win 93% of the time” does not support the conclusion that class actions should replace arbitration as the forum for resolving consumer disputes.

By the CFPB’s own calculations, 87% of the class actions studied provided no relief at all to the putative class members, while in the 13% of class actions that settled, the average payment to putative class members was a paltry $32.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.  These are not numbers that support the additional 6,042 class actions that the CFPB estimates will be filed over the next five years if the arbitration rule is not repealed.  Nor are they numbers that justify the $2.6 billion to $5.2 billion that companies will have to spend defending them.

Even the CFPB did not find arbitration to be a system rigged against consumers.  If it had found arbitration to be unfair, it would not have allowed companies to continue to engage in individual arbitrations with consumers.   However, very few companies are expected to retain individual arbitration programs if the CFPB rule takes effect.  That is because companies subsidize almost all of the costs of individual arbitrations, and few of them will continue to pay those costs while also spending many billions of dollars defending against the 6,042 new class actions that will be filed against them as a result of the rule.

Senator Warren’s press release states that “consumers rarely pursue individual arbitration.”  But that is because most consumers resolve disputes through the use of companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies including the CFPB itself.  Moreover, although the CFPB has a Consumer Education and Engagement division and virtually unlimited resources, it did not spend a single dollar trying to educate consumers about arbitration.

When all of the relevant numbers and facts are considered, there is only one conclusion — the CFPB arbitration rule must be repealed so that consumers can continue to enjoy the many benefits that arbitration affords them in resolving disputes with companies.  If the rule is repealed, Congress would still be able to issue a regulation supporting the use of arbitration as a vehicle for resolving consumer disputes, if it chose to do so.  For example, such a regulation could require companies using arbitration to provide enhanced disclosures to consumers.  It could also require the CFPB to devote some of its resources to educating consumers about arbitration so that they will be more knowledgeable and better equipped to use it.

Much attention has been devoted to the issuance very soon of the CFPB’s small-dollar lending rule.  I thought that once that rule was issued, Richard Cordray would soon thereafter resign as Director to return to Ohio to run for Governor.  However, based on a very reliable source, I now believe that Director Cordray will issue a Notice of Proposed Rulemaking regarding Part I of the debt collection rule (“NPR”) before he resigns.  I believe that the NPR will be issued during September.  Perhaps, that shouldn’t be considered a surprise since the CFPB’s Spring 2017 rulemaking agenda did give a September 2017 estimated date for the issuance of a proposed debt collection rule.  Since the CFPB has a track record for missing estimated deadlines in its rulemaking agendas, I did not think that the CFPB would meet the September 2017 deadline for the proposed debt collection rule.

On June 8, 2017 during the last meeting of the CFPB’s Consumer Advisory Board, Director Cordray revealed a new plan regarding the debt collection rulemaking.  He indicated that Part I of the debt collection rulemaking will concern disclosures by third-party debt collectors and how consumers are treated by third-party debt collectors.  Part II of the debt collection rulemaking will cover the subject of collecting the right amount from the right consumer.  Part II is expected to cover both first-party and third-party debt collectors.

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank.  The adjustments reflect changes in the Consumer Price Index in effect on June 1, 2017 and will take effect January 1, 2018.

CARD Act.  The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor.  The calculation did not result in a change for 2018 to the current minimum interest charge threshold (which requires disclosure of any minimum interest charge above $1.00).  The calculation also did not result in a change for 2018 to the first and subsequent violation safe harbor penalty fees.  Such fees remain at $27 and $38, respectively.

HOEPA.  HOEPA requires the CFPB to annually adjust the total loan amount and fee thresholds that determine whether a transaction is a high cost mortgage.  In the final rule, for 2018, the CFPB increased the current total loan amount threshold from $20,579 to $21,032, and the current points and fees threshold from $1,029 to $1,052.  As a result, in 2018, a transaction will be a high-cost mortgage (1) if the total loan amount is $21,032 or more and the points and fees exceed 5 percent of the total loan amount, or (2) if the total loan amount is less than $21,032 and the points and fees exceed the lesser of $1,052 or 8 percent of the total loan amount.

Ability to repay/QM rule.  Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan cannot exceed to satisfy the requirements for a QM.  The CFPB must also annually adjust the related loan amount limits.  In the final rule, the CFPB increased these limits for 2018 to the following:

  • For a loan amount greater than or equal to $105,158 (currently $102,894), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $63,095 (currently $61,737) but less than $105,158, points and fees may not exceed $3,155
  • For a loan amount greater than or equal to $21,032 (currently $20,579) but less than $63,095, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $13,145 (currently $12,862) but less than $21,032, points and fees may not exceed $1,052
  • For a loan amount less than $13,145 (currently $12,862), points and fees may not exceed 8 percent of the total loan amount

 

In July, the CFPB finalized amendments to the TILA/RESPA Integrated Disclosure (TRID) rule.   Published in the Federal Register earlier this month, the amendments will become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018.

The CFPB has just released a 24-page summary of the amendments, with citations to the sections of the rule that were amended.

 

According to a Wall Street Journal article published this past weekend, “people familiar with the matter” are reporting that the CFPB’s final payday loan rule will be narrower in its coverage than the CFPB’s proposed rule.

The CFPB’s proposal established limitations for a “covered loan” which could be either (1) any short-term consumer loan with a term of 45 days or less; or (2) a longer-term loan with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains either a lien or other security interest in the consumer’s vehicle or a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account or obtain payment through a payroll deduction or other direct access to the consumer’s paycheck.  The proposal excluded from coverage purchase-money credit secured solely by the car or other consumer goods purchased, real property or dwelling-secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and overdraft lines of credit, and apparently credit sale contracts.

According to the WSJ article, the final rule is expected to cover only short-terms loans with a term of less than 45 days (presumably subject to the same exclusions contained in the proposal).  The article indicated that the final rule is now undergoing a peer review by other agencies, including the OCC and FDIC, with an early September deadline for completion.  It also reported that a CFPB spokesman indicated that the CFPB is “nearing the end of its rule-making process.”

 

A report by the majority staff of the House Financial Services Committee concludes that there is a “valid and factual basis” for instituting contempt of Congress proceedings against Director Cordray.  The report states that it was issued in furtherance of “the Committee’s on-going investigation into the CFPB’s arbitration rulemaking.”

The report recites the history of what the majority staff calls “the CFPB’s longstanding failure to fully comply with the Committee’s on-going oversight regard pre-dispute arbitration. The report describes the Committee’s request for records relating to the CFPB’s arbitration rulemaking issued in April 2016, the CFPB’s failure to produce the requested records, the subpoena issued by the Committee to Director Cordray in April 2017 requiring production of the requested arbitration-related records as well as documents requested by the Committee on other topics, and Director Cordray’s default on the subpoena.

The report focuses on the two specifications in the subpoena related to the arbitration rulemaking.  One specification required production of “all documents relating to pre-dispute arbitration agreements between the CFPB and [specified consumer advocacy groups.]”  The other specification required production of “all communications from one CFPB employee to another CFPB employee relating to pre-dispute arbitration agreements.”  The majority staff provides a detailed explanation for their finding that Director Cordray has defaulted on the two specifications and that due to such default, there is “ample basis to proceed against [him] for contempt of Congress.”

Politico has reported that Jen Howard, a CFPB spokesperson, issued a written statement in which she indicated that the CFPB has “been working diligently to comply with the committee’s oversight on a number of fronts,” and “[o]n this particular matter, we have produced thousands of pages of documents thus far, and by next week we will have completely responded to one of the two specifications at issue.”

The Committee has not yet taken a contempt vote.  We hope the report may help persuade Republican Senators who are reportedly undecided on how they will vote on the resolution introduced in the Senate to disapprove the CFPB’s arbitration rule under the Congressional Review Act to vote in favor of the resolution.

A group of 11 trade associations have sent a letter to members of Congress expressing their “strong disapproval” of the CFPB’s final arbitration rule and urging Congress to pass the resolutions introduced in the House and Senate that provide for Congressional disapproval of the rule under the Congressional Review Act.  (The House resolution, H.J. Res. 111, was passed yesterday by the full House.)  The trade associations include the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Financial Services Roundtable, and U.S. Chamber of Commerce.

In the letter, the associations discuss the following reasons for their disapproval of the arbitration rule:

  • The CFPB’s arbitration study is incomplete and the data that was accumulated, and conclusions based on that data, does not support the rule
  • The rule is contrary to the public interest and fails to enhance consumer protection
  • The rule enriches trial attorneys at the expense of consumers

 

Yesterday afternoon, the House of Representatives, by a 231-190 partisan vote, passed H.J. Res. 111 which provides for Congressional disapproval under the Congressional Review Act (CRA) of the CFPB’s final arbitration rule.  The rule was published on July 19, 2017 in the Federal Register.

Under the CRA, to override the arbitration rule, both the House and Senate must pass a resolution of disapproval within 60 legislative days by a simple majority vote.  While a disapproval resolution has already been introduced in the Senate, a vote is not expected to take place until September.  Several Republican Senators are reported to be undecided on how they will vote.  Assuming all Democratic Senators oppose the resolution as expected, Republicans can only lose two votes and still pass the resolution.

The White House also issued a “Statement of Administration Policy” setting forth its support for H.J. Res. 111.   The Statement describes the resolution as consistent with Executive Order 13772, Core Principles for Regulating the United States Financial System, because it “would protect consumer choices by eliminating a costly and burdensome regulation and reining in the bureaucracy and inadvisable regulatory actions of the CFPB.”  The Statement indicates that “[i]f H.J. Res. 111 were presented to the President in its current form, his advisors would recommend that he sign it into law.”

 

Yesterday at 5:00 p.m., the House Rules Committee, by a 9-4 partisan vote, reported a rule on H.J. Res. 111 with a recommendation that the resolution be adopted.  H.J. Res. 111 provides for Congressional disapproval under the Congressional Review Act (“CRA”) of the CFPB’s Arbitration Rule which was published on July 19, 2017 in the Federal Register.  The full House is scheduled to vote on H.J. Res. 111 today.  It is widely expected that the House will easily pass the resolution.

Under the CRA, in order to override the CFPB’s Arbitration Rule, within 60 legislative days both the House and the Senate must pass a resolution by a simple majority vote overriding the Arbitration Rule and President Trump must sign the resolution.  Since the Republicans have a slim 52-48 margin in the Senate with Vice President Pence getting a tie-breaker vote, they can only lose 2 votes and still pass the resolution, assuming as expected, that all Democratic Senators will oppose the resolution.  Reportedly, there are a few Republican Senators who are undecided on how they will vote.  While a resolution has already been introduced in the Senate, it is not expected that a vote will take place until September.