CFPB Rulemaking

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As we previewed earlier this year, the CFPB, on June 15, proposed substantive changes to the Prepaid Final Rule (the “Rule”).  The proposed changes are generally positive for prepaid providers and incorporate feedback and comments from industry representatives.  The proposal, however, does not lift the onerous restrictions on credit features currently in the Rule.  Because the proposal invites comments regarding extending the effective date, we expect the effective date, which was originally set for October 1, 2017 and then delayed to April 1, 2018, to be further delayed.

The proposal would reverse two controversial aspects of the Rule, and make several other changes:

  • Error Resolution and Limitation of Liability. One of the existing Rule’s most controversial mandates requires error resolution and limited liability protections on unregistered accounts (e., accounts that have not concluded the verification process, accounts where the process is concluded but the consumer’s identity could not be verified, and accounts in programs for which there is no such verification process).  The CFPB has apparently acknowledged these concerns engendered by this mandate, as the proposed rule would no longer require financial institutions to resolve errors or limit consumers’ liability on unregistered prepaid accounts.  The proposal would impose these obligations after a financial institution successfully completes its consumer identification and verification process.  The requirements would also apply retroactively to disputed transactions that occurred before verification was completed and that fell within the general timing requirements of the Rule.  If no verification process is available, financial institutions would be required to disclose to consumers the absence of, or limitations on, such protections.
  • Digital Wallets. The proposed rule also narrows the definition of “business partner” under Regulation Z to clarify the Rule’s application to digital wallets and to alleviate burdens for digital wallet providers.  Under the existing Rule, requirements such as a 30-day waiting period and additional disclosures are required to link a credit card issued by a business partner to a digital wallet, but these requirements do not apply to non-business partners, thereby creating disparity between credit cards in the wallet, as well as customer confusion.  Under the proposed rule, business arrangements between prepaid account issuers and issuers of traditional credit cards would be excluded from coverage under the Rule’s hybrid prepaid-credit card provisions as long as (1) the prepaid card cannot access credit from the credit card account during a prepaid card transaction without written consent to link the two accounts, (2) the acquisition or retention of either account is not conditioned on whether the consumer authorizes such a connection, and (3) the parties do not vary certain terms and conditions based on whether the two accounts are linked.  This change may not go as far as some would like because it does not completely exclude digital wallets that can store funds, or person-to-person (“P2P”) payment products from the Rule, but it does benefit digital wallets providers that allow consumers to link their debit and credit cards and to store and access funds.
  • Loyalty, award, and promotional gift cards. The existing Rule provides that loyalty, award, or promotional gift cards are excluded from the definition of “prepaid account” if the cards contain disclosures required by the Gift Card Rule.  But the Rule is not clear on how to treat loyalty, award, or promotional gift cards that are not marketed to the general public, and are therefore exempted from the Gift Card Rule’s disclosure requirements.  The proposed rule clarifies that loyalty, award, or promotional gift cards that are not marketed to the general public are not covered by the Rule, regardless of whether they provide disclosures under the Gift Card Rule.
  • Unsolicited Issuance. Regulation E provides that a financial institution may issue an access device for an account to a consumer only when solicited to do so by the consumer in response to an oral or written request for the device, or as a renewal of, or in substitution for, an accepted access device, or on an unsolicited basis in accordance with certain requirements. The current Rule raises questions about how the unsolicited issuance rules of Regulation E apply to prepaid accounts used for making disbursements where the consumer is given no other option but to receive the disbursement via a prepaid account, such as prison release cards, jury duty cards, and certain types of refund cards.  The proposed rule seeks to provide clarification – if an access device for a prepaid account is provided on an unsolicited basis where the prepaid account is used for disbursing funds to a consumer, and there are no alternative means for the consumer to receive those funds, the financial institution can comply with the unsolicited issuance rule by informing the consumer that there is no other way to access funds in the prepaid account if the consumer disposes of the access device.
  • Retail Location Exception. The existing Rule requires a financial institution to provide a long form disclosure after a consumer acquires a prepaid account at a retail location, and also requires the underlying information from this long form disclosure to be provided via the mandatory initial disclosures.  These initial disclosures must be provided at the time a consumer contracts for an electronic funds transfer (“EFT”) service or before the first EFT is made, and are thus typically provided inside the packaging of prepaid accounts sold at retail.  The CFPB considered feedback about this requirement from a trade association, which explained that, for at least some institutions, this requirement might necessitate a substantial increase in the size of the packages in order to accommodate the long form disclosure, thus requiring retooling of their “J-hook” packaging used at retail. The trade association suggested alternative methods of delivery such as sending the long form disclosure to the consumer by mail, or providing the disclosure electronically without E-Sign consent.  In response to these suggestions, the proposed rule provides that financial institutions that qualify for the retail location exception may deliver the long form disclosure after acquisition without E-Sign consent, “if it is not provided inside the prepaid account packaging material, and the financial institution is not otherwise mailing or delivering to the consumer written account-related communications within 30 days of obtaining the consumer’s contact information.”  The CFPB seeks comments on this proposal, and on whether financial institutions were, in fact, planning to include in their retail packaging the long form disclosure, and whether there are other accommodations the CFPB could make to the retail location exception to facilitate financial institutions’ inclusion of the long form disclosure inside retail packaging.
  • Pre-acquisition Disclosures. One of the primary reasons the CFPB opted to delay implementation of the existing Rule was its concern over the compliance burden posed by the Rule’s pre-acquisition disclosure requirements.  The proposed rule seeks to narrow the scope of several disclosure provisions to facilitate compliance and reduce burdens.  First, according to the CFPB, “if a financial institution provides pre-acquisition disclosures in writing, and a consumer subsequently completes the acquisition process online or by telephone, the financial institution need not provide the disclosures again electronically or orally.”  Second, financial institutions disclosing additional fee types with three or more fee variations would be able “to consolidate those variations into two categories and allow those two categories to be disclosed on the short form.”  Third, foreign language pre-acquisition disclosures would not be “required for payroll card accounts and government benefit accounts, where the foreign language is offered by telephone only via a real-time language interpretation service provided by a third party.”
  • Submission of Agreements. The proposed rule would make several changes to the Rule’s requirements regarding submission of prepaid account agreements to the CFPB to reduce compliance burdens:  (1) issuers could “delay submitting a change in the names of other relevant parties to a prepaid account agreement (such as employers for a payroll card agreement) until the issuer is submitting other agreement changes”; and (2) short form and long form disclosures could be provided as separate addenda to the agreement, rather than integrated into the agreement or provided as a single addendum.  The latter change is proposed due to recognition of the fact that, given the form and content requirements of the short form and long form disclosures, many issuers will likely create two separate documents, making the task of combining the documents into the agreement or a single addendum potentially “unnecessarily complex.”

The CFPB is also seeking comment on whether these proposed amendments would make a further delay of the Rule’s effective date (originally October 1, 2017, currently April 1, 2018) necessary or appropriate, and whether any conflict(s) exist between the Rule as amended and current federal regulation governing prepaid accounts, such that a safe harbor provision addressing compliance with the final Rule before its effective date is needed.

Comments are due 45 days after the proposed rule is published in the Federal Register.

With this proposed rule, the CFPB concurrently announced an updated version of its previously issued small entity compliance guide, which reflects the April 1, 2018 effective date and provides clarification on several issues.  For example, the guide clarifies that reversing a provisional credit does not otherwise trigger Regulation Z coverage under the Rule, and states that if a financial institution makes 12 months of account transaction history available through its website and also offers a mobile application, the mobile application need not provide a full 12 months of history.

While the Senate did not reject the Prepaid Final Rule under the Congressional Review Act (“CRA”), it is unclear whether this proposal, if adopted, would be subject to the CRA.  The CRA’s plain language, and at least one prior use of the CRA, suggests that the proposed amendments would be subject to review.  However, because the proposal largely favors industry participants, we think it unlikely that there will be a significant push for rejection under the CRA.

In his prepared remarks for today’s Consumer Advisory Board meeting, Director Cordray discussed CFPB initiatives in four areas.  In addition to the CFPB’s letter to the top retail credit card companies encouraging them to use zero-interest promotions instead of deferred-interest promotions and its new report on consumers transitioning to credit visibility, Director Cordray discussed the CFPB’s RFI on the small business lending market and its debt collection rulemaking.   

Last month, in conjunction with a field hearing, the CFPB issued the RFI, together with a white paper on small business lending.  In his remarks, Director Cordray revealed that, in response to requests for additional time to respond to the RFI (which currently has a July 14, 2017 comment deadline), the CFPB is extending the comment period by 60 days.  He also indicated that the CFPB has “been hearing from congressional officials who want to see more progress made on [the Section 1071] rulemaking” and that the CFPB is “now moving forward.”   

With regard to the CFPB’s debt collection rulemaking, Director Cordray discussed the debt collection proposals under consideration by the CFPB which it released last July in anticipation of convening a SBREFA panel.  The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  When it issued the proposals, the CFPB indicated that  it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals. 

In his remarks, Director Cordray described the proposals as focused on three primary issues: “mak[ing] sure that collectors are contacting the right consumers, for the right amount”; “mak[ing] sure that consumers clearly understand the debt collection process and their rights”; and “mak[ing] sure that consumers are treated with dignity and respect, particularly in their communications with collectors.”  He indicated that when the CFPB evaluated “the feedback we received on the proposals under consideration” (presumably the report of the SBREFA panel on the input received from the small entity representatives who met with the panel), it became clear that “[w]riting rules to make sure debt collectors have the right information about their debts is best handled by considering solutions from first-party creditors and third-party collectors at the same time.”  He observed that “[f]irst-party creditors like banks and other lenders create the information about the debt, and they may use it to collect the debt themselves.  Or they may provide it to companies that collect the debt on their behalf or buy the debt outright.  Either way, those actually collecting on the debts need to have the correct and accurate information.” 

He commented that because “breaking the different aspects of the informational issues into pieces in two distinct rules was shaping up to be troublesome in various ways,” the CFPB has decided to write a market-wide rule in which it will “consolidate all the issues of ‘right consumer, right amount’ into the separate rule we will be developing for first-party creditors, which will now cover these intertwined issues for third-party collectors and debt buyers as well.”   He indicated that this approach will allow the CFPB “to move forward more quickly with a proposed rule focused on the remaining issues” concerning disclosures by debt collectors and how consumers are treated by debt collectors and that “[o]nce we proceed with a proposed rule on these issues, we will return to the subject of collecting the right amount from the right consumer, which is a key objective regardless of who is collecting the debt.”

 

 

In a notice published earlier this week in the Federal Register, the CFPB announced that it plans to seek OMB approval to conduct an online survey of approximately 8,000 individuals as part of its research on debt collection disclosures.  Comments must be received on or before August 4, 2017.

Last July, in anticipation of convening a SBREFA panel for the CFPB’s debt collection rulemaking, the CFPB issued an outline of the proposals it is considering.  The panel met with small entity representatives to discuss the proposals last August.  The proposals included revisions to the form and content of the validation notice, new disclosures for time-barred debts, and a new “obsolescence disclosure” informing the consumer whether a time-barred debt can appear on a credit report.

In support of the OMB request, the CFPB has filed a sample of the survey questions and Supporting Statements Part A and Part B.  As described in Supporting Statement Part B, the survey would test a number of questions related to the disclosures the CFPB is developing in conjunction with its rulemaking, especially with regard to time-barred and “obsolete” debts.  The research will be conducted by a contractor retained by the CFPB that will subcontract with a survey research firm to assist with the administration of the survey.

Through the survey, the CFPB intends to test consumers’ comprehension and decision making using updated versions of disclosures previously used by the CFPB in a study.  The sample survey questions do not include the disclosures, which the CFPB states are “currently being developed.”

The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  Despite the CFPB’s statement when it issued the proposals last July that it expected to convene a second SBREFA panel in the “next several months” for creditors and others engaged in debt collection not covered by the proposals, it has not yet done so.

 

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.

 

 

 

On May 4, the CFPB announced that as part of its impending 5-year review of mortgage rules, it was proposing a plan to assess the effectiveness of the Real Estate Settlement Procedures Act (RESPA) mortgage servicing rule.  The proposed assessment plan focuses on the 2013 RESPA Servicing Final Rule, which was issued in January 2013 and amended before it became effective on January 10, 2014.  The CFPB intends to issue an assessment report no later than January 10, 2019. While this report will likely not include specific proposals to modify the rule, the CFPB states that the report will “help to inform the Bureau’s thinking as to whether to consider commencing a rulemaking proceeding in the future.”

The purpose of the assessment is to determine how well the 2013 RESPA Servicing Final Rule has met its objectives of (1) responding to borrower requests and complaints in a timely manner; (2) maintaining and providing accurate information; (3) helping borrowers avoid unwarranted or unnecessary costs and fees; and (4) facilitating review for foreclosure avoidance options.  The proposed assessment plan seeks to compare servicer and consumer activities and outcomes to a baseline that would exist if the 2013 RESPA Servicing Rule’s requirements were not in effect.  To do so, the CFPB will use loan-level data from a small number of servicers, data from the National Mortgage Database, and the American Survey of Mortgage Borrowers , consumer complaints, servicing data from a private vendor, and information obtained from supervision and enforcement activities.

The CFPB is soliciting comments on a variety of issues related to the assessment, including the feasibility and effectiveness of the assessment plan and recommendations for modifying, expanding, or eliminating the 2013 RESPA Servicing Rule.  Comments must be received 60 days after the CFPB’s notice is published in the Federal Register.

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.