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.

 

The DOJ submitted its amicus brief in the PHH case on Friday, March 17.  We have blogged extensively about this case since its inception. Unsurprisingly, the Trump DOJ supports striking from Dodd-Frank the removal-only-for-cause protection currently applicable to the director of the CFPB.  In its “view, the panel correctly applied severability principles and therefore properly struck down only the for-cause removal restrictions.”  If the DOJ gets its way, the CFPB would remain intact with a director that President Trump can replace at any time.

While PHH likely appreciates the DOJ’s support, the DOJ is advocating a more limited remedial measure than PHH is seeking.  As we’ve noted before, PHH is arguing in the case that the CFPB should be dismantled in its entirety because its “unprecedented independence from the elected branches of government violates the separation of powers” and because the CFPB’s “constitutional infirmities extend far beyond limiting the President’s removal power…the proper remedy is to strike down the agency in its entirety.”  In sharp contrast, the Trump DOJ supports keeping the CFPB intact with a director removable at the will of the President.

Though the brief does not highlight the fact, the Trump DOJ has departed substantially from the position that the DOJ took under President Obama.  The departure is most obvious in brief’s first footnote, where the DOJ notes that “[i]n one case filed against several federal agencies and departments . . ., [t]he [DOJ’s] district court briefs . . . argued that, based on the Supreme Court’s decision in Humphrey’s Executor, the CFPB’s for-cause removal provision is consistent with the Constitution.”  However, the footnote goes on, “[a]fter reviewing the panel’s opinion here and further considering the issue, the [DOJ] has concluded that the better view is that the provision is unconstitutional.”  The obviously political nature of the change makes it difficult to predict how the judges on the court will react to the DOJ’s brief.

Of course, the change at the DOJ is not reflected in the CFPB’s view, which is diametrically opposed to the DOJ’s.  It’s rare that two executive agencies disagree so starkly and so publicly on an issue of such importance.  This contrast only highlights the problems created by a federal agency headed by a single person that is not accountable to the president.

On February 28, 2017, B. Dan Berger, President and Chief Executive Officer of the National Association of Federally-Insured Credit Unions (the “NAFCU“), urged regulatory relief for credit unions in a letter submitted to the Secretary of the Treasury, Steven Mnuchin, in his capacity as Chairman of the Financial Stability Oversight Council (the “FSOC”), the voting members of which also include the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, the Director of the Consumer Financial Protection Bureau (the “CFPB“), the Chairman of the Securities and Exchange Commission, the Chairperson of the Federal Deposit Insurance Corporation, the Chairperson of the Commodity Futures Trading Commission, the Director of the Federal Housing Finance Agency, the Chairman of the National Credit Union Administration (the “NCUA“) and an independent member with insurance expertise.

The letter asserted that credit unions have been “improperly ensnared in a regulatory net that was not intended for them” and emphasized that Dodd-Frank and the CFPB were “designed to curb the bad practices of bad actors” as opposed to “credit unions [that] did not cause the financial crisis and have traditionally acted in good faith.”  It further emphasized that this unintended inclusion of credit unions has created an environment whereby “credit unions can no longer afford to review and comply with hundreds of regulations totaling thousands of pages.”  With this in mind, the NAFCU pressed Secretary Mnuchin to utilize consultations with the heads of the agencies of the FSOC—as required by President Trump’s “Executive Order on Core Principles for Regulating the United States Financial System” prior to the issuance of a 120-day report—to work closely with the NCUA to “uncover practical approaches to remedying Dodd-Franks’ regulatory misalignment.”

The NAFCU’s letter also urged scrutiny of the CFPB’s detrimental rulemaking impact on credit unions in light of the fact that credit unions are already subject to “strict field membership and capital restrictions” and “numerous consumer protection provisions in the Federal Credit Union Act.”  In particular, it asked Secretary Mnuchin to address CFPB actions that are especially burdensome on credit unions, such as those related to: (i) unfair, deceptive or abusive acts or practices, (ii) debt collection, (iii) qualified mortgages, (iv) mortgage servicing; (v) consumer complaints, (vi) Home Mortgage Disclosure Act requirements, (vii) overdraft programs, (viii) payday lending rules, (ix) arbitration and (x) small entity exemptions.

Finally, citing the recent changes in party affiliation with respect to the new administration and the composition of agency heads serving on the FSOC, the NAFCU urged the FSOC to review CFPB rules “that it believes pose a safety and soundness risk to the banking system or the stability of the financial system.”  Particularly, the NAFCU entreated the FSOC to use its authority under section 1023 of Dodd-Frank to stay and set aside CFPB regulations to “spur renewed dialogue between the Bureau and the federal banking agencies regarding rules that may actually pose systemic risk to financial institutions and the customers they serve.”

The CFPB sent industry trade groups a letter on October 1, 2015 to address the approach of the FFIEC member agencies during the initial months following the implementation of the TILA-RESPA Integrated Disclosure (TRID) rule on October 3, 2015. In the letter, the CFPB noted that it and the other FFIEC member agencies recognized the implementation challenges presented by the TRID rule and the significant efforts made by the industry to implement the rule. Notably, the letter acknowledges that “additional technical and other questions are likely to be identified once the new forms are used in practice after the effective date.”

The CFPB advises that during initial examinations for TRID rule compliance, examiners will look at an institution’s compliance management system and its overall efforts to comply. The CFPB also advised that examiners will expect institutions to make good faith efforts to comply in a timely manner, and will consider the institution’s implementation plan, including actions taken to update policies, procedures and processes; its training of appropriate staff; and, its handling of early technical problems or other implementation challenges.

As we previously reported earlier this year, the CFPB stated that it would be sensitive to the progress made by institutions that have squarely focused on making good faith efforts to come into compliance with the TRID rule on time. In 2013, the CFPB made a similar statement regarding its approach to assessing compliance with the mortgage rules that became effective in January 2014, as we reported.

Fannie Mae and Freddie Mac (collectively, the “GSEs”) also released guidance to their sellers explaining that they expect lenders to make good faith efforts to comply with the TRID rule in a timely manner as well. While the GSEs will evaluate whether a lender used the correct forms, until further notice, the GSEs will not conduct routine post-purchase loan file reviews for technical compliance with the TRID rule during this transitional period. However, the GSEs also advised that they will exercise contractual remedies, including repurchase, in the following two “limited circumstances”: (1) the required form is not used, or (2) if a particular practice would impair enforcement of the note or mortgage or would result in assignee liability, and a court of law, regulator or other authoritative body has determined that such practice violates the TRID rule. Fannie Mae also indicated that it will post FAQs on its website that will answer additional questions about the TRID rule.

The efforts of the CFPB and other FFIEC member agencies fall short of requests by the industry that institutions who have acted in good faith to implement the TRID rule be protected from legal liability for a transitional period. As we have described, H.R. 3192, entitled the “Homebuyers Assistance Act,” would provide a hold harmless period for the TRID rule until February 1, 2016. The bill provides that a suit cannot be filed for violations of TRID before then as long as good faith efforts are made to comply. H.R. 3192 passed in the House on October 7, 2015 and will be reviewed by the Senate.

The CFPB has issued a final rule postponing the effective date for all provisions of the TILA-RESPA Final Rule and Amendments to October 3, 2015.  The final rule also includes certain technical amendments to reflect the new effective date.  The provisions of the final rule related to the delay in the effective date, are effective immediately upon publication in the Federal Register in order to move the effective date for TILA-RESPA Final Rule and Amendments from Saturday, August 1, 2015 to Saturday, October 3, 2015.  The Federal Register that contains the finalized rule is scheduled to be published on July 24, 2015.

The final rule also makes two technical changes to the TILA-RESPA Final Rule that were not in the proposed rule.  Specifically, the final rule amends § 1026.38(i)(8)(ii) and (iii)(A) to include, in the amount disclosed as “Final” for Adjustments and Other Credits, the amount disclosed under § 1026.38(j)(1)(iii) for certain personal property sales in order to conform the calculation of Adjustments and Other Credits on the Closing Disclosure and Loan Estimate.  The final rule also attempts to conform the disclosure of the borrower’s cash to close in the Calculating Cash to Close and the Summaries of Transactions tables on the Closing Disclosure by amending § 1026.38(j)(1)(iv) to include, in the amount disclosed as Closing Costs Paid at Closing, lender credits disclosed under § 1026.38(h)(3).  According to the preamble, these “technical corrections are in line with existing industry expectations and informal Bureau guidance.”

As we previously reported, due to an administrative error the CFPB committed under the Congressional Review Act, the TILA-RESPA Final Rule would have been delayed by two weeks until August 15, 2015.  According to Director Cordray, the CFPB believes that the additional time provided by the new October 3, 2015 effective date will “better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year.”  In addition, the preamble also notes that the CFPB noticed “delays in the delivery of system had left some creditors with limited time to fully test all of their systems and system components to ensure that each system works with the others in an effective manner.”

Finally, the preamble to the final rule repeats the CFPB’s vow that it will not institute either a formal grace period or a dual compliance period as requested by many in the industry and Congress. However, the preamble states that, as expressed in Director Cordray’s letter to members of Congress on June 3, 2015, the CFPB’s “oversight of the implementation of the Rule will be sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the rule on time.”

The CFPB along with five other federal agencies have issued a final rule that establishes minimum state registration and substantive requirements for appraisal management companies (AMCs), as required by Section 1473 of the Dodd-Frank Act.  AMCs that are a subsidiary of an insured depository institution and are federally regulated (federally regulated AMCs) are subject to the substantive requirements of the rule, but are not subject to state registration or supervision requirements.  The final rule also requires states to report to the Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examinations Council (FFIEC) information required by the ASC to administer the new national registry of the AMCs (AMC National Registry), which includes both state-registered AMCs and federally regulated AMCs. The other federal agencies issuing the rule are the federal banking agencies, the Federal Housing Finance Agency, and the National Credit Union Administration (NCUA).

As we previously reported, for purposes of the rule an AMC is an entity that provides appraisal management services in connection with consumer credit transactions secured by a consumer’s principal dwelling or securitizations of those transactions to creditors or to secondary mortgage participants.  In particular, an AMC is a company that meets the statutory panel size threshold, which means a company that oversees an appraiser panel of more than 15 state-certified or licensed appraisers in a single state, or 25 or more state-certified or licensed appraisers in two or more states.  An appraiser panel is defined as a network of licensed or certified appraisers approved by an AMC to perform appraisals as independent contractors (i.e., non-W2 employees) for the AMC.  For the purposes of calculating the number of appraisers on an AMC’s appraiser panel, the count is based on the number of appraisers listed on the AMC’s roster who are potentially available to perform appraisals rather than the number of appraisers actually engaged to perform appraisals.

The minimum registration and substantive requirements established by the final rule apply to states that have elected to establish an appraiser certifying and licensing agency with authority to register and supervise AMCs that meet the standards.  The rule does not preclude a state from establishing additional requirements for state-registered AMCs.

The final rule does not require that a state establish an AMC regulatory regime, but there is a significant negative consequence if a state elects not to adopt such a regime.  If a state has not adopted a regulatory structure after 36 months from the effective date of this final rule, any non-federally regulated AMC would be prohibited from providing appraisal management services for federally-related mortgage transactions (i.e., credit transactions involving a federally regulated depository institution) in the state.  Furthermore, the federal agencies and the ASC will not serve as a “back-up” regulator to register and supervise AMCs in non-participating states.  Consequently, the only AMCs that would be able to provide appraisal management services for federally-related transactions in such states would be non-federally regulated AMCs that are below the statutory panel size and federally regulated AMCs.  (For a state that does not meet the 36 month timeframe, there is a process for the ASC to delay the restriction on non-federally regulated AMCs for one year if the state has made substantial progress toward implementation of a compliant regulatory system.)

Even if the restriction on non-federally regulated AMCs is triggered in a state, the state may later lift the restriction by adopting a regulatory structure for AMCs at any point after the three year implementation period has passed.

Among the minimum requirements to be applied by states, the final rule requires participating states to ensure that AMCs: (1) register with or obtain a license from the state and be subject to regulatory supervision; (2) contract with or employ only state-certified or licensed appraisers for federally related transactions; (3) select appraisers who are independent of the transaction and who have the requisite education, expertise, and experience necessary to competently complete appraisal assignments for the particular market and property type; (4) require that appraisals comply with the Uniform Standards of Professional Appraisal Practice (USPAP); and (5) establish policies and procedures to ensure compliance with the appraisal independence standards established under Truth in Lending Act.

An AMC that is a federally regulated AMC must comply with same minimum requirements as state-registered AMCs, but is not required to register with a state. A federally regulated AMC must also register with the AMC National Registry and report directly to the participating state or states in which it operates the information required by the ASC for the AMC National Registry.

Consistent with the proposed rule, the final rule does not require any additional federal registration fees to be paid in connection with registration on the AMC National Registry.  According to the preamble, the final rule governs how to calculate the number of appraisers on a panel only for the purposes of determining whether an entity is an AMC subject to the AMC minimum requirements, not for the purpose of determining the annual AMC National Registry fee. Pursuant to the Dodd-Frank Act, it is the ASC, and not the federal agencies, that is responsible for establishing any potential AMC National Registry fee.

In addition, the CFPB believes that the rule does not impose requirements on AMCs (other than federally regulated AMCs), but merely encourages states to adopt the minimum registration and substantive requirements for AMCs.  According to the CFPB in the preamble, “the final rule is not prescriptive as to how or when the states must exercise the authority or mechanisms.  Exercise of such authority and mechanisms is determined at the discretion of the states, subject to monitoring by the ASC for effectiveness in the judgment or discretion of the ASC.”  Thus, it appears that the CFPB’s position is that any fees that are charged to AMCs are attributable to states exercising their implementation authority and/or ASC oversight expectations rather than to the final rule itself.

Note that the AMC minimum standards do not affect the responsibilities of banks, federal savings associations, state savings associations, bank holding companies, and credit unions for compliance with applicable regulations and guidance concerning appraisals.  An institution that engages a third party, such as an AMC, to administer any part of the institution’s appraisal program remains responsible for compliance with applicable laws concerning appraisers and appraisals.

As of November 2014, 38 states have passed an AMC licensing and registration law.  Thus, with the issuance of the final rule, the federal agencies are stepping up the pressure on the remaining states to adopt a regulatory structure for AMCs.

The final rule will become effective 60 days after publication in the Federal Register.  Federally regulated AMCs must comply with the substantive requirements of the rule no later than 12 months from the effective date of the final rule.  Participating states will specify the compliance deadline for state-regulated AMCs.  Publication of the final rule is expected shortly.

On May 21, 2015, from 2:00pm to 3:30pm, the FDIC’s Division of Depositor and Consumer Protection will host a teleconference as part of its periodic series of events for bankers on important bank regulatory and emerging issues in the compliance and consumer protection area.  According to the announcement, the upcoming teleconference will focus on the implementation of the CFPB’s mortgage rules.  Specifically, the FDIC will share observations that FDIC examiners have noted during initial examinations and highlight a number of practices currently used by some institutions that might be useful to bank compliance officers.  The announcement provides no indication whether the CFPB staff will participate in the call.

The session is free, but registration is required.

Taking its inspiration from Elvis Costello’s song lyrics, “peace, love and understanding” is how the FTC describes its “cooperative relationship” with the CFPB in a blog post about the reauthorization of the Memorandum of Understanding (“MOU”) entered into by the two agencies on January 20, 2012.

The MOU had an initial term of three years, and when it was signed, Chris Willis wrote about the MOU’s implications for nonbank entities.  Among the topics it addressed were enforcement, rulemaking and guidelines, supervision and examination (including, most notably, the sharing of examination reports and confidential supervisory information), consumer complaints, and information sharing and confidentiality.

The new MOU, which also has a three-year term, makes what the FTC describes as “a few small administrative tweaks” to the initial MOU.  The reauthorization of the MOU is not surprising since, as the FTC writes in its blog post, the two agencies are “in harmony” about consumer protection.

On October 22, 2014, six federal agencies adopted the final Credit Risk Retention Rule under Section 941 of the Dodd-Frank Act.  The final rule will require sponsors of securitizations to retain an economic interest in the assets that they securitize.

When members of the Federal Reserve voted unanimously to adopt the final rule, they expressed hope that its implementation will address concerns about the risk taking that contributed to the financial crisis.  According to Chair Janet Yellen, “Often called “skin in the game,” risk retention requirements better align the interests of sponsors and investors by providing an economic incentive for sponsors to monitor the quality of securitized assets.”

Pursuant to the Dodd-Frank Act, the final rule is being issued jointly by the SEC, FDIC, Federal Reserve, OCC, FHFA, and HUD.  The final rule generally requires sponsors of asset-backed securities to retain not less than five percent of the credit risk underlying the securities and does not permit sponsors to transfer or hedge that credit risk.

The rule also provides exemptions for certain securitizations, including securitizations of qualified residential mortgages (QRM).  Further, the rule aligns the QRM definition with that of a qualified mortgage as defined by the CFPB.  The final rule requires the agencies to review the definition of QRM within four years after the effective date of the rule with regard to the securitization of residential mortgages and every five years thereafter.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

Read our Legal Alert for further information on the Credit Risk Retention Rule.