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

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

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  • Bureau regulatory expansion of data beyond the statute should be rescinded.
  • Dodd-Frank expansion of HMDA data fields should be repealed.

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

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

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

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

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

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

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

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

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

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

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

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

For years many industry participants wondered if allowing their real estate agents or loan officers to engage in co-marketing on Zillow Group applications and websites posed a risk to their companies under RESPA.  The industry may soon know the answer, as Zillow Group advised in recent prepared remarks on first quarter earnings that “Over the past two years, the Consumer Financial Protection Bureau, or CFPB, has been reviewing our program for compliance with the Real Estate Settlement Procedures Act, or RESPA, which is a regulation designed to protect consumers.”

To say that the CFPB is not a fan of marketing arrangements between settlement service providers is an understatement.  We previously reported on an October 2015 bulletin in which the CFPB addressed its experiences with such marketing arrangements.  The CFPB stated “In sum, the Bureau’s experience in this area gives rise to grave concerns about the use of [marketing services agreements] in ways that evade the requirements of RESPA.”  The recent announcement by Zillow may cause industry members to assess co-marketing arrangements.

While the Zillow announcement indicates that the CFPB investigation has occurred over the past two years, the apparent reason for the announcement is the disclosure that “Recently, the CFPB requested additional information and documents from us as part of their evaluation, which we are working with them on.”  Zillow also notes that it considers its co-marketing program to be compliant, and that it has continually encouraged consumers to shop around while looking for a mortgage.

 

 

The CFPB’s newly-released Spring 2017 edition of Supervisory Highlights covers supervisory activities generally completed between September and December 2016.  The report indicates that  supervisory resolutions resulted in restitution payments of approximately $6.1 million to more than 16,000 consumers and notes that “[r]ecent non-public resolutions were reached in several auto finance origination matters.”  It also indicates that recent supervisory activities have either led to or supported five recent public enforcement actions, resulting in over $39 million in consumer remediation and $19 million in civil money penalties.  The five enforcement actions are described in the report.  (They include the CFPB’s March 2017 consent order with Experian and its December 2016 consent order with Moneytree.)

The report includes the following:

Mortgage origination.  The report discusses compliance with the Regulation Z ability-to-repay (ATR) requirements, specifically how examiners assess a creditor’s ATR determination that includes reliance on verified assets rather than income.  It states that to evaluate whether a creditor’s ATR determination is reasonable and in good faith, examiners will review relevant lending policies and procedures and assess the facts and circumstances of each extension of credit in sample loan files.  After determining whether a creditor considered the required underwriting factors, examiners will determine whether the creditor properly verified the information it relied upon to make an ATR determination.  When a creditor relies on assets and not income for an ATR determination, examiners evaluate whether the creditor reasonably and in good faith determined that the consumer’s verified assets were sufficient to establish the consumer’s ability to repay the loan according to its terms in light of the creditor’s consideration of other required ATR factors (such as the consumer’s mortgage payments on the transaction and other debt obligations).  The report states that in considering such factors, a creditor relying on assets and not income could, for example, assume income is zero and properly determine that no income is necessary to make a reasonable determination of the consumer’s ability to repay the loan in light of the consumer’s  verified assets.  (The report notes that a creditor that considers monthly residual income to determine repayment ability for a consumer with no verified income could allocate verified assets to offset what would be a negative monthly residual income.)

The report also discusses a creditor’s reliance on a down payment to support the repayment ability of a consumer with no verified assets or income.  It states that a down payment cannot be treated as an asset for purposes of considering a consumer’s assets or income under the ATR rule and, standing alone, will not support a reasonable and good faith determination of ability to repay.  The report also indicates that even where a loan program as a whole has a history of strong performance, the CFPB “cannot anticipate circumstances where a creditor could demonstrate that it reasonably and good faith determined ATR for a consumer with no verified income or assets based solely on down payment size.”

Mortgage servicing.  The report indicates that examiners continue to find “serious problems” with the loss mitigation process at certain servicers, including “one or more servicers” that after failing to request additional documents from borrowers needed to obtain complete loss mitigation applications denied the applications for missing such documents.  In particular, examiners found that “one or more servicers” did not properly classify loss mitigation applications as facially complete after receiving the documents and information requested in the loss mitigation acknowledgment notice and failed to provide the Regulation X foreclosure protections for facially complete applications to those borrowers.  Examiners also determined that “servicer(s)” violated Regulation X by failing to maintain policies and procedures reasonably designed to properly evaluate a loss mitigation applicant for all loss mitigation options for which the applicant might be eligible.  Another servicing issue observed by examiners was the use of phrases such as “Misc. Expenses” or “Charge for Service” on periodic statements.  Examiners found such phrases to be insufficiently specific or adequate to comply with the Regulation Z requirement to describe transactions on periodic statements.

Student loan servicing.  Examiners found that “servicers” had engaged in an unfair practice by failing to reverse the financial consequences of an erroneous deferment termination, such as late fees charged for non-payment when the borrower should have been in deferment, and interest capitalization.  Examiners also found that “one or more servicers” had engaged in deceptive practices by telling borrowers that interest would capitalize at the end of a deferment period but, for borrowers who had been placed in successive periods of forbearance or deferment, capitalized interest after each period of deferment or forbearance.  Although the CFPB provides no support for this statement, it asserts that “[r]easonable consumers likely understood this to mean interest would capitalize once, when the borrower ultimately exited deferment and entered repayment.”

Service provider examinations.  We recently blogged about the announcement made at an American Bar Association meeting by Peggy Twohig, the CFPB’s Assistant Director for Supervision Policy, that the CFPB had begun to examine service providers on a regular, systematic basis, particularly those supporting the mortgage industry.  In the report, the CFPB discusses its plans to directly examine key service providers to institutions it supervises.  It states that its initial work involves conducting baseline reviews of some service providers to learn about their structure, operations, compliance systems, and compliance management systems.  The CFPB also confirms that “in more targeted work, the CFPB is focusing on service providers that directly affect the mortgage origination and servicing markets.”  The CFPB plans to shape its future service provider supervisory activities based on what it learns through its initial work.

Fair lending.  The report indicates that as of April 2017, examiners are relying on updated proxy methodology for race and ethnicity in their fair lending analysis of non-mortgage products.  The updated methodology reflects new surname data released by the U.S. Census Bureau in December 2016.

Spike and trend complaint monitoring.  The report indicates that, for purposes of its risk-based prioritization of examinations, the CFPB is now continuously monitoring spikes and trends in consumer complaints.  To do so, the CFPB is using an automated monitoring capability that relies on algorithms to “identify short, medium, and long-term changes in complaint volumes in daily, weekly, and quarterly windows.”  The CFPB states that the tool works “regardless of company size, random variation, general complaint growth, and seasonality” and is intended to be an “early warning system.”  Unfortunately, the validity of the complaints does not seem to factor into the algorithm.

 

Dovetailing with President Trump’s recent Executive Order requiring a reduction in regulatory burden, on March 21, 2017, a CFPB official remarked at the American Bankers Association Government Relations Summit that the CFPB was planning to start its review of significant mortgage regulations, including the ability to repay/qualified mortgage rule.

The Dodd-Frank Act requires the CFPB to use available evidence and data to assess all of its rules five years after they go into effect to ensure they are meeting the purposes and objectives of Dodd-Frank, and the specific goals of the subject rule.  January 2018 will mark five years since the ability to repay/ qualified mortgage rule was finalized, as well as other key mortgage regulations, in January 2013.

Citing this requirement and “common sense,” Chris D’Angelo, Associate Director of the CFPB’s Division of Supervision, Enforcement and Fair Lending, said that the CFPB is “embarking upon now the beginning of an assessment process for our major mortgage rules.” D’Angelo said that the CFPB would assess these rules’ “real-world effects” on the market, as well as “whether it had the effect which was intended, what the costs were, whether there’s some tailoring that would make that more effective.”

D’Angelo noted that the CFPB was still receiving complaints related to the mortgage servicing industry despite the existence of these rules, and that most of the problems were due to “the third-party service providers and the folks who develop your technology solutions.”  He also stated that incentive compensation practices would be considered but noted that “We know that you need those in order to manage larger organizations and how you drive your employees.”

Given Presidential pressure to reduce regulatory burdens and the fact that the CFPB’s mortgage rules have been criticized by financial industry participants and consumer advocates alike, the CFPB review of the key mortgage rules warrants close attention.

On October 15, 2015, the CFPB released a final rule amending Regulation C, which implements the Home Mortgage Disclosure Act (HMDA), requiring certain data on mortgage applications and loans to be collected beginning in 2017 by “covered institutions.”

The CFPB has previously made various resources available for HMDA filers, including a recording of a webinar conducted by the CFPB staff that provides an overview of the 2015 HMDA final rule.  Last week, the CFPB posted a recording of a new webinar on the final rule that discusses identifiers and other data points, including those related to applicants and borrowers.

The CFPB has issued its January 2017 complaint report that highlights mortgage complaints.  The report also highlights complaints from consumers in Tennessee and the Memphis and Nashville metro areas.

General findings include the following:

  • As of January 1, 2017, the CFPB handled approximately 1,080,700 complaints nationally, including approximately 22,900 complaints in December 2016.
  • Debt collection continued to be the most-complained-about financial product or service in December 2016, representing about 31 percent of complaints submitted.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 65 percent of the complaints submitted in December 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 109 percent from the same time last year (October to December 2015 compared with October to December 2016).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects the change in where such complaints are sent.
  • Prepaid card complaints showed the greatest percentage decrease based on a three-month average, decreasing about 59 percent from the same time last year (October to December 2015 compared with October to December 2016).  Complaints during those periods decreased from 458 complaints in 2015 to 189 complaints in 2016.  Prepaid cards also showed the greatest decrease based on a three-month average in the November and December 2016 complaint reports.
  • Payday loan complaints in December 2016 were 23 percent less than payday loan complaints in November 2016, representing the product with the greatest month-over-month decrease in complaints.
  • Alaska, Georgia, and Louisiana experienced the greatest complaint volume increases from the same time last year (October to December 2015 compared with October to December 2016) with increases of, respectively, 357,46, and 32 percent.
  • Wyoming, Vermont, and Delaware experienced the greatest complaint volume decreases from the same time last year (October to December 2015 compared with October to December 2016) with decreases of, respectively, 20, 19, and 12 percent.

Findings regarding mortgage complaints include the following:

  • The CFPB has handled approximately 260,500 mortgage complaints.
  • The CFPB found a trend of consumers increasingly identifying issues relating to the issue of “making payments” (which covers loan servicing, payments, escrow accounts).
  • Consumers reported issues involving escrow account shortages, such as the misapplication of funds resulting in an increase in the monthly payment and a lack of explanation for shortages. Other escrow-related issues included the servicer’s purchase of hazard insurance despite the consumer’s provision of proof of coverage and the servicer’s failure to timely submit insurance payments resulting in inadequate coverage.
  • Consumers complained about the loss of timely payments by servicers resulting in negative credit reporting and improper crediting by servicers of electronic monthly payments made via bill pay services through their financial institutions..
  • Consumers attempting to negotiate loss mitigation assistance complained that servicers were slow to respond, made repeated requests for already submitted documents, and provided ambiguous denial reasons.

Findings regarding complaints from Tennessee consumers include the following:

  • As of January 1, 2017, approximately 17,800 complaints were submitted by Tennessee consumers of which approximately 4,700 and 5,800 were from Memphis and Nashville consumers, respectively.
  • Debt collection was the most-complained-about product, representing 34 percent of all complaints submitted by Tennessee consumers, which was higher than the national average rate of 27 percent of all complaints submitted by consumers.
  • Average monthly complaints received from Tennessee consumers increased 8 percent from the same time last year (October to December 2015 to October to December 2016), higher than the increase of 12 percent nationally.

PHH has filed a reply to the CFPB’s opposition to PHH’s motion for leave to file a supplemental response to the CFPB’s petition for rehearing en banc.  On December 22, PHH and the United States filed responses to the CFPB’s petition with the D.C. Circuit.  The D.C. Circuit had invited the Solicitor General to file a response expressing the views of the United States.

In its motion for leave to file a supplemental response, PHH asserts that “the United States [in its response] argues that this Court should grant the CFPB’s petition for rehearing en banc on several grounds that were not pressed in the CFPB’s petition, and with which PHH strongly disagrees.”  Further asserting that “[t]he United States government has now had two rounds of briefing and taken two separate positions in this Court in support of rehearing,” PHH seeks an opportunity to be heard “on the United States’ newly expressed views.”  In its opposition to the motion, the CFPB states only that it opposes PHH’s motion and that if PHH “wants an opportunity to present additional arguments to this Court, they may do so if this Court grants rehearing en banc and seeks additional briefing.”

In its reply, PHH describes the CFPB’s opposition as “completely nonresponsive to PHH’s basis for seeking a supplemental response.”  It states that “the CFPB does not dispute or even address” PHH’s point that it has not had a chance to respond to the United States’ response and “[i]nstead it offers a non sequitur: that if rehearing is granted, PHH will have a chance to brief the merits.”  PHH asserts “[t]hat is always true—and has nothing to do with whether PHH has had a fair opportunity to respond to the arguments for rehearing. It has not.”

The CFPB has opposed the motion filed by PHH for leave to file a supplemental response to the CFPB’s petition for rehearing en banc.  On December 22, PHH and the United States filed responses to the CFPB’s petition with the D.C. Circuit.  The D.C. Circuit had invited the Solicitor General to file a response expressing the views of the United States.

In its motion for leave to file a supplemental response, PHH asserts that “the United States [in its response] argues that this Court should grant the CFPB’s petition for rehearing en banc on several grounds that were not pressed in the CFPB’s petition, and with which PHH strongly disagrees.”  Further asserting that “[t]he United States government has now had two rounds of briefing and taken two separate positions in this Court in support of rehearing,” PHH seeks an opportunity to be heard “on the United States’ newly expressed views.”

The CFPB’s opposition filed in the D.C. Circuit states only that the CFPB opposes PHH’s motion and that if PHH “wants an opportunity to present additional arguments to this Court, they may do so if this Court grants rehearing en banc and seeks additional briefing.”

PHH and the United States have filed responses with the D.C. Circuit to the CFPB’s petition for rehearing en banc.  The D.C. Circuit invited the Solicitor General to file a response expressing the views of the United States and entered an order requiring both PHH and the SG to file their responses by December 22.

In PHH, the D.C. Circuit ruled that that the CFPB’s single-director-removable-only-for-cause structure violates the U.S. Constitution’s separation of powers.  To remedy the constitutional defect, it severed the removal-only-for-cause provision from the Dodd-Frank Act so that the President “now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.”  It also rejected the CFPB’s interpretation of RESPA, which departed from HUD’s prior interpretation, to prohibit captive mortgage re-insurance arrangements such as the one at issue in PHH.  The court also held that even if the CFPB’s interpretation was correct, the CFPB’s attempt to retroactively apply its new interpretation violated due process.

In its petition, the CFPB argued that the panel’s constitutionality ruling conflicts with U.S. Supreme Court precedent and should therefore be reconsidered by the court sitting en banc.  It also argued that panel’s RESPA ruling should be reviewed by the court sitting en banc but observed that the panel’s retroactivity holding “is perhaps not worthy of en banc review on its own.”  The CFPB also did not seek en banc reconsideration of the panel’s ruling that CFPB administrative enforcement actions are subject to the same statute of limitations as would apply to a CFPB lawsuit filed in court.

In its response, PHH asserts that the panel’s constitutionality ruling is fully consistent with Supreme Court precedent “and more than two centuries of separation-of-powers jurisprudence.”  As a result, PHH contends the panel’s “correct application of settled constitutional principles warrants no further review.”  PHH argues that further review of the panel’s RESPA interpretation is also not warranted because it “is plainly correct irrespective of the separation-of-powers ruling, and it presents no conflicting authority.”  PHH asserts that “[o]n the contrary, the CFPB would ask the en banc Court to create a circuit split with every other court to have considered the proper scope of RESPA.” (emphasis supplied.)  In addition, PHH contends that the panel’s retroactivity holding “provides another independent basis for vacating the $109 million penalty against PHH.”

The United States, in its response filed by the Department of Justice, does not address the D.C. Circuit’s RESPA rulings and instead “addresses only the panel’s separation-of-powers holding.”  The United States argues that “the panel’s approach to resolving [the CFPB’s] constitutionality departs from the approach the Supreme Court has applied in resolving such separation-of-powers questions.”  According to the United States, the panel’s opinion was “premised on its view that an agency with a single head poses a greater threat to individual liberty than an agency headed by a multi-member body that exercises the same powers.”  The United States contends that, under relevant Supreme Court precedent, the proper inquiry is whether a removal restriction is an “impermissible intrusion on Presidential power or on the functioning of the Executive Branch,” and although a removal restriction’s effect on individual liberty “may shed light on whether it constitutes [such] an impermissible intrusion…the possible impact on individual liberty has not been an independent inquiry.”

PHH has filed a motion for leave to file a supplemental response to the petition for rehearing en banc.  In the motion, PHH asserts that “the United States [in its response] argues that this Court should grant the CFPB’s petition for rehearing en banc on several grounds that were not pressed in the CFPB’s petition, and with which PHH strongly disagrees.”  Further asserting that “[t]he United States government has now had two rounds of briefing and taken two separate positions in this Court in support of rehearing,” PHH seeks an opportunity to be heard “on the United States’ newly expressed views.”