We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

The state AGs’ motion and supporting memorandum was filed in CFPB v. Sprint Corporation, a litigation in which the Bureau alleged that Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  The associated Stipulated Final Judgment and Order (“Consent Order”) authorized the implementation of a consumer redress plan pursuant to which Sprint would pay up to $50 million in refunds.  The redress plan provided for the payment of refund claims on a “claims made” basis subject to a filing deadline.  Any balance remaining nine months after the claim filing deadline was to be paid to the CFPB.

The Bureau, in consultation with the AGs of all fifty states and the District of Columbia, which were parties to concurrent settlement agreements with Sprint relating to similar billing practice claims, and the FCC, was then to determine whether additional consumer redress was “wholly or partially impracticable or otherwise inappropriate.”  If so, the Bureau, again in consultation with the states and the FCC, was authorized to apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief were to be deposited in the U.S. Treasury as disgorgement.

In a recent Memorandum and Order recounting the history of the litigation, the district court stated that “the siren song of $15.14 million in unexpended funds [had] lured some new sailors into the shoals of this litigation” because “[d]espite full restitution to Sprint customers and subsequent consultations with the Attorneys General and the FCC, the CFPB could not identify any equitable relief to which $15.14 million in unexpended settlement funds could be applied.”  The court observed that, “[a]pparently, the prospect of simply complying with the Consent Order by paying the funds into the U.S. Treasury lacked sufficient imagination.”

Although the defendant initially filed a memorandum in opposition to the intervention motion, it subsequently filed a joint submission with the state AGs that adopted their proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAGTRI and proposed redirecting the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  (The court acknowledged that these were perhaps noble causes worthy of consideration.)  The joint submission stated that the CFPB had been consulted about the proposed modification but “[took] no position” on it.  The court characterized its failure to do so as remarkable, given that the Bureau was “the plaintiff in this lawsuit responsible for securing the $50 million settlement.”

The district court thus observed that it had been left “in a quandary” because:

  • The proposal would “alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury”;
  • The proposal may raise an issue under the Miscellaneous Receipts Act, which requires that government officials receiving money for the government “from any source” must deposit such money with the Treasury;
  • The proposed modification “does not appear, at least at first blush, to be ‘reasonably related to the allegations set forth in the Complaint’”; and
  • The defendant had concurrently entered into settlements with the Attorneys General of all 50 states and the District of Columbia and already paid them $12 million to resolve a multi-state consumer protection investigation.

The court characterized as “particularly galling” the argument that Fed. R. Civ. P. 60(a) permits the proposed modification to correct a clerical mistake.  It noted that the parties had “unmistakably understood that the Consent Order related to federal claims and that any undistributed settlement funds would be paid to the U.S. Treasury.”

In view of the foregoing, the court concluded that it needed “to hear from the Government” because of “the peculiar posture of the intervention application.”  Specifically, the court noted that the CFPB, as the plaintiff in the action, needed to take a position on the proposed intervenors’ motion and application to modify the Consent Order.  And because the proposed modification would redirect funds earmarked for the U.S. Treasury, the court noted that the United States has a direct interest that should be considered.

Accordingly, the court directed the CFPB and the Department of Justice to respond separately to the proposed intervenors’ motion and application to modify the Consent Order.  Their separate memoranda must be filed by May 10, 2017; the state AGs and the defendant may file responsive memoranda by May 24, 2017.  The court stated that the responsive submission of the Bureau “should advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application.”   We will continue to monitor developments in this case.

 

The Conference of State Bank Supervisors issued a press release this week in which it announced the April 1 release of a new tool within the Nationwide Multistate Licensing System (NMLS) to streamline reporting by money services businesses.  The new tool is called the “Money Services Businesses (MSB) Call Report.”

The press release quotes a Vermont regulator who stated that the call report information “will provide complete and meaningful information on MSBs, including fintech companies licensed to do business as money transmitters, and assist state regulators to better analyze risk, monitor compliance, and make more informed and timely decisions when it comes to MSB supervision.”  The press release also indicated that the new reports “will also provide a unique, detailed snapshot of fintech companies as they mature and evolve.”

Licensees are required to file the new report within 45 days of the end of the first quarter (May 15).   According to the press release, 18 states (covering 25 money transmitter, money service, check casher/seller and currency exchange licenses) have adopted the report for the first quarter of 2017 and seven more states are expected to adopt it in the near future.

The reports include national and state specific MSB activity that is submitted on a quarterly and annual basis.  The MSB Call Report is the first comprehensive report to consolidate state MSB reporting requirements and provide a database of nationwide MSB transaction activity.  More detailed information regarding the MSB Call Report is available on the MSBCR webpage.

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 House Financial Services Committee announced that it will hold a hearing on April 26, 2017 to discuss the Financial CHOICE Act.  It also released a discussion draft of a revised version of the bill.

In February, Rep. Hensarling, who chairs the Committee, circulated a memorandum to the Committee’s Leadership Team describing key revisions to the bill introduced last year.  Last week, he issued an outline of changes to the bill in which he identified more revisions, including revisions that would further reduce the CFPB’s powers.  Presumably, these revisions are reflected in the discussion draft.

 

The FTC issued a press release earlier this week in which it stated that it is “moving aggressively to implement Presidential directives aimed at eliminating wasteful, unnecessary regulations and processes.”  The press release does not identify the directives but presumably they are contained in President Trump’s executive orders entitled “Core Principles for Regulating the United States Financial System” and “Presidential Executive Order on a Comprehensive Plan for Reorganizing the Executive Branch.”

The press release listed a series of initiatives that are already underway to implement the directives that include the following:

  • New groups within the FTC’s Bureau of Competition and Bureau of Consumer Protection are working to streamline demands for information in investigations to eliminate unnecessary costs to recipients of such demands.
  • Both Bureaus are reviewing their dockets and closing older investigations, where appropriate.
  • The entire FTC is working to identify unnecessary regulations that are no longer in the public interest.
  • The Bureaus of Consumer Protection and Economics are working together to integrate economic expertise earlier in FTC investigations to better inform agency decisions about the consumer welfare effects of enforcement actions

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.”

 

In its new annual report covering its fair lending activities during 2016, the CFPB identifies the following three areas on which it “will increase our focus” in 2017:

  • Redlining.  The CFPB “will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods.”
  • Mortgage and Student Loan Servicing.  The CFPB “will evaluate whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race, ethnicity, sex, or age.”
  • Small Business Lending.  “Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when they apply for credit, and has required the CFPB to take steps to ensure their fair access to credit.  Small business lending supervisory activity will also help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection process; and the nature, extent, and management of fair lending risk.”

The three 2017 priority areas are the same as those identified by Patrice Ficklin, Associate Director of the CFPB’s Office of Fair Lending, in her December 2016 blog post that outlined the CFPB ‘s fair lending priorities for 2017.  However, unlike Ms. Ficklin’s blog post, the fair lending report includes the CFPB’s plans to ramp up its small business lending supervisory activity. 

The report states that in 2016, CFPB fair lending supervisory and public enforcement actions resulted in approximately $46 million in remediation.  In the report’s section on supervisory activities, the CFPB reviews information previously provided in its June 2016 Mortgage Servicing Special Edition of Supervisory Highlights and its Summer 2016 and Fall 2016 editions of Supervisory Highlights.  In the section on enforcement, the CFPB reviews several fair lending public enforcement actions and its implementation of several consent orders.  The report also discusses HMDA warning letters sent by the CFPB in October 2016 and notes that in 2016, the CFPB referred 8 matters to the Department of Justice.  The CFPB states that at the end of 2016, it had a number of pending redlining investigations as well as a number of pending investigations in other areas.  It is unclear how much collaboration between the CFPB and DOJ will occur in the Trump Administration. 

In the section on rulemaking, the CFPB discusses its final rule amending Regulation C (which implements HMDA) and related HMDA/Regulation C developments.  The CFPB also discusses the status of the new uniform residential loan application, the collection of race and ethnicity information under Regulation B, and its March 2017 proposal regarding amendments to Regulation B to facilitate Regulation C compliance and address other issues.  

In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the CFPB tracks verbatim much of what was stated in last year’s fair lending report.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.)  As it did last year, the CFPB states that the first stage of its Section 1071 work will be focused on outreach and research, after which it “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for  information-gathering and public disclosure.”  The report again states that the CFPB “has begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  This year’s report adds the statement above that the CFPB intends to use its future small lending supervisory activity to “help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.” 

Two other sections of the report discuss the CFPB’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights).  The last section of the report is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.    

Clients are always asking me and others in our Consumer Financial Services Group about how long Richard Cordray will remain as CFPB Director.  The short answer is nobody knows, perhaps not even Richard Cordray.  There are a number of factors, however, that lead me to believe that he will remain as Director until the end of his term on July 16, 2018 unless he voluntarily resigns before then to run for Governor of Ohio.

A Politico article yesterday reported that Gary Cohn, top White House economic aide, recently had a dinner meeting with Director Cordray at which he gave him an ultimatum:  resign or be removed by President Trump.  The article reported that Mr. Cohn had heard the rumors that Director Cordray wants to run for Ohio governor and, according to people familiar with the meeting, left the dinner thinking that the rumors were true.  According to the article, the White House decided to hold off on firing Director Cordray because President Trump “didn’t want to cause a sensation that could boost his candidacy and juice his fundraising.”

While it is very hazardous to predict what President Trump will do, I doubt whether he will try to remove Director Cordray either for cause or without cause.  As things now stand, the only event which could change my opinion would be if the Court of Appeals en banc in the PHH case were to reach the same conclusion as the 3-judge panel in the case – namely, that the CFPB was unconstitutionally structured and the appropriate remedy is to enable the President to remove the Director without cause – and the en banc judgment were to become final before Director Cordray’s term ends on July 16, 2018 (which is only 15 months away).  In my view, the likelihood of those events happening before July 16, 2018 is remote.

The recent filing of a brief  by the DOJ in the PHH case essentially urging  the en banc court to adopt the opinion of the 3-judge panel  suggests that President Trump will not jump the gun by attempting to remove Director Cordray before a final judgment in the PHH case authorizes him to do so.  An attempt by the President to remove Director Cordray for cause would likely trigger a legal challenge by Director Cordray that would outlast the expiration of his term unless his removal were to coincide with a decision by him to voluntarily resign to run for Ohio Governor.  Such a lawsuit would likely be stayed pending the outcome of the PHH case.  If President Trump intended to pursue a removal for cause, I believe he would have done so by now.  If he were to attempt now to remove Director Cordray for cause, that would also likely result in litigation that would outlast July 16, 2018 and, in the meantime, Director Cordray might remain in office.

Ultimately, I believe the length of Director Cordray’s remaining tenure at the CFPB will turn on whether he decides to run for Ohio Governor, and, if so, his view on when he needs to resign as Director to begin his campaign.

Even if Director Cordray remains at the CFPB for several months or longer, it does not necessarily mean that he will finalize any new regulations.  While he should have sufficient time to finalize at least the arbitration regulation, he may be deterred from doing so because of his concern that the rule will be overridden by Congress and President Trump under the Congressional Review Act.  Congress and President Trump have already overridden at least 13 final regulations issued by other federal agencies.

While Director Cordray may be deterred from finalizing any additional regulations, there is no reason to believe that there will be any let-up in his continuing pursuit of his enforcement and supervisory activities.  Indeed, the CFPB has initiated 9 enforcement actions since President Trump’s inauguration.

In a memorandum issued last week, U.S. Department of Education Secretary Betsy DeVos withdrew various memoranda issued by the Obama Administration ED Secretary and the ED’s Financial Student Aid Division (FSA) that provided policy direction for a new federal student loan “state-of-the-art loan servicing ecosystem” to be procured by the ED.  The memoranda were intended to guide the development of provisions in new contracts to be entered into by the ED with “customer service providers” it selected to participate in servicing federal student loans on the new servicing ecosystem.  ED had also planned to work with federal and state law enforcement agencies and regulators to apply the policy direction to the servicing of all student loans, to the maximum extent possible.

The memoranda had included: recommendations for changes to the compensation structure and performance measurements included in the federal Direct Loan servicing contracts; directions to contractors to designate, train, and appropriately compensate specialized servicing personnel to assist at-risk and certain other borrowers; and standards to provide consistency in the handling, processing, and application of payments by servicers and other servicing practices, such as how information about student loans is reported to credit bureaus and the process for servicing transfers.

In the fifth annual report of the CFPB Student Loan Ombudsman released in October 2016, the CFPB focused on servicers’ alleged failure to help distressed private and federal student loan borrowers enroll or stay enrolled in affordable or income-driven repayment (IDR) plans.  To address problems discussed in the report, the Ombudsman urged policymakers and industry to consider various actions, including requiring collectors to initiate and assist borrowers seeking to complete applications for IDR plans and to hand-off these documents to servicers for processing, enhancing servicer communications to borrowers transitioning out of default, and using incentive compensation for debt collectors and servicers that is linked to a borrower’s enrollment in an IDR plan and successful recertification of income after the first year of enrollment.  In light of Secretary DeVos’s action, the CFPB could intensify its efforts to address servicing issues through heightened supervisory and enforcement activity, and potentially rulemaking.

It is unclear what the ED’s next steps will be.  In her memo, Secretary DeVos indicated the memoranda were withdrawn because ED “must promptly address not only [moving deadlines, changing requirements and a lack of consistent objectives in the student loan servicing procurement process] but also any other issues that may impede our ability to ensure borrowers do not experience deficiencies in service.”  She stated that she looked forward to working with FSA staff “as well as others, in order to acquire new federal student loan capabilities that will provide borrowers with the tools necessary to efficiently repay their debt.”

 

On February 6, House Financial Services Committee Chairman Hensarling circulated a memorandum to the House Financial Services Committee Leadership Team describing key revisions to the Financial Choice Act.  Last week, he issued in outline form a so-called “Summary of Bill Changes” which identified further revisions to the Choice Act, which he referred to as “Choice 2.0”, some of which address subjects not covered in his February 6 revisions, which he referred to as “Choice 1.0.”

Choice 2.0, which addresses a wide range of issues, includes the following provisions that affect consumer financial services:

  1. De novo review of agency regulations would be required two years after a regulation’s enactment. This would call on more agency resources.  (Last week, we blogged about a former CFPB attorney’s comment that the CFPB’s Regulations Division is severely understaffed.)  Under Dodd-Frank, the CFPB is required to conduct a review of a regulation it adopts five years after the regulation’s effective date.  Indeed, the CFPB recently announced that it will initiate a five-year review of its regulation dealing with international money remittances.
  2. The President could remove the FHFA Director at will. The governance of the OCC and the NCUA would be unchanged.  The FDIC would be reorganized as a bipartisan commission with all five commissioners appointed by the President.  The Comptroller of the Currency and the CFPB Director, who currently serve on the FDIC Board, would not be members of the FDIC commission.
  3. Financial agencies would be required to “(1) when promulgating a rule with $100 million or more a year in impacts of state/local governments or the private sector to prepare and file a written statement on their process and evaluation and to select the least costly, most cost-effective, or least burdensome alternative, unless otherwise explained; and (2) provide state and local government and private sector with an effective process to provide input on proposals with significant mandates.”
  4. Financial agencies would be required to “implement policies to (1) minimize duplication between federal and state authorities in bringing enforcement actions; (2) determine when joint investigations and enforcement actions are appropriate; (3) and establish a lead agency for joint investigations and enforcement actions.”
  5. A financial agency, DOJ, and HUD would be prohibited “from entering into a settlement that provides payments to any person who is not a victim of the alleged wrongdoing.” The prohibition seems to be directed at certain ECOA settlements in the auto finance industry involving disparate impact.
  6. The Second Circuit’s controversial opinion in Madden v. Midland Funding would be overridden. Madden held that a non-bank transferee of a loan from a national bank loses the ability to charge the same interest rate that the national bank charged on the loan under Section 85 of the National Bank Act.  Under Choice 2.0, “a loan that is valid when made as to its maximum rate of interest should remain valid regardless of whether the loan is subsequently sold, assigned or transferred.”  While such a statutory amendment would be welcome, I believe that the OCC could more simply and quickly accomplish the same objective by issuing a regulation, as I pointed out in my recent article for American Banker’s BankThink.
  7. The CFPB, renamed the “Consumer Financial Opportunity Agency” would be governed by a sole Director (Choice 1.0 provided for a bipartisan independent commission with staggered terms) removable at will by the President. Also, the Deputy Director would be appointed by the President instead of by the Director as provided under Dodd-Frank.  The Deputy Director would also be removable at will by the President.  Under Dodd-Frank, the CFPB Director is only removable by the President for cause.
  8. The CFPB would be an enforcement agency only. It would be stripped of its supervisory authority.
  9. The CFPB would only be authorized to enforce the enumerated consumer protection laws. It would have “no UDAAP authority of any kind.”  Under Choice 1.0, the CFPB would have retained the authority to enforce the “unfairness,” and “deception” prongs of UDAAP, but not the “abusive” prong.
  10. The consumer complaint database could not be published. Under Choice 1.0, the database could be published to the extent that complaints were verified.
  11. The CFPB would be stripped of its authority to monitor markets. Under Choice 1.0, it could continue to engage in market monitoring as long as such monitoring is “separate from enforcement.”

It has been reported that the changes outlined above will be reflected in a new Choice Act bill to be introduced before the end of this month.

While there is a reasonable likelihood that the Choice Act will pass the House, its fate in the Senate is very uncertain.  In light of the proposed changes to the CFPB’s structure and powers, one might ask why lawmakers have not proposed to combine the FTC and the CFPB. The proposed cutbacks on the CFPB’s powers would result in the two agencies having largely overlapping enforcement powers for non-banks.

Rep. Hensarling’s proposal for the CFPB to continue to be managed by a sole Director is contrary to the CFPB governance desired by many in the banking industry.  In a letter dated April 13, 2017 from Richard Hunt, President and CEO of the Consumer Bankers Association (CBA) to Senator Mike Crapo, Chairman of the Senate Committee on Banking, Housing and Urban Affairs and Senator Sherrod Brown, Ranking Member of that Committee, the CBA strongly advocated in favor of a bipartisan five-member commission.