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The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has written to the Department of Education urging the ED to issue preemption guidance.

In its letter, NCHER urges the ED “to issue regulatory guidance that clearly states that federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”  Earlier this month, the Education Finance Council, another national trade group representing higher education finance organizations, wrote to the ED requesting similar guidance.

In its letter, NCHER discusses the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the Higher Education Act (HEA).  NCHER also discusses the resulting compliance costs of such requirements and their potential to create borrower confusion.

In addition, NCHER observes that a number of state attorneys general have begun to take action against student loan servicers for activities governed by the HEA, federal regulatory requirements, and the terms of federal contracts.  It urges the ED to take “a leadership role” with regard to federal contractors, which could include intervening with an AG’s office on behalf of an agency or working with both parties to achieve a resolution.  According to NCHER, state AGs “should not be permitted to make an end run around the Department by intimidating its contracted loan servicers.”  Also discussed in NCHER’s letter is an attempt by Connecticut to apply its registration requirement for collection agencies to guaranty agencies that have agreements with the ED.

 

 

 

Eighteen states and the District of Columbia have filed suit against Secretary of Education Betsy DeVos seeking an injunction of the Department of Education’s indefinite postponement of the Obama Administration’s Borrower Defense Rule. While generally providing for loan forgiveness for borrowers deceived by postsecondary institutions, the Borrower Defense Rule also created a joint state-federal enforcement scheme by providing that any judgment obtained by a government agency against a postsecondary institution under state law would give rise to a borrower defense to loan repayment. The Rule also established that a state civil investigative demand against a school whose conduct resulted in a borrower defense qualifies as notice permitting the Secretary to commence a collection action against the school.

As part of her promise to conduct a “regulatory reset” Secretary DeVos announced last month that the Department of Education was postponing the July 1, 2017 effective date of the Rule “until further notice” and establishing a negotiated rulemaking committee to revise the Rule. The announcement came on the heels of a California Association of Private Postsecondary Schools (CAPPS) lawsuit to bar implementation of the Rule. CAPPS additionally filed, but later withdrew, a motion for preliminary injunction against the Rule’s prohibition on mandatory arbitration and class action waiver agreements. Eight states and the District of Columbia, each also a party to the latest lawsuit, previously filed a motion to intervene in the CAPPS lawsuit in support of the Rule. Secretary DeVos and CAPPS have entered memorandums in opposition to the states’ motion. The states must file their replies by July 26, 2017.

In a press release, the Department stated the indefinite postponement was “[d]ue to pending litigation challenging the [Borrower Defense Rule] regulations,” and lawful under Section 705 of the Administration Procedures Act (APA), which provides that an agency “may postpone the effective date of action taken by it, pending judicial review.” In the suit they have filed, the AGs claim that the postponement of the Rule injures their residents by depriving state authorities of increased enforcement powers, eliminating improved remedies for violations of law, and removing deterrence of misconduct by educational institutions.

The four causes of action generally allege that the postponement operates as a summary rescission of the rule in violation of Section 706 the APA. More specifically, the AGs assert that:

  • The Department failed to follow the APA’s formal notice and comment process, which is required when the Department delays the effective date of a final regulation for the purpose of substantive rulemaking, amendment, or rescission of the final regulation.
  • The Department’s Delay Notice does not comply with or even acknowledge the legal test applicable when the Department seeks a stay of its own regulations pending litigation, which requires: 1) a likelihood of prevailing on the merits; 2) an absence of delay will irreparably harm the Department; 3) that others will not be harmed by the delay; and 4) that the public interest requires a delay.
  • The Department has failed to provide justification for the postponement adequately related to the existence or consequences of the pending litigation. Specifically, the Department’s notice published in the Federal Register indicates a complete reconsideration of the rule (while the CAPPS litigation only challenges a few provisions) and the Department claims federal cost-savings which are unrelated to the CAPPS litigation.
  • The Department has failed to offer a reasoned analysis for reversing or departing from a previous policy position, which is required when a Delay Notice operates as an amendment or rescission to an existing rule.

Section 706 of the APA requires a reviewing court to set aside agency action, findings, and conclusions found to be “without observance of procedure required by law” or “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”

As part of a previous post, we discussed the ability of a successor administrator to unilaterally stay the compliance date of a final rule under the APA. In Clean Air Council v. Pruitt, the D.C. Circuit vacated an EPA stay of its rule concerning methane and other greenhouse gas emissions. Before a final compliance date of June 3, 2017, several industry associations filed a petition with the EPA seeking reconsideration. The new EPA administrator issued a 90-day stay of the compliance date and announced that the Agency was reconsidering the rule. The D.C. Circuit found that the stay was “tantamount to amending or revoking a rule” and rejected the Agency’s reliance on its broad discretion to reconsider its own rules without complying with the APA’s formal notice and comment requirements.

The Department of Education also recently announced its plan to establish a negotiated rulemaking committee to revise the Gainful Employment Rule. This Obama Administration rule became effective in July 2015 and required that schools make disclosures such as graduation rates, earnings of graduates, and student debt amounts. The press release criticized the rule for “unfairly and arbitrarily limit[ing] students’ ability to pursue certain types of higher education and career training programs.” The effective date has been delayed one year to July 1, 2018. The Department has also provided a six-month extension—to January 1, 2018—for compliance with disclosure requirements for fees associated with school-sponsored debit cards and other financial products marketed on their campuses.

Education Finance Council, a national trade association representing state-based nonprofit higher education finance organizations, has asked the Department of Education to “publicly state” that the ED’s rules governing servicers of federal student loans preempt state laws and regulations that would impose conflicting requirements on such servicers.

In a letter to Education Secretary Betsy DeVos, EFC expresses concern that state efforts to impose regulations on student loan servicers contracted by the federal government to service federal student loans threaten “to add an unnecessary web of regulations which are both duplicative and potentially contradictory to existing federal regulations and policies.”  EFC notes that the ED has previously “made clear its position on the preeminence of federal law in student loan servicing,” and asks the ED to make it clear “to both the public and to state entities that seek to impose their own conflicting regulations on federal student loan servicing contractors” that federal law takes precedence in the event of a conflict between federal and state laws.

 

 

In conjunction with its public event today on student loan servicing, the CFPB issued a new report, “Staying on track while giving back.”  The report, which provides a mid-year update on student loan complaints, highlights complaints from borrowers seeking to access federal law protections for borrowers working in the public service arena, particularly the Public Service Loan Forgiveness (PSLF) program.  The report analyzes complaints submitted by consumers from March 1, 2016 to February 28, 2017.

During the period covered by the report, the CFPB handled approximately 7,500 private student loan complaints, approximately 11,500 federal student loan complaints, and 2,200 debt collection complaints related to private and federal student loans.  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  The report states that “over the past 12 months, the Bureau saw a 325 percent increase in student loan complaints.”  While noting that the CFPB “also began handling complaints” about federal student loans prior to the period covered by the report, the report does not connect the increase to this change.  As a result, readers are likely to assume that the increase in student loan complaints reflects an increase in the number of borrowers making student loan complaints and may not observe that the increase in student loan complaints most likely reflects the change in where such complaints were sent.

The PSLF program provides loan forgiveness to borrowers who work full-time for a qualified employer and meet certain other eligibility requirements.  “Qualified employers” include a federal, state, local, or tribal government and certain non-profit organizations.  Because the PDLF program was launched in 2007 and a borrower must also make 120 qualifying payments (i.e. 10 years of payments) to be eligible, the ED will begin accepting applications from borrowers seeking PSLF forgiveness in October 2017.  Other eligibility requirements are that the borrower must have one or more Direct Loans and  be enrolled in a qualified repayment plan.  With regard to each eligibility requirement, the report discusses various servicing-related problems reported by borrowers that impacted a borrower’s ability to meet that requirement.

For example, with regard to the Direct Loan eligibility requirement, the report discusses borrower complaints about delays and defects in the process of consolidating loans not eligible for PSLF into an eligible Direct Consolidation Loan.  With regard to the qualified employer eligibility requirement, the report discusses problems encountered by borrowers in completing employer certification forms or in learning the reason for denial of an ECF.  With regard to the requirements for a borrower to be enrolled in a qualified repayment plan (which primarily consist of income-driven repayment (IDR) plans) and make 120 qualified payments, the report discusses borrower reports of lost IDR enrollment as a result of delays in processing IDR recertification paperwork and payments being deemed non-qualifying because the servicer had advanced payment due dates when excess payments were received.  The report also includes a series of recommendations for policymakers and student loan industry participants to address the problems reported by borrowers in accessing the PSLF program and other federal law protections.

In addition to issuing the report, the CFPB updated its “Education Loan Examination Procedures.”  The Student Loan Servicing module (Module 3) includes a description of the PSLF program and directs servicers to look at a servicer’s policies and practices related to PSLF programs such as the accuracy and adequacy of information provided to borrowers about PSLF, steps taken when a borrower expresses interest in PSLF, providing information to subsequent servicers and collecting information from prior servicers, and determining whether a payment is a qualifying payment under various scenarios.

The CFPB also launched a consumer education campaign for student loan borrowers working in public service and released a toolkit for public service employers to use in assisting employees qualify for the PSLF program.

 

 

The CFPB will hold a public event on June 22, 2017 in Raleigh, N.C. about student loan servicing. The CFPB’s announcement provides no description other than that the event will feature remarks from Director Cordray and North Carolina Attorney General Josh Stein.

The CFPB may be labeling the event a “public event” rather than a “field hearing” because it is not inviting “witnesses” to provide “testimony” as it typically does for field hearings.  However, similar to its field hearings, it is likely the CFPB will use the event as a venue for announcing a new development involving student loan servicing.  Isaac Boltansky of Compass Point has suggested that that the CFPB may announce the release of either an update on the industry’s consumer complaint profile or an updated supervisory highlights report.  It is also possible that the CFPB will discuss the comments it has received in response to the notice it published in the Federal Register in February 2017 regarding its plan to require student loan servicers to report quarterly data on aggregated servicing metrics and borrower outcomes.

Mr. Stein, the North Carolina AG, was among the group of state AGs who sent a letter to U.S. Department of Education Secretary Betsy DeVos in April 2017 criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.  He also recently announced the settlement of a lawsuit involving an alleged student loan debt relief scam.  Mr. Stein might discuss these developments at the CFPB event.

In a notice published in today’s Federal Register, the Dept. of Education announced that it is postponing  “until further notice” the July 1, 2017 effective date of various provisions of the “borrower defense” final rule issued by the ED last November, including the rule’s ban on arbitration agreements.  In a second notice also published in today’s Federal Register, the ED announced that it plans to establish two negotiated rulemaking committees, with one committee to develop proposed regulations to revise the “borrower defense” rule and the other to develop proposed revisions to the “gainful employment” rule that became effective in July 2015 and includes requirements for schools to make various disclosures such as graduation rates, earnings of graduates, and student debt amounts.

Effective Date Postponement.   Last week, the California Association of Private Postsecondary Schools (CAPPS) filed a complaint in D.C. federal district court against the ED and Education Secretary Betsy DeVos to overturn the “borrower defense” final rule.  In its notice delaying the rule’s July 1 effective date, the ED stated that the postponement “will preserve the regulatory status quo while the litigation is pending and the Court decides whether to uphold the final regulations.”

The Federal Register notice lists the specific provisions of the final rule for which the effective date is postponed.  The ED described the postponed provisions as those “pertaining to the standard and process for the Department to adjudicate borrower defense claims, requirements pertaining to financial responsibility standards, provisions requiring proprietary institutions to provide warnings about their students’ loans repayment rates, and prohibitions against institutions including arbitration or class action waivers in their agreements with students.”  The ED is retaining the July 1 effective date for several provisions of the final rule, such as those expanding the types of documentation that can be used for granting a discharge based on a borrower’s death.

Negotiated rulemaking.  The Federal Register notice indicates that the ED plans to hold public hearings on July 10, 2017 in Washington, D.C. and on July 12, 2017 in Dallas, Texas.  The ED stated that, after it reviews the public comments submitted at the hearing and in written submissions, it will publish one or more documents in the Federal Register announcing the specific topics for which it intends to establish the negotiated rulemaking committees and request nominations for individual negotiators.  The ED anticipates that the committees will begin negotiations in November or December 2017, with the committees meeting in Washington, D.C. area for up to three sessions of three to four days each at roughly five- to eight-week intervals.

Comments on the topics on which the Department intends to conduct negotiated rulemaking and additional topics to be considered for action by the negotiated rulemaking committees must be received by the ED on or before July 12, 2017.

State AGs Motion to Intervene.  Earlier this week, a group of 8 state attorneys general and the D.C. attorney general filed a motion for leave to intervene in the CAPPS lawsuit and to be heard at the hearing on the preliminary injunction sought by CAPPS. While the lawsuit challenges the overall final rule, CAPPS also filed a motion for a preliminary injunction in which it asked the court to preliminarily enjoin only the final rule’s arbitration ban and class action waiver provisions pending the resolution of the lawsuit.  To explain their interest in the case, the AGs highlight the arbitration ban in the “borrower defense” rule and assert that “by protecting borrowers’ ability to bring private lawsuits, the [ban] restore[s] an important component of the State Movants’ consumer protection enforcement frameworks, which were designed to include private lawsuits to supplement public enforcement efforts.”

 

The California Association of Private Postsecondary Schools (CAPPS) has filed a complaint in D.C. federal district court against the Dept. of Education and Education Secretary Betsy DeVos to overturn the “borrower defense” final rule issued by the ED last November.  CAPPS describes itself in the complaint as “a non-profit association of California private postsecondary schools” that has a membership of about 150 institutions, most of which are smaller institutions averaging less than 400 students and one or two locations.

The final rule, which is effective on July 1, 2017, broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).

The final rule prohibits both mandatory and voluntary pre-dispute arbitration agreements, whether or not they contain opt-out clauses, and prohibits a school from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

While CAPPS challenges the overall final rule in its complaint, CAPPS also filed a motion for a preliminary injunction in which it asks the court to preliminarily enjoin only the final rule’s arbitration ban and class action waiver provisions pending the resolution of the lawsuit.  In the complaint and preliminary injunction motion, CAPPS alleges that the arbitration ban and class action waiver provisions conflict with the Federal Arbitration Act, violate the Administrative Procedure Act (APA), exceed the ED’s authority under the HEA, and violate the Due Process Clause of the U.S. Constitution to the extent they apply retroactively.  In the complaint, in addition to other statutory and constitutional claims, CAPPS alleges that other provisions of the final rule also violate the APA and exceed the ED’s authority under the HEA.

 

 

One of the hallmarks of the CFPB’s enforcement actions has been its use of those actions to announce new legal standards. Navient attacks this enforcement strategy in its motion to dismiss a recent case brought against it by the CFPB. On January 18, 2017, the CFPB sued Navient, alleging a number of violations. The chief allegation is that Navient unlawfully “steered” consumers into resolving student loans defaults using forbearance instead of income-driven repayment plans (“IDB”), even in situations where IDB would have been allegedly better for consumers. The motion to dismiss briefing closed on May 15, 2017.

Navient’s main argument is that the CFPB cannot seek penalties against it for the alleged steering because no one had fair notice that steering, if it occurred, violated UDAAP before the enforcement action began.  This is especially so when, as Navient points out, it was governed by the comprehensive rules, regulations, and contractual obligations that never even mention the conduct that the CFPB is suing over.

In addition, Navient argues that the CFPB is required to engage in rulemaking before imposing penalties on industry actors for alleged UDAAP violations. The CFPB is authorized under 12 U.S.C. § 5531(a) to seek fines and penalties against any entity that that engages in “an unfair, deceptive, or abusive act or practice under Federal Law.” Navient argues that “under Federal Law” means the CFPB must declare that conduct violates UDAAP through rulemaking before seeking fines and penalties for alleged violations. This, Navient argues, is supported by § 5531(a)’s placement in the statute immediately before § 5531(b), which allows the CFPB to “prescribe rules . . . identifying as unlawful unfair, deceptive, or abusive acts or practices.” The CFPB disagrees, arguing that “under Federal Law” is a reference to the general prohibition on UDAAPs in § 5536, and that no rulemaking is required prior to a UDAAP enforcement action. No court that we know of has yet addressed this specific issue under Dodd-Frank. How the court resolves this argument could have a substantial impact on how the CFPB does business going forward.

Navient also attacked the premise of the CFPB’s steering claims. For steering to be a violation, Navient argues, the CFPB has to first establish that Navient had some legal duty to counsel consumers on whether IDB or forbearance is better for their individualized situations. In an attempt to manufacture that duty, the CFPB points to general statements on Navient’s website inviting consumers to let Navient help them resolve their student loan defaults. In response, Navient emphasizes that such generalized statements do not create a fiduciary relationship as a matter of law and rightly reminds the court that lenders are not fiduciaries of borrowers.

We will continue to follow this case and keep you posted. Oral argument on the motion has been scheduled for June 27.

The CFPB’s Student Loan Ombudsman has released an update setting forth the CFPB’s “preliminary observations” based on the data it received in response to a voluntary request for information sent to several of the largest student loan servicers in October 2016.  The request, which was sent contemporaneously with the release of the Ombudsman’s 2016 annual report (2016 report), asked servicers to provide information about their policies and procedures related to servicing loans of previously defaulted borrowers.  The update indicates that the CFPB received information from servicers collectively handling accounts for more than 20 million student loan borrowers.

On June 8, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “CFPB Criticism of Student Loan Servicers – What’s Coming Next?”  Click here to register.

In the update, the CFPB makes the following “preliminary observations” regarding the borrowers about whom servicers provided loan performance information:

  • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making payments under an income-driven repayment (IDR) plan within the first nine months after curing a default.  According to the CFPB, this data reinforces its observations in the 2016 report that “a series of administrative, policy, and procedural hurdles may limit access to or enrollment in IDR for borrowers with previously defaulted federal student loans.”
  • Borrowers who did not enroll in an IDR plan were five times more likely to default a second time.
  • Nearly one in three borrowers who completed rehabilitation and for whom a servicer provided information about two years of payment history redefaulted within 24 months.
  • Over 75 percent of borrowers who default for a second time after completing rehabilitation did not successfully satisfy a single bill, including those who used forbearance or deferment for a period of time before redefaulting.  The CFPB states that it estimates that “as many as four out of five borrowers who rehabilitate a student loan could be eligible for a zero dollar payment under an IDR plan, which suggests that many of these defaults were preventable.
  • Borrowers using consolidation to cure defaulted loans are more likely to have better outcomes.

The CFPB states that the data described in the update provides support for its policy recommendations in the 2106 report. Those recommendations included a reassessment by policymakers of the treatment of borrowers with severely delinquent or defaulted loans and consideration of steps to streamline, simplify or enhance the current consumer protections in place for such borrowers.  The CFPB also urged policymakers and industry to consider various actions, including enhancing servicer communications to borrowers transitioning out of default, such as using personalized communications related to IDR enrollment, 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 the update, the CFPB asks policymakers to “examine whether an extended period of income-driven rehabilitation payments and a complicated collector-to-servicer transition are necessary and whether current financial incentives for [servicers] are in the best interests of taxpayers and consumers.”  It also suggests that policymakers and market participants should “in the near-term” implement the CFPB’s recommendations for improving borrower communication throughout the default-to-IDR transition and streamlining IDR application and enrollment.

Although not mentioned in the update, the CFPB’s press release suggests that the CFPB plans to use the information discussed in the update to support its efforts to establish industrywide servicing standards.  The press release states that such information “will help the Bureau assess how current practices intended to assist the highest-risk borrowers may differ among companies. The Bureau previously highlighted how inconsistent practices across servicers can cause significant problems for borrowers, calling for industrywide servicing standards in this market.”

 

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.