As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

I have previously expressed serious doubt whether Director Cordray will issue a final arbitration rule. In the CFPB’s last semi-annual regulatory agenda issued last year, the CFPB stated that the arbitration rule would be issued in February of this year. It is almost July and the CFPB has still not issued the rule. All they have stated publicly, most recently in May at the Chicago version of the PLI Annual Institute on Consumer Financial Services which I co-chair, is that the staff is still wading through comment letters and that the rule was not ready to be issued.

As I have stated previously, I think that the real reason for the delay is a result of Director Cordray’s concern that if he issued a final rule, Congress would nullify it under the Congressional Review Act (the “CRA”). Under the CRA,  through a joint resolution passed by a simple majority in the House and Senate and signed by the President, Congress may override any final rule within 60 legislative days after it receives notice of the rule. Already, at least 14 rules issued by agencies other than the CFPB have been nullified. However, Congress didn’t nullify the CFPB’s prepaid accounts rule. If a rule is nullified, then the agency is precluded from ever issuing a similar rule in the future.

I felt that the fear of a CRA override would be enough to deter Director Cordray from ever issuing a final arbitration rule. It appears that I may be wrong.

I’m now hearing a rumor from a reliable source that Director Cordray is willing to roll the dice and will issue a final arbitration rule by the end of July. If he does so, the rule will become effective on the 211th day after the rule is published in the Federal Register, well within Director Cordray ‘s remaining term which expires on July 21,2018. However, I heard from the same source who told me that the rule will be finalized by the end of July that Director Cordray will resign in the 4th quarter of this year to return to Ohio to run for governor.

So where does this leave us? If Cordray issues the rule by the end of July, there will certainly be an effort to override it under the CRA. It should succeed as long as the Republican Senators vote as a bloc to override it. With a 52-48 voting margin in the Senate, the Republicans can only afford to lose 2 votes and still pass the override resolution.

It is also likely that there will be a lawsuit filed challenging the legality of the rule. While I think there are very strong arguments in support of a court invalidating the rule, the outcome of litigation is always uncertain.

There is yet a potential third way for the arbitration rule to not become effective. If Director Cordray resigns to run for Governor of Ohio in the 4th quarter and President Trump appoints a successor (either a permanent one or a temporary one), and the rule is not yet effective, the successor could delay the effective date and then take steps to repeal the rule before it ever becomes effective. Of course, any such repeal would need to comply with the Administrative Procedures Act.

As you can see, there are lots of “moving parts” here and it is very uncertain how this will all play out.

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.

At a panel discussion today on the prepaid account rule, held as part of the meeting of the American Bar Association Committee on Consumer Financial Services in Carlsbad, CA, Kristine Andreassen, the team leader for the CFPB prepaid account rule, left the door open for changes to be made and said that the Bureau wants to hear about problems or issues with the rule. She stated that the rules “are never set in stone” and advised that clarifications could come in the form of informal guidance or a formal modification to the rule. Ms. Andreassen also indicated that a small entity compliance guide should be issued within the next two months. Ms. Andreassen did not assuage concerns raised by Nessa Feddis of the American Bankers Association and our own Jeremy Rosenblum concerning the rule’s failure to clearly define the difference between prepaid cards subject to the rule and debit cards associated with “checking accounts,” which are subject to an entirely different (and in important respects more liberal) regulatory regime.

In addition to the proposed payday loan rule released yesterday, the CFPB has issued (1) a “Request for Information on Payday Loans, Vehicle Title Loans, Installment Loans, and Open-End Lines of Credit,” and (2) a report titled “Supplemental findings on payday, payday installment, and vehicle title loans, and deposit advance products.”

The Request for Information (RFI) seeks general feedback regarding consumer protection concerns pertaining to (1) loan products outside the scope of the proposed payday loan rule, and (2) “risky” credit practices not covered by the proposed rule. Specifically, the RFI mentions installment loans and open-end credit lines with durations exceeding 45 days with no vehicle title security or account access (“leveraged payment mechanism” features) as products falling outside the scope of the proposed rule. According to the RFI, the CFPB is “seeking to learn more about the scope, use, underwriting, and impact” of products not expressly covered by the proposed rule in “determining what types of Bureau action may be appropriate.” In other words, “the Bureau is seeking information about certain consumer lending practices to increase the Bureau’s understanding of whether there is a need and basis for potential future efforts, including but not limited to future rulemakings, supervisory examinations, or enforcement investigations.”  The RFI also asks for input regarding business practices relating to loans that fall within the CFPB’s proposed payday loan rule but “raise potential consumer protection concerns that are not addressed” in the proposed rule “in order to determine whether additional Bureau actions are warranted.”

Some of the particular points of interest raised by the CFPB about which the Bureau seeks comment are as follows:

  • Forms of credit not covered by the proposed rule that are offered to the types of consumers who use loans to deal with cash shortfalls, including the types and volume of installment and open-end credit products that would not be covered by the proposed rule.
  • Potential consumer harm resulting from garnishment orders, judgment liens, or other forms of enhanced collection. While the proposed rule does not cover collection practices, the Bureau has expressed concern that there may be certain collection practices that are “more prevalent with respect to high-cost loans made to consumers facing cash shortfalls that pose serious risks to consumers.”
  • Loan churning, prepayment penalties, and slowly amortizing credit.
  • Issues relating to default interest rates, late fees, teaser rates, and other  so-called “back-end” pricing practices.
  • Potential consumer harm resulting from ancillary or “add-on” products.
  • The comment period runs through October 14, 2016.

In prepared remarks delivered yesterday at a field hearing on small-dollar lending in Kansas City, Director Cordray characterized this RFI process as an “inquiry into other situations that may harm consumers,” and noted that what the Bureau learns “may affect future rulemaking, and it will clearly help guide…continuing efforts to supervise companies and take enforcement actions against unfair, deceptive, or abusive acts or practices.” This new inquiry will likely inform the Bureau’s upcoming installment lending larger participant rulemaking, and sends a signal to the industry that shifting over to certain products not covered by the proposed rule is at best a temporary solution.

Also, in conjunction with its new rule proposal, the CFPB released a supplemental report on small-dollar lending. This report is cited many times throughout the proposed payday loan rule in support of the Bureau’s assertions about the current state of the market and the likely effects of the proposed regulations. Key topics covered in the report include:

Consumer usage and default patterns for vehicle title installment loans and payday installment loans;

  • An analysis of the substitutability among deposit advance products, bank overdraft services, and payday loans;
  • The impact of certain state laws on storefront payday lending, looking at examples from Colorado, Texas, Virginia, and Washington;
  • Comparisons  of the share of payday loans reborrowed across states with varying limits on renewals and cooling-off periods between loans;
  • Findings on borrowing and default patterns for storefront payday loans for loans; and
  • Simulations intended to estimate the impact of certain lending and collection restrictions on the payday, payday installment, and vehicle title loan markets.

This supplemental research report is the fifth report issued by the CFPB in the last three years addressing the family of credit products covered in the Bureau’s proposed payday loan  rule. The previous reports were issued in April 2013 (features and usage of payday and deposit advance loans), March 2014 (payday loan sequences and usage), April 2016 (use of ACH payments to repay online payday loans), and May 2016 (single payment title lending).

On August 26, 2014, the CFPB staff and Federal Reserve Board co-hosted a webinar and addressed questions about the final TILA-RESPA Integrated Disclosures Rule that will be effective for applications received by creditors or mortgage brokers on or after August 1, 2015.  The webinar is the second in a planned series intended to address the new rule.  In the initial webinar the CFPB staff provided a basic overview of the final rule and new disclosures that we have previously covered.

According to the CFPB staff, this webinar and the ones that will follow will be in the format of a spoken Q&A to answer questions that have been posed to the CFPB.  Although the CFPB staff does not plan to issue written Q&A, the staff believes this approach will help facilitate clear guidance on the new rules in an accessible way.  Industry members, however, would prefer written guidance.  Note that the American Bankers Association (ABA) has released a transcript of the CFPB’s webinar that is available to ABA members.

During the remarks, the CFPB staff announced that the CFPB will soon release additional guidance material on its website, including a timing calendar to illustrate the various timing requirements under the new rule.  In addition, the next webinar in the series is tentatively scheduled for October 1, 2014, and will cover Loan Estimate and Closing Disclosure content questions.

Below is a summary of various answers to questions provided by the CFPB staff.  The topics covered include: (1) the receipt of an application, (2) whether new disclosures will be required for assumptions, (3) record retention, (4) the tolerance applicable to owner’s title insurance, and (5) the timing for the initial and revised  Loan Estimates.  Continue Reading CFPB Answers FAQ on the TILA-RESPA Integrated Disclosures Rule

The Bureau’s Mortgage Servicing Examination Procedures, released on October 13, 2011, offer a fascinating insight into the CFPB’s supervision and enforcement priorities. There’s a great deal worthy of comment in the Procedures, but here I want to highlight one aspect of them: the heavy focus on the Equal Credit Opportunity Act.

The CFPB apparently intends to look for evidence of ECOA violations in three distinct areas: optional products, loan modifications, and foreclosures. The focus on ECOA isn’t a real surprise. After all, it is one of the federal consumer financial protection laws handed over to the CFPB earlier this year, and there has been a focus on ECOA in the mortgage industry ever since the discretionary pricing cases were filed a couple of years ago.

There are two aspects of the CFPB’s planned focus, though, that are cause for concern. First, with regard to loan modifications, under the “disparate treatment” section, the Examination Procedures call for several inquiries into “the exercise of discretion” by individuals involved in the process. The CFPB’s concentration on “discretion” suggests that the CFPB views discretion as “a factor that may indicate disparate treatment.” In Wal-Mart v Dukes, the U. S. Supreme Court rejected an employment discrimination class action predicated on “discretion” as the alleged discriminatory practice. According to the Supreme Court, giving discretion to employees is “a very common and presumptively reasonable way of doing business—one that we have said ‘should itself raise no inference of discriminatory conduct.’” It’s not clear whether the CFPB’s truly views “discretion” as a factor that “may indicate disparate treatment,” but I believe that any inference along those lines would not be consistent with the Supreme Court’s decision in Dukes.

Second, the Examination Procedures envision several different statistical inquiries designed to test for “disparate impact” in loan modifications and foreclosures. This analysis covers the receipt of loan modifications; the processing time for such modifications; the terms of the modifications; and the incidence of foreclosures. In all instances, the CFPB states that it plans to examine the treatment of “protected class members” as compared to “non-protected class members.” In concept, this sounds simple, but it isn’t.

In disparate impact litigation, huge battles rage over the statistical methods used to assess discrimination—including the size and composition of samples and the control factors applied in the analysis. Given the impact of such decisions on a statistical analysis, what will the CFPB do to make sure that its assessment of “disparate impact” is fair, transparent, and neutral? Will it permit the examined institution to conduct its own statistical analysis? And will the disparate impact analysis devolve into the kind of “battle of experts” typically seen in a private class action? The Examination Procedures leave all of these questions unanswered. But with the stakes involved and the extreme expense associated with these sorts of analyses, this is an area in which the CFPB should provide much more clarity and should adopt measures both to ensure fairness in this aspect of its examinations and to avoid imposing massive costs on the institutions it supervises.  (For more information on the Examination Procedures, see our legal alert.)

The American Bankers Association (“ABA”) recently submitted its comments on the CFPB’s interim final rule regarding the treatment of confidential information obtained by the CFPB.

Among other things, the ABA recommended the CFPB’s proposed information sharing rule be amended to:

• Ensure supervisory information remains confidential and is not disclosed to third parties except in very limited circumstances so as to promote ongoing dialogue and transparency between the CFPB and its supervised institutions;

• Take into account established limitations on the investigative powers of state Attorneys General and other state law enforcement officials so as to limit the disclosure of confidential supervisory information to such state officials to only those circumstances in which those officials exercise authority to enforce applicable law within a judicial process;

• Limit any regular sharing of confidential information (as defined under Section 1070.2 of Dodd Frank and including but not limited to confidential supervisory information) to federal and state agencies that have financial institution supervisory authority over CFPB supervised institutions; and

• State that the CFPB will not normally share confidential information (as defined under Section 1070.2) with third parties. In particular, the ABA noted that this is the standard used by the Board of Governors of the Federal Reserve System and OCC.

Notably, the ABA steadfastly advocated against any broad or presumptive disclosure of confidential supervisory information to state Attorneys General or in support of actions against financial institutions that are unrelated to Dodd Frank or other federal consumer financial laws under which states have enforcement authority. In particular, the ABA expressed concern that regularly sharing confidential supervisory information with state Attorneys General could actually impair the CFPB’s mission as a result of premature law enforcement actions by states that disrupt the CFPB’s examination process and other supervisory activities.

Moreover, the ABA emphasized that the CFPB must consider the language of Section 1047 of Dodd-Frank and the Supreme Court’s decision in Cuomo v. Clearing House Association, in which the Court expressly rejected the authority of state Attorneys General to obtain information directly from national banks outside of a judicial process. Therefore, in the ABA’s view, in codifying Cuomo, Congress could not have intended for state Attorneys General to be able to obtain confidential information pertaining to national banks through the CFPB that they could not have obtained elsewhere.

The ABA also lobbied for advance notice to financial institutions prior to any disclosure of confidential supervisory information to various third parties in order to allow the financial institutions to take steps to avoid any safety and soundness concerns.

The ABA also proposed broadening the list of third parties to whom financial institutions can disclose confidential supervisory information under the current rule to clarify that the scope of the term “consultant” includes any third party service provider that is acting on behalf of a financial institution. As currently drafted, the rule permits disclosure only to certified public accountants, legal counsel, and undefined “consultants.”

The CFPB can either establish itself as having an open and fair dialogue with the institutions it supervises or it can position itself as an agency that is designed to gather information for litigation. The stance the CFPB takes with regard to the ABA’s comments will illustrate which of these paths it intends to pursue. However, it would seem that the CFPB will be better positioned to fulfill its goals and become an effective regulator if it chooses the path of providing for an open dialogue with its supervised institutions, as proposed by the ABA.

Later this year, the rules for which rulemaking authority was transferred to the CFPB by the Dodd-Frank Act will be getting new numbers. The CFPB announced in July that it plans to house those rules in chapter X of CFR title 12, meaning that the 200 series will become the 1000 series. We understand Regulation Z will become 12 CFR Part 1026, instead of Part 226, and the new numbers for the other 200 series regulations will follow a similar pattern. In addition to giving the regulations new numbers, the CFPB will be making conforming amendments to reflect the CFPB’s role and other Dodd-Frank Act changes to the underlying statutes.

The CFPB’s publication of the new 1000 series, however, does not mean the 200 series goes away. Since the Fed retains authority to issue rules for auto dealers, some of the 200 series will remain in place. That means similar regulations will have different citations, thereby adding a new layer of complexity to legal research.

 We understand the CFPB already has about 30 lawyers in its regulations department. Presumably, those lawyers can be contacted at the new phone number the CFPB has posted on its website (202-435-7000).

NotificationOne of the four sets of Interim Final Rules released by the CFPB on July 28 was its “State Official Notification Rules,” which set forth the obligations of state attorneys general to notify the CFPB when the AGs bring actions to enforce the provisions of the Dodd-Frank Act.  One might wonder whether such rules are even necessary, given the close cooperation anticipated between state AGs and the CFPB. 

On a state and federal regulators’ panel that I moderated at a recent conference, one state AG representative noted that the CFPB has been busy hiring bright, energetic individuals from state AG offices across the country.  The effect of this mode of hiring is that there is a natural and personal connection between state AG offices and the CFPB—cooperation between them will frequently involve nothing more than two former colleagues talking to one another.

This informal cooperation is reinforced by the Joint Statement of Principles announced between the CFPB and the National Association of Attorneys General back in April of this year. 

But leaving the obvious aside, the real question, I think, is whether the CFPB will use the oversight powers it has over state AG actions to prevent the state-by-state fragmentation of federal law.  It’s no secret that one of the primary impacts of Dodd-Frank is to greatly increase the importance of state law and force national banks and federal thrifts to comply with a patchwork of differing laws.  But even beyond this, by giving state AGs the right to enforce Title X of Dodd-Frank and the CFPB’s regulations, Congress has raised the specter that even supposedly-uniform federal laws will be interpreted and applied differently in different states.

The release accompanying the State Official Notification Rules states that the CFPB’s objective is to maintain “consistent application of the [Dodd-Frank] Act.”  The rules give the CFPB the authority to promote consistency by intervening in cases and even removing them to federal court, but one of the most interesting things to watch as the CFPB begins to operate is whether it will meaningfully police state AG enforcement actions to achieve this goal.

A related question is whether (and how) the CFPB will “feed” cases to state Attorneys General during the time that the CFPB is limited in its enforcement authority from the lack of a confirmed Director.  Without a Director, the Bureau cannot bring actions arising from its “unfair, deceptive or abusive” enforcement authority, but state AGs can, at least with respect to state-chartered banks.  And state AGs are not limited by the $10 billion threshold applicable to the CFPB’s enforcement authority.  Thus, we may get a sneak preview of the CFPB’s views on “unfair, deceptive and abusive” through state AG actions that may arise while the CFPB awaits the confirmation of a Director.