The CFPB’s Spring 2017 rulemaking agenda has been published as part of the Spring 2017 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The preamble indicates that the information in the agenda is current as of April 1, 2017.  Accordingly, the agenda does not reflect the issuance of the CFPB’s final arbitration rule on July 10 or other rulemaking actions taken since April 1 such as the proposed changes to the CFPB’s prepaid account rule and various recent mortgage-related developments.  In addition, the agenda and timetables are likely to be significantly impacted should Director Cordray leave the CFPB this fall to run for Ohio governor as has been widely speculated.

The agenda sets the following timetables for key rulemaking initiatives:

Payday, title, and deposit advance loans.  The CFPB released its proposed rule on payday, title, and high-cost installment loans in June 2016 and the comment period ended on October 22, 2016.  The Spring 2017 agenda gives a June 2017 date for completing the initial review of comments (which the CFPB states in the preamble numbered more than one million) but does not give an estimated date for a final rule.  There has been considerable speculation that a final rule will be issued by the end of next month.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In July 2016, it issued an outline of the proposals it is considering in anticipation of convening a SBREFA panel.  The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  When it issued the proposals, the CFPB indicated that it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals.  However, Director Cordray announced last month that the CFPB has decided to proceed first with a proposed rule on disclosures and treatment of consumers by debt collectors and thereafter write a market-wide rule in which it will consolidate  the issues of “right consumer, right amount” into a separate rule that will cover first- and third-party collections.

In the Spring 2017 agenda, the CFPB gives a September 2017 date for a proposed rule.  Presumably, that date is for a proposal that will deal with disclosures and treatment of consumers by debt collectors.  The new agenda gives no estimated dates for the convening of a second SBREFA panel or a proposed second rule.  In the preamble to the new agenda, the CFPB states only that it “has now decided to issue a proposed rule later in 2017 concerning FDCPA collectors’ communications practices and consumer disclosures.  The Bureau intends to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”

Larger participants.  The CFPB states in the Spring 2017 agenda that it “expects to conduct a rulemaking to define larger participants in the markets for consumer installment loans and vehicle title loans for purposes of supervision.”  It also repeats the statement made in previous agendas that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  The new agenda estimates a June 2017 date for prerule activities and a September 2017 date for a proposed rule.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2017 agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2016 agenda estimated a January 2017 date for further prerule activities, the new agenda moves that date to June 2017.  As we have previously noted, the extended timeline may reflect that the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order.

Small business lending data.  Dodd-Frank 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.  Such data includes the race, sex, and ethnicity of the principal owners of the business.  The new agenda estimates a June 2017 date for prerule activities.  The CFPB repeats the statement made in the Fall 2016 agenda that it “is focusing on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and determining the appropriate procedures and privacy protections needed for information-gathering and public disclosure under this section.”

Mortgage rules.  Earlier this month, the CFPB issued a proposed rule dealing with a lender’s use of a Closing Disclosure to determine if an estimated charge was disclosed in good faith.  The Spring 2017 agenda gives a March 2018 estimated date for issuance of a final rule.  This past March, the CFPB issued a proposal to amend Regulation B requirements relating to the collection of consumer ethnicity and race information to resolve the differences between Regulation B and revised Regulation C.  The Spring 2017 agenda gives an October 2017 estimated date for a final rule.

 

 

The CFPB issued HMDA Loan Scenarios on July 19, 2017 to provide additional guidance to the industry on reporting transactions under the revised HMDA rule, which has a January 1, 2018 effective date for most provisions.

The guidance includes loan scenarios for a single-family mortgage loan, multifamily mortgage loan, and home equity line of credit.  For each scenario, the guidance reflects how the information about the transaction would be mapped to the required data fields, and then how the transaction would appear on the Loan Application Register in the pipe delimited format.

 

The CFPB recently issued two updates for its Mortgage Servicing Rule amendments to Regulations X and Z.  Issued on August 4, 2016, the Mortgage Servicing Final Rule amended various aspects of the existing Mortgage Servicing Rules.  These changes will become effective either on October 19, 2017 or April 19, 2018.

First, the CFPB issued non-substantive, technical corrections to the Mortgage Servicing Final Rule issued in 2016.  The corrections include several typographical errors, revisions to show the correct effective date for certain provisions, and a citation correction.

The CFPB also issued non-binding policy guidance for a three-day period of early compliance with the amended Mortgage Servicing Rules.  According to the Bureau, the policy guidance was issued in response to industry concerns over operational challenges presented by the mid-week effective date.  Industry participants sought the ability to implement and test these changes over the weekend prior to the effective date.

Accordingly, the non-binding policy guidance states that the CFPB does not intend to take supervisory or enforcement action for violations of existing Regulation X or Regulation Z provisions, resulting from a servicer’s compliance with the new requirements, up to three days before the applicable effective dates.  Therefore, for amendments that become effective on October 19, 2017, the three-day period will cover Monday, October 16 through Wednesday, October 18.  For amendments that will take effect on April 19, 2018, the three-day period will cover Monday, April 16 through Wednesday, April 18.

The CFPB recently issued final amendments to the TILA/RESPA Integrated Disclosure (TRID) rule and a proposal to further amend the TRID rule.  The CFPB has also issued an Executive Summary of the amendments.

Although the amendments will become effective 60 days after publication in the Federal Register, mandatory compliance with the amendments will be required for applications received on or after October 1, 2018.  The CFPB advises that during the optional compliance period between the effective date and October 1, 2018, a party may comply with the amendments “all at one time or phase in the changes over time (even within the course of a transaction).”

The CFPB also addresses uncertainty regarding what loans are subject to the existing partial payment disclosure requirement for mortgage transfer notices and the existing escrow closing notice requirement.  The requirements were included in the same final rule that contains the original TRID rule provisions, even though they are not integrated disclosure requirements.  This led to uncertainty as to whether the requirements apply to all transactions within the scope of the requirements, or only those transactions for which the application was received on or after October 3, 2015, which is the effective date of the original TRID rule.   The CFPB clarifies that compliance with the requirements becomes mandatory on October 1, 2018, regardless of when the application was received.

 

 

The U.S. Treasury Department recently issued a report titled “A Financial System That Creates Economic Opportunities-Banks and Credit Unions.”  In addition to recommended changes for the CFPB, the report devotes substantial attention to the residential mortgage industry.

The report cites the size of the housing market, contributing approximately 18% to U.S. GDP, and constituting a debt market second in size only to the U.S. Treasury market.  Accordingly, the report states that tight mortgage lending conditions in the private sector warrant careful review of regulations which may be holding back access to credit.

The Treasury’s review produced the following findings, which are copied verbatim below:

  • “The revised regulatory regime disproportionately discourages private capital from taking mortgage credit risk, instead encouraging lenders to channel loans through federal insurance or guarantee programs, or Fannie Mae or Freddie Mac;
  • Regulatory requirements have significantly and unnecessarily tightened the credit box for new mortgage originations, denying many qualified Americans access to mortgages;
  • Increased regulatory requirements have significantly increased the cost of origination and servicing activities, which, when passed on to borrowers in the form of higher mortgage rates, have decreased the number of Americans that can qualify for mortgages;
  • Some regulatory regimes or approaches are viewed by industry participants as having inadequate transparency and mutual accountability, thus creating uncertainty and risk aversion among lenders in serving certain market and client segments; and
  • Capital, liquidity, and other prudential standards, in combination with a wide range of capital market regulations, have inhibited both private originate-to-hold lenders as well as lenders focused on origination and secondary sale in the private-label securitization market.”

According to the report, the aim of Treasury’s recommendations is to properly calibrate the regulation of mortgage lending to be more efficient, effective and appropriately tailored.  Treasury further states that its recommendations also serve the goal of avoiding the recurrence of flawed practices in the U.S. residential mortgage market that contributed to the financial crisis.  The recommendations for the residential mortgage market include the following:

  • Mortgage Loan Origination
    • Adjust and clarify the ATR/QM rule and eliminate the “QM Patch” for GSE-eligible loans (the temporary exemption for loans eligible for purchase by the GSEs).  The goal of this recommendation would be to subject all market participants to the same set of requirements, and provide greater flexibility to the QM parameters.
    • Modify Appendix Q of the ATR/QM rules to simplify the standards and release clear, binding guidance for its use and application.
    • Revise the points and fees cap for QM loans, by increasing the dollar loan amount threshold for application of the 3% cap.
    • Increase the maximum asset threshold for making small creditor QM loans.
    • Clarify the TRID rule through notice and comment rulemaking and/or through the publication of more robust and detailed FAQs in the Federal Register.
    • Modify the TRID rule to allow for a more streamlined waiver for the mandatory waiting periods, and to permit lenders to cure errors in a loan file within a reasonable period after closing.
    • Improve flexibility and accountability for the Loan Originator Compensation rule, in particular to allow for post-closing corrections of non-material errors.
    • Delay implementation of the new HMDA reporting requirements until borrower privacy is adequately addressed and the industry is in a better position to implement the requirements.
  • Mortgage Loan Servicing
    • Place a moratorium on additional Mortgage Servicing Rules, while the industry updates its operations to comply with existing regulations and transitions from the HAMP program to alternative loss mitigation options.
    • Improve alignment and consistency among the CFPB, prudential regulators, and state regulators, in both regulation and examinations, to help decrease the cost of servicing.
  • Private Sector Secondary Market Activities
    • Repeal or revise the residential mortgage risk retention requirement.  If the requirement is revised rather than repealed, designate one agency from among the six rule-writing agencies to be responsible for interpreting the rule.
    • Enhance investor protections for private label mortgage-backed securities.
    • Clarify limited assignee liability for secondary market investors, in connection with origination errors that are not apparent on the face of the disclosure statement and not asserted as a defense to foreclosure.
    • Evaluate the impact that the Basel III capital and liquidity rules would have on the secondary market, and adjust them to reduce complexity and avoid punitive capital requirements.

 

On May 24, 2017, the US Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument in the PHH case, which we have blogged about extensively. The constitutionality of the CFPB’s structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish Presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to Presidential power, including: (i) the single director, (ii) the for cause removal provision, (iii) the funding outside the Congressional appropriations process, (iii) the director’s ability to appoint all inferior officers with no outside input, (iv) the director’s five-year term, (v) the deferential standard of review given to the director’s decisions, (vi) the director’s ability to promulgate regulations unilaterally, and (vii) the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished Presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphrey’s Executor. The DOJ, which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on Presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphrey’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphrey’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphrey’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphrey’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ ‘s counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to Presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphrey’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphrey’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphrey’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior, officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that Elizabeth Warren may run for President after Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphrey’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic Congressional encroachment on Presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The RESPA and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

* * *

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.

 

On Thursday, April 27, the CFPB released a report which outlines a number of strategies for promoting diversity and inclusion (D&I) in the mortgage industry, presents the business case for diversity, and provides current D&I approaches and practices used by mortgage industry participants.

D&I has been a foundational principle of the CFPB since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  Specifically, Section 342 of the Act created Offices of Minority and Women Inclusion (OMWI) at all federal financial regulatory agencies, including the CFPB. OMWIs are responsible for promoting diversity and inclusion in employment and procurement practices at their own agencies, and within the financial entities they regulate.  Pursuant to that mission, the April 27 report came out of a roundtable meeting from CFPB’s OMWI which included representatives from larger and smaller banks, nonbank financial companies, and federal agencies.

The report first highlights the notion that a diverse and inclusive workforce is important to help mortgage industry participants attract and retain the talent and perspective necessary to solve complex issues, create innovative solutions, and improve business outcomes.

Next, the report shares strategies and best practices for creating a D&I program, including:

  • Sustaining a D&I program requires “buy-in” and accountability from leadership. A top-down approach reduces organizational resistance and causes employees to more likely understand the company’s position and be an active participant in D&I efforts. In addition, proper accountability creates a focus that directs D&I efforts to the goals set by management and enhances the organization’s likelihood of achieving its goals.
  • The need to clearly define “diversity and inclusion” so that both employees and consumers can more clearly understand the broad nature of D&I programs and be able to see themselves included in such definitions.
  • The need to make the business case for diversity, which includes diversifying workforces and employee bases in order to more effectively meet the needs of diverse consumers, as well as capitalize on a robust and diverse talent pool. More specifically, the report notes that when the diversity of the workforce is aligned with the demographics of targeted consumers, there is a greater likelihood of increasing business opportunities.
  • The importance of data as data collection and analysis play an integral role in supporting many D&I programs. In fact, the report explains that understanding the demographics of an organization’s workforce is key to ensuring that it reflects the available talent pools as well as customer bases.

In addition to the CFBP OMWI, the Bureau plans to work with the other OMWIs to host additional roundtables that will expand upon the business case for diversity and inclusion. The report concludes by encouraging entities to develop a D&I program that best fit their needs.

Ballard Spahr’s Diversity & Inclusion Team advises clients on the design and implementation of diversity and inclusion programs and is counseling regulated entities on developing and implementing diversity programs. The team consists of Ballard Spahr lawyers from several practice groups who regularly advise financial institutions and publicly traded companies on regulatory compliance issues, including those under consumer financial services laws.

As we have previously discussed, on October 15, 2015, the Consumer Financial Protection Bureau (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 in 2017 by “Covered Institutions.” The 2017 HMDA institutional chart  provides guidance on how to determine whether an institution is covered by Regulation C in 2017.

We also reported on various resources available for HMDA filers. Recently, the “Resources for HMDA Filers” webpage has been updated and is accessible here. As you will see, the 2017 Loan/Application Register (LAR) Formatting Tool has been released. It appears that the focus is lenders with small loan volumes of covered loans and applications, as the Tool is based on Microsoft Excel. In addition, please note that the Filing Instructions Guide for data collected in 2017 is still the July 2016 guide, but the Filing Instructions Guide for 2018 is updated to a January 2017 guide.

A new CFPB report, “A snapshot of servicemember complaints,” focuses on issues related to VA mortgage refinancing.

The report indicates that as of November 1, 2016, the CFPB had received over 12,500 mortgage complaints from servicemembers, veterans, and their dependents.  The CFPB determined based on a key word search of complaint narratives that approximately 18% (about 1,800) of those complaints concern refinance issues.

According to the report, the issues raised in the complaints involve aggressive solicitations, misleading advertisements, and “failed promises” due to processing delays that caused rate locks to expire or otherwise resulted in less favorable terms than expected; a lack of clarity regarding underwriting requirements to obtain a loan; and poor communications causing consumer confusion about changes to monthly payments and escrows.

The CFPB has published a notice in the Federal Register announcing that it has revised its methodology statement for calculating the average prime offer rates (APORs) under Regulations C and Z.

Regulation C requires covered financial institutions to report, for certain transactions, the difference between a loan’s annual percentage rate (APR) and the APOR for a comparable transaction.  Under Regulation Z, a creditor may be subject to certain special provisions if the difference between a loan’s APR and the APOR for a comparable transaction exceeds certain thresholds.

The CFPB calculates APORs on a weekly basis according to a publicly available methodology statement.  The CFPB has revised the statement to reflect a change in the source of survey data for the one-year variable rate mortgage product that it uses to calculate the weekly APORs.  The change was made because Freddie Mac has discontinued publishing the one-year variable rate mortgage data used by the CFPB.  Beginning on July 7, 2016, the CFPB started using data provided by HSH Associates for the one-year variable rate mortgage product.  It continues to use data provided by Freddie Mac for other products in calculating the weekly APORs.