Category Archives:Consumer Financial Protection Bureau

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.

PHH Corporation v. CFPB

If you are like me, you have probably read several very brief articles about the eagerly anticipated appellate decision from the DC Court of Appeals in PHH Corporation v. Consumer Financial Protection Bureau (CFPB), considering whether or not the CFPB is an unconstitutionally created behemoth. As important as the future of the CFPB is, there were really critical issues addressed by this decision. So, I have put on my reading glasses and now read the entire 110 pages of the opinion.

Constitutional Issue. The first 69 pages of the opinion dealt with the constitutionality issue as to the structure of the CFPB. The court concluded that, in order to appropriately maintain the effect of the Executive Branch, an independent agency must either have a multi-member board or the president must have the authority to remove the director at will rather than only “for cause.” The remedy put into place by this court is to conclude that the CFPB director must be dismissible at will by the president.

FYI, there are three agencies that don’t fit the analysis including the Social Security Administration, FHFA, and the Office of Special Counsel. Another single executive agency, the Office of Comptroller of the Currency, is safe as the comptroller is removable at will.  Therefore, that agency’s constitutional validity should not be at question. And the court found appropriate protections or limitations as to the other three.

RESPA. The court then totally struck the CFPB’s interpretation of the anti-kickback provisions in RESPA. The law and the rule have an explicit exception for “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” HUD had long standing letters and interpretations explicitly permitting the reinsurance scenario. The only issue in this case, then, is whether the reinsurance premiums were at “reasonable market value.” According to the court, “the basic statutory question in this case is not a close call.

This part of the opinion is very important to community bankers as I believe it strikes at the heart of the guidance published last year by the CFPB on marketing services agreements. If the contracts provide for services that are actually performed and the payment is at reasonable market value, then these agreements should be valid.

Statute of Limitations. Cordray held in his administrative opinion that the statute of limitations in RESPA did not apply to him. He concluded that the Dodd Frank Act’s enforcement authority granted to the CFPB authorized administrative actions that were not bound by other statutes and their specific limitations provisions. The court disagreed and concluded that the CFPB’s enforcement authority is in fact limited by the “statutes of limitations of the various federal consumer protection laws it is charged with enforcing.” RESPA has a one year limitation period for court actions and a three year period for administrative ones. Thus, the three years applies here. This is just not ambiguous in RESPA, and the Dodd Frank Act doesn’t override this. This part of the opinion also means that the CFPB can’t ignore the clear statutes of limitation in the other 18 laws assigned by DFA to it.

There is a very good discussion of the core American jurisprudence concept of due process in this part of the opinion. I particularly like this quote from Satellite Broadcasting Co. v. FCC: “Traditional concepts of due process…preclude an agency from penalizing a private party for violating a rule without first providing adequate notice of the substance of the rule…Otherwise the practice of administrative law would come to resemble ‘Russian Roulette.'” I would argue that the current ADA application to private websites-without any rulemaking on the part of the Department of Justice-would also fall within this prohibition!

For more information contact: Karen M. Neeley.

RESPA Compliance and Marketing Services Agreements

As appeared in Banker’s Digest on October 26, 2015

By: Karen Neeley

The CFPB has been very active in pursuing perceived kickbacks in the real estate settlement process.  In June, Director Cordray issued a decision in the PHH Corp administrative enforcement appeal.  The administrative law judge had imposed a penalty of $6 million.  The case involved an alleged kickback relating to mortgage insurance referred to affiliates of the mortgage company.  Cordray concluded that the action was not limited in time and pursued all loans closed on or after July 21, 2008 (years before the bureau was created).  In addition, he disallowed reliance on a 1997 HUD letter on point.  The result was an increase in the penalty to $109 million.  This case follows on the heels of a number of other kickback cases decided on an ad hoc basis by the CFPB.

On October 8, 2015 the CFPB issued Compliance Bulletin 2015-05 on RESPA Compliance and Marketing Services Agreements (MSAs).  This is not a rule, and so no comments are permitted.  As with UDAAP, the CFPB is making law through enforcement proceedings and guidance rather than through formal rulemaking.

Although many of the cases brought by the CFPB have related to insurance services, the bulletin is not limited in its scope.  For example, the Bureau notes that it has found many examples of settlement service providers keeping payments without actually performing any contractually-obligated services such as underwriting, processing, and closing services.  In one case, a title company entered into unwritten agreements with individual loan officers to defray their marketing expenses and to provide leads.  Then the loan officers sent referrals to the title company. Other cases involved other marketing services that were alleged not performed in exchange for the fees paid.

The bulletin notes that the “Bureau has found that many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement…”  A more careful consideration of legal and compliance risk arising from MSAs is recommended by the CFPB.  Whistle blower activity continues to grow and is encouraged by the CFPB.

The timing on this bulletin could not be worse.  Many community banks have already exited residential mortgage lending due to the rigidity of the QM rules and ability to repay standard.  Those who are toughing it out have seriously reevaluated their programs due to the compliance nightmare posed by TRID (Truth in Lending/RESPA Integrated Disclosures).  One obvious solution to the bank that wanted to continue providing residential mortgage loans was to enter into an MSA with a mortgage company or larger institution.  The Compliance Bulletin pours cold water on that option.

Nonetheless, a properly drafted and carefully monitored MSA with a quality mortgage lender can still be a viable option.  But there must be a rigorous due diligence review of the third party with whom the bank contracts.  The board should carefully evaluate all risks before entering into such an arrangement.  Most significantly, the bank must carefully and fully perform the services it agrees to provide in exchange for its fee.  Finally, the program should be monitored and evaluated from time to time to make sure that compliance is still on course.

The bulletin notes, and Cordray states in his decision, that these MSA arrangements result in higher cost and less ability to shop for the consumer.  My concern as an unabashed supporter of community banking is that the true cost of these moves by the CFPB will be in reduced credit availability in rural communities and to marginal borrowers.  Meanwhile, clearly regulatory compliance costs for community banks are now higher.  And while I don’t have a degree in economics, I strongly suspect that higher costs will ultimately mean higher prices on loans.

TBA Files Freedom of Information Act Request with CFPB

The Texas Bankers Association (TBA) announced on its website that it has filed a Freedom of Information Act (FOIA) Request with the CFPB to obtain all documentation the CFPB requested from bank software processors on the overdraft activity of their bank customers.

In a memo, dated June 2nd, to state banking associations, the American Bankers Association raised concerns about the costs to industry of the CFPB’s use of its expansive authority to gather information under Section 1022 of the Dodd-Frank Act. The ABA stated in the memo that one of the processors had informed its clients that it may pass on to them the processor’s costs in responding to the CFPB’s order. The memo encouraged the Bureau to seek all relevant information before engaging in rulemaking, insist that the Bureau fund its data collection efforts, and support the introduction of legislation to address Section 1022 of the Dodd-Frank Act.

In its announcement, the TBA states that it was informed by its members that one of the processors would be billing its client banks for the cost of producing the information sought by the CFPB regarding overdraft checking programs. The TBA commented that it “objects to this third-party data search on both legal and customer privacy grounds” and is “concerned about the breadth of this data sweep and why the CFPB’s information requirements could not be satisfied with a representative cross-sampling rather than a demand request apparently sent to every major processor in the banking industry.”

According to the TBA, in addition to seeking “copies of all factual and analytical surveys and investigations conducted by the CFPB, or on its behalf by third parties,” its FOIA request also seeks “access to any legal analysis relied upon by way of supporting the CFPB’s legal authority for the issuance of the information orders.”

CFPB Challenged

The Consumer Financial Protection Bureau (CFPB), established on July 21, 2011, was challenged by Senator Ted Cruz and Representative John Ratcliffe with the introduction of (S. 1804, H.R. 3118). Both bills move to abolish the Bureau, saying that while the Bureau was intended to “help consumers by regulating and reigning in larger financial institutions,” in actuality, “big banks have only gotten bigger and the number of smaller banks and options for consumers have only decreased.” Separately, Chairman Richard Shelby of the Senate Banking Committee progressed legislation that would place the Bureau within the appropriations process and replace its director-driven governance model with a five-member commission. 

In survey results released by SNL Financial last week, 33% of respondents identified the creation of the CFPB as the byproduct of Dodd-Frank that has most impacted their bank. SNL Financial conducted the online survey of 616 banking industry professionals. The survey ran from July 2, 2015-July 17, 2015.

Senators Ask CFPB for Small Business Loan Data

On July 10th U.S. Sen. Cory Booker (D-NJ) with fellow senators issued a letter urging the Consumer Financial Protection Bureau (CFPB) to expedite the agency’s rulemaking (Regulation B) around publicly available small business loan data, pursuant to Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The request was made due to the lack of public data which makes it difficult for lenders to identify, control and increase lending across all communities.

The letter states, ““There are nearly 28 million small businesses in the United States. While entrepreneurship can open the door to achieve the American Dream, it can be difficult for entrepreneurs to get their businesses started. Access to capital is often limited in underserved and underrepresented communities—the same communities that disproportionately endure financial hardship and lack broader access to opportunities….Current data collection efforts are fragmentary and provide an incomplete picture of lending in the small business marketplace. Regulation B will facilitate the enforcement of fair lending laws and help identify the credit needs of women-owned, minority-owned, and all small businesses.”

Read the Letter

CFPB Proposes Two-Month Extension of Know Before You Owe Mortgage Rule

The Consumer Financial Protection Bureau (CFPB)has issued a proposed amendment to the Know Before You Owe mortgage disclosure rule, which proposes to move the rule’s effective date from August 1st to October 3, 2015. The rule, also called the TILA-RESPA Integrated Disclosure rule, requires easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The Bureau is issuing the proposal to correct an administrative error that would have delayed the effective date of the rule by at least two weeks, until August 15 at the earliest. The Bureau believes that moving the effective date may benefit both industry and consumers with a smoother transition to the new rules. The Bureau further believes that scheduling the effective date on a Saturday may facilitate implementation by giving industry time over the weekend to launch new systems configurations and to test systems. A Saturday launch is also consistent with existing industry plans tied to the original effective date of Saturday, August 1.

The FDIC has revised its interagency examination procedures to reflect the requirements of the TILA/RESPA integrated disclosures (TRID) rule. The revised procedures also reflect the following amendments to other provisions of TILA Regulation Z and RESPA Regulation X:

  1. The alternative definition of the term “small servicer” for certain nonprofit entities in the mortgage servicing rules
  2. The provisions in the ability-to-repay/qualified mortgage rule that give creditors or assignees meeting certain requirements a limited period of time in which to review a transaction and “cure” excess points and fees for purposes of maintaining QM status
  3. Additional exempt transactions under the appraisal rule for higher-priced mortgage loans

The proposal is open for public comment until July 7.


CFPB Expands Consumer Complaint Database

Each week the CFPB sends thousands of consumers’ complaints about financial products and services to companies for response. Those complaints are published in a complaint database after the company responds or after 15 days, whichever comes first.

On June 25, 2015, the Consumer Financial Protection Bureau’s (CFPB’s) Consumer Complaint Database went public providing increased access to consumer complaints. Since 2012, the CFPB has shared anonymous individual-level complaint data on their website to educate the public and improve the functioning of the marketplace. the public complaint included the date of complaint, the type of consumer product at issue, the issue classification, the sub-issue classification, the company criticized in the complaint, and the state and zip code of the complainant’s residence.

In March 2015, individuals were given the option to openly air their grievances by publicizing searchable, narrative descriptions of their complaints in the CFPB database. According to the CFPB, 59% of the consumers lodging complaints have elected to publicize their complaints. Included in the new database is information regarding the timeliness of the company’s response to the complaint, the company’s public response, and whether the complainant disputed the company’s response.

The CFPB believes the new database will: (i) provide context for customer complaints, (ii) allow users to spot trends, (iii) permit consumers to make informed decisions, and (iv) encourage companies to improve their own processes and systems.

View the Complaints in the new database.

Third Annual Fair Lending Report Released

On April 28, the CFPB published its third annual report to Congress on its fair lending activities. The Bureau’s mission includes ensuring fair, equitable, and nondiscriminatory access to credit for all consumers, and that markets for consumer financial products and services are fair, transparent, and competitive. The Report provides an overview of the work performed by the CFPB and accomplishments made during the past year.

According to the  Report, mortgage lending remains a “key priority” for the Office of Fair Lending in terms of both supervision and enforcement, with the focus being largely on Home Mortgage Disclosure Act (HMDA) data integrity and potential fair lending risks in connection with redlining, underwriting, and pricing. In addition, the indirect auto lending industry is also another critical area of concern and focus identified in the Report and, more particularly, the use of discretionary pricing policies within this industry that have resulted in discrimination against certain minorities in violation of the Equal Credit Opportunity Act (ECOA).  For instance, during the past two years, multiple supervisory reviews by the CFPB have revealed discretionary dealer markup and compensation policies which may discriminate against certain minorities. The report also monitored the credit card market, including enforcement actions against a company for its alleged failure to provide certain consumers who had a Puerto Rico mailing address or preferred to communicate in Spanish with debt relief offers. Lastly, the report noted outlined the rights of a consumer whose income is derived, in part or in whole, from a public assistance program. According to the report, the Bureau’s efforts in 2014 to protect consumers from credit discrimination lead to financial institutions providing approximately $224 million in monetary relief to over 300,000 consumers.

In closing the CFPB noted that they look forward to maintaining a sharp focus on discrimination and ensuring that markets operate fairly and effectively for all market participants in 2015.


Banking Regulatory Round Up April 2015

The U.S. House of Representatives this week passed five regulatory relief bills that help community banks.

The bills are:
Helping Expand Lending Practices in Rural Communities Act (H.R. 1259)
Reps. Andy Barr (R-KY) and Ruben Hinojosa (D-TX) have reintroduced this legislation that passed the full House in the last Congress. The bill would direct the CFPB to establish an application process under which a person who lives or does business in a state may apply to have an area designated as a rural area if it has not already been designated as such by the Bureau.

Eliminate Privacy Notice Confusion Act (H.R. 601)
This bill by Rep. Blaine Luetkemeyer (R-MO) would eliminate the annual privacy notice disclosure requirement for institutions that haven’t changed their policies.

Bureau Advisory Commission Transparency Act (H.R. 1265)
This bill by Rep. Sean Duffy (R-WI), would increase transparency in CFPB advisory council meetings.

SAFE Act Confidentiality and Privilege Enhancement Act (H.R. 1480)
This bill by Rep. Robert Dold (R-IL) would protect the confidentiality of information banks share with state regulators.

Mortgage Choice Act (H.R. 685)
This bill by Rep. Bill Huizenga (R-MI) would provide needed clarifications on the Qualified Mortgage rule’s points and fees test.

All of the bills were supported by the American Bankers Association.