During the past year, the CFPB has engaged in an in-depth review of short term and small dollar loans, specifically payday loans extended by non-depository institutions and deposit advance products offered by depository institutions to their customers. These are loans that are due to be repaid on the consumer’s next payday, or when a significant deposit is expected. On April 24, 2013, the CFPB published a white paper titled “Payday Loans and Deposit Advance Products” containing its findings. CFPB Director Richard Cordray has described the purpose of the CFPB study as being “to help us figure out how to determine the right approach to protect consumers and ensure that they have access to a small loan market that is fair, transparent, and competitive.”
In this week’s episode of As the CFPB Turns questions remain regarding Director(?) Richard Cordray’s constitutional authority to act as the Director of the CFPB. House Financial Services Committee Chairman, Jeb Hensarling, R-Texas, advised Cordray that the D.C. Circuit’s recent decision, which found that President Obama’s recess appointments to the National Labor Relations Board were unconstitutional, applied to the CFPB director as well. Mr. Hensarling advised Director(?) Cordray that “absent contrary guidance from the United States Supreme Court, you do not meet the statutory requirements of a validly serving director of the CFPB, and cannot be recognized as such.” Thus, Mr. Hensarling advised Director(?) Cordray that he was not allowed to testify before the House Financial Services Committee. Mr. Hensarling’s comments received the expected cheers from the right side of the legislative aisle and jeers from the left. Stay tuned for next week’s episode to find out whether Director(?) Cordray and Mr. Hensarling will meet for beers at the White House. On to other news …
The Consumer Financial Protection Bureau (CFPB or Bureau), through its Office of Enforcement, may conduct inquiries of institutions or persons to investigate compliance with the federal consumer financial laws for which it is responsible. The CFPB currently has many such investigations underway. The CFPB’s basic investigative tool is a Civil Investigative Demand (CID), or a demand for documents and written answers to questions. A CID also may seek tangible things, reports, or oral testimony in an investigational hearing. The CID will specify the enforcement staff involved, instructions for dealing with the dreaded electronically stored information (ESI), and the deadline for response (which is typically fairly short).
During the Great Recession courts expressed frustration with sloppy paperwork and borrowers’ inability to get anyone to help them work out problem loans. Many courts refused to allow mortgage foreclosures to proceed because of the perceived mess. The Consumer Financial Protection Bureau just made it clear it was not going to tolerate these problems when it comes to the transfer of mortgage servicing rights.
On Monday, the CFPB issued guidance directing servicers to “make sure consumers are not collateral damage in the mortgage servicing transfer process.” Servicer must be careful when transferring loans servicing rights. The CFPB wants servicers to know that, where appropriate, they will be required to prepare and submit “informational plans describing how they will be managing the related risk to consumers” when making transfers.
On January 31, 2013, the Consumer Financial Protection Bureau (“CFPB”) published a notice in the Federal Register seeking information regarding the impact of financial products marketed to students enrolled in institutions of higher education (the “Notice”). Although the Credit Card Accountability, Responsibility and Disclosure Act of 2009 includes requirements that financial companies publicly disclose credit card agreements with colleges, universities and alumni associations, less is known about other financial products marketed to students, including debit cards to access student loan funds and bank accounts. At this time, we can only speculate about the outcome of the CFPB’s inquiry, but it is possible that it may lead to requirements, similar to those relating to credit cards, that financial companies publicly disclose these types of agreements with institutions of higher education.
On January 10, 2013, the CFPB issued its final ability-to-repay rule (Rule), which implements Dodd-Frank mortgage reforms requiring creditors to make a reasonable and good faith determination that a consumer will have a reasonable ability to repay the loan according to its terms. Failure to comply with these requirements may give rise to various damages under TILA, and consumers also may assert an ability-to-repay violation as a defense to a foreclosure action. There is no time limit on the use of this defense (although there is a cap on the recoupment or setoff of finance charge and fees), which applies against assignees of the loan in addition to the original creditor.
Loans that meet the criteria to be a “qualified mortgage” (“QM”) are entitled to either safe harbor or a rebuttable presumption of compliance with the ability-to-repay requirements.
Qualified mortgage criteria prohibit certain risky features and practices such as negative amortization. A loan also cannot be a QM unless the consumer has a total debt-to-income ratio of less than or equal to 43 percent (although the CFPB has provided a temporary QM definition softening the debt-to-income ratio). In addition, the transaction’s total “points and fees,” cannot exceed specified thresholds. For a loan of $100,000 or more, the QM threshold is 3% of the total loan amount.
Many in the industry are currently examining the loans they make loans to assess what percentage are expected to exceed the 3% threshold when the Rule becomes effective on January 10, 2014. The element of loan originator compensation remains an important — and unresolved — factor in this analysis.
Loan originator compensation as an element of “points and fees”
Under the Ability-to-Repay Rule, points and fees includes, among other things, all compensation paid directly or indirectly by a consumer or creditor to a loan originator that can be attributed to that transaction at the time the interest rate is set.” A “loan originator” includes mortgage broker firms and individual employees hired by either brokers or creditors, but generally excludes creditors themselves.
Before the CFPB issued the final Rule, many in the industry commented that including all loan originator compensation in points and fees makes little sense. Commenters pointed out that as a practical matter, compensation paid to individual employee originators is already included in the cost of the loan in the form of origination fees or as part of the interest rate. Furthermore, including loan originator compensation in points and fees will often result in “double-counting.” For example, points and fees include mortgage broker fees, including fees paid directly to the broker or the lender for delivery to the broker. But also included is compensation paid to individual loan originators (i.e., loan officers who are employed by mortgage brokerage firms) to the extent their compensation can be attributed to the transaction at the time the interest rate is set. Similarly, money collected by a creditor in up-front charges from consumers (which is already counted toward the points and fees thresholds as items in the finance charge) would be counted a second time as loan originator compensation if the creditor passed it on to its employee loan officer.
The CFPB proposes amendments on this issue
The CFPB is still considering exactly how it should require the inclusion of loan originator compensation under the Ability-to-Repay Rule. The agency has expressed its belief that Congress did intend the Dodd-Frank statute to literally require that loan originator compensation be treated as “additive” to the other elements of points and fees. Nonetheless, the CFPB is not convinced that “an automatic literal reading of the statute in all cases would be in the best interest of either consumers or industry…” In particular, the CFPB does not believe that it is necessary or appropriate to count the same payment between a consumer and a mortgage broker firm twice, simply because it is both part of the finance charge and loan originator compensation.
Therefore, concurrent with the final Ability-to-Repay Rule, the CFPB issued proposed amendments to the Rule that would provide that loan originator compensation is not necessarily always counted against the QM points and fees threshold if it is already counted elsewhere in points and fees.
- The CFPB proposes a new comment that would provide that mortgage broker fees already included in the points and fees as items included in the finance charge need not be counted again as loan originator compensation.
- Another proposed comment would clarify that compensation paid by a mortgage broker to its individual loan originator employee is not loan originator compensation.
- With regard to the creditor context, the CFPB has proposed two alternatives.
- The first alternative would enshrine double-counting by creditors, specifying that a creditor must include compensation paid by a consumer or creditor to a loan originator in points and fees in addition to any fees or charges paid by the consumer to the creditor.
- Under the second alternative, the CFPB would permit all consumer payments of up-front fees and points to offset creditor payments to the loan originator. This alternative would provide that a creditor should reduce the amount of loan originator compensation included in the points and fees calculation by any amount paid by the consumer to the creditor and included in the points and fees calculation as part of the finance charge. For example, if the consumer paid a creditor a $3,000 origination fee and creditor paid the loan originator $1,500 in compensation attributed to the transaction, points and fees would include the $3,000 origination fee but not the $1,500 in loan originator compensation. However, if the consumer paid the creditor a $1,000 origination fee and the creditor paid the loan originator $1,500 in compensation, then the points and fees would include the $1,000 origination fee as well as $500 of the loan originator compensation.
Comments on these important issues are due by February 25, 2013. A link for submitting comments to the CFPB may be found here.
Today, the CFPB issued final rules amending Regulation X (Real Estate Settlement Procedures Act (“RESPA”)) and Regulation Z (Truth in Lending Act (“TILA”)). The amendments focus on mortgage servicing requirements and servicer obligations, and largely track the CFPB’s proposed rules issued August 10, 2012. The CFPB’s announcement of the final rules includes the preamble, regulatory text and official interpretations of the final rules. The final rules and supporting documentation have not yet been published in the Federal Register.
The stated goal of the rules are to provide better disclosure to consumers of their mortgage loan obligations and to provide better information and assistance with available options to consumers having difficulties meeting their mortgage loan obligations. As with the proposed rules, the two final rules are set forth in different notices titled “2013 RESPA Servicing Final Rule” and “2013 TILA Servicing Final Rule.” The Major Topics covered in each are listed below:
The Regulation Z amendments cover:
- Periodic Billing Statements;
- Interest Rate Adjustment Notices; and
- Prompt Payment Crediting and Payoff Statements.
The Regulation X amendments cover:
- Force-Placed Insurance;
- Error Resolution and Information Requests;
- General Servicing Policies, Procedures and Requirements;
- Early Intervention With Delinquent Borrowers;
- Continuity of Contact With Delinquent Borrowers; and
- Loss Mitigation Procedures.
The final rules (and supporting material) span 753 pages and will take effect on January 10, 2014. Prior to the effective date, mortgage loan servicers should take the time to review their business practices and implement any necessary changes. We will continue to post more detailed analysis and commentary regarding the amendments as the full scope of the final rules is assessed.
The Consumer Financial Protection Bureau (“CFPB”) and the Federal Housing Finance Agency (FHFA”) have agreed to jointly produce a National Mortgage Database containing detailed mortgage loan information. In a press release dated November 1, 2012, the CFPB said: “The database will primarily be used to support the agencies’ policymaking and research efforts and to help regulators better understand emerging mortgage and housing market trends.”
The National Mortgage Database will include comprehensive information regarding a mortgage loan, from its origination through servicing, and will include borrower characteristics. It will include loan-level data about the mortgage, including the borrower’s credit profile, the terms of the mortgage, the property financed, and the payment history of the loan. Data will be updated monthly and will be available back to 1998. Additionally, this database fulfills an FHFA requirement under prior legislation to conduct a monthly mortgage market survey.
The database will not contain personally identifiable information, and appropriate precautions will be taken by the agencies to ensure that individual consumers cannot be identified through the database. However, the agencies will undoubtedly use the information from the database to better monitor the mortgage industry and to further develop consumer protections.
The agencies hope that the database will help them track the health of the mortgage markets and of consumers, by showing whether payments are being made on time, as well as information regarding loan modifications, foreclosures, and bankruptcies. The database will also be used to conduct surveys to understand consumer decision-making and how they shop for mortgages and deal with distressed homeownership. The agencies will also monitor the performance of various products to identify potential problems or risks. The database will allow policy makers to see how many mortgages consumers may have and how they are performing. The database will be the first comprehensive database to permit such analysis. The database will also include information about a borrower’s other debts, such as auto loans and student loans.
The agencies expect early versions of the full dataset to be complete in 2013. The agencies hope to be able to share database information with other federal agencies, academics an the public once the database is complete.
Legislation was introduced in Congress August 2, 2012 that would prevent the Federal Reserve from designating nonbanks as systemically significant. This bill is significant, because it in effect prevents the Federal Reserve from supervising insurance companies and other nonbanks. Under Dodd Frank, nonbank entities that are designated as systemically important are subject to the Federal Reserve’s rules governing capital, contingency and succession planning (“living wills”). Entities designated as systemically significant are also subject to the FDIC’s authority.
Concerns regarding the Federal Reserve’s oversight of nonbank entities first began to surface when the Federal Reserve announced the results of its “stress test” for large nonbank entities, such as MetLife. After MetLife and others failed the “stress test,” it was apparent that the Federal Reserve was trying to fit square pegs into round holes. The Federal Reserve was employing the same metrics it had historically used to evaluate depository banks. Those metrics do not translate well to determine the viability and sustainability of large nonbank entities.
The proposed legislation is an extension of that square peg-round hole argument. It seeks to prevent the Federal Reserve from classifying nonbank entities as “too big to fail.” Trade groups argue that the designation of nonbank entities as systemically significant would subject such entities to such massive compliance costs, thereby forcing them out of business, or at the very least, further stifling an economic rebound.
Critics disagree. Critics of the bill argue that allowing nonbank entities to escape the Federal Reserve’s supervision may cause a financial panic. Thus, based on the opposing sentiments, it appears we have come full circle to damned if you do, or damned if you don’t.
Today, the Consumer Financial Protection Bureau (“CFPB”) engaged in its first major enforcement action by requiring Capital One to refund 2 million consumers approximately $140 million for profits gained from deceptive marketing practices related to its credit card protection services. The settlement was reached following an investigation, prompted by a March 2011 Government Accountability report on the high costs of credit card protection services, and numerous consumer complaints about Capital One’s credit card add-on products. The add-ons consisted of certain payment protection and credit monitoring products. The consent order not only required the $140 million refund, but also fined Capital One with a $25 million civil penalty and required it to take a variety of remedial measures, including developing a compliance plan before reengaging in these programs.
For weeks the Consumer Financial Protection Bureau has been advertising the pending release of its proposed mortgage loan disclosures that “are easier for both consumers and lenders to understand and use.” Alas, await no more. The CFPB released its proposed mortgage loan disclosures today. The purpose of the new, supposedly friendlier disclosures, is for the CFPB to meet the requirement under the Dodd-Frank Act that the Truth in Lending Act (commonly referred to as TILA) and the Real Estate Settlement Procedures Act (commonly referred to as RESPA) disclosures be combined into one easy-to-read disclosure. If adopted, the new rule will modify the rules commonly known as Regulations X and Z.Continue reading this entry
This past Thursday, June 21, 2012, the State National Bank of Big Spring (“National Bank’”), the Competitive Enterprise Institute (“CEI”), and the 60 Plus Association, Inc. (“the Association”), filed suit against the Consumer Financial Protection Bureau (“CFPB”), the U.S. Department of the Treasury and various financial officials, including Richard Cordray, Director of the CFPB, in their official capacities. In a 32- page Complaint, the Petitioners railed against what they characterized as the unchecked power of the CFPB and the “chilling effect” its operation would have on small financial institutions. The Petitioners challenged the CFPB on three separate grounds: (1) violation of the separation of powers for failure to provide any meaningful checks and balances on the CFPB; (2) violation of the Appointment Clause for fraudulently appointing Mr. Cordray; and (3) violation of the separation of powers for failure to provide any meaningful checks and balances on the Financial Stability Oversight Council (“FSOC”).
Yesterday, June 19, 2012, the Consumer Financial Protection Bureau (“CFPB”) launched the first public database of complaints against credit card companies. The database shows the different complaints that have been filed against any bank that issues credit cards. The director of the CFPB, Richard Cordray, reports that the new database is not only about keeping consumers informed, but also about providing the CFPB with important insight into consumers and problematic transactions with credit card related financial products.
On Wednesday June 6, 2012, the Consumer Financial Protection Bureau (“the Bureau”) also issued an interim rule with request for public comment, on the rules drafted to bring the Bureau into compliance with the Equal Access to Justice Act (“EAJA”). The rules set out the guidelines for payment of attorney’s fees for certain parties, excluding the United States. The Bureau followed closely to the model rules created by the Administrative Conference of the United States. While the interim rule outlines various modifications made to modernize the model rules, the Bureau adopted the majority of the model rule.
On June 6, 2012 the Consumer Financial Protection Bureau (the “Bureau”) issued a final rule providing more on their investigative procedures. Codified in Section 1080, the rules have only further delineated the practices and processes already in use by the Bureau. Yet, the regulations provide further structure and clarity to the Bureau’s intended investigation procedures.
As noted in an earlier posting, the final investigation and adjudication rules are modeled heavily after those presently employed by the Federal Trade Commission (“the FTC”). Yet, the Bureau also reviewed the guidelines of other law enforcement agencies. The Director, Assistant Director, and the Deputy Assistant Director of the Office of Enforcement (“the Bureau leadership”) are authorized to issue civil investigative demands (CID’s). This authority is non-delegable. The Bureau has broad authority to request documentary material, tangible things, electronically stored material, written reports, answers to questions, or oral testimony from the target of an investigation pursuant to the investigative demands. Each type of evidentiary material is outlined and defined in the final rule. Additionally, the Bureau leadership has broad power to modify CID’s, to extend time (although disfavored) in order to cooperate with the parties.
The Consumer Financial Protection Bureau (“the Bureau”) promulgated various final rules dealing with their enforcement powers on June 6, 2012. Among them was the final rule for state official notification. While short in comparison to the other rules issued, this rule provided some guidelines for state officials and attempted to create a process that will keep the Bureau informed of all consumer protection actions initiated by the states.
Some “non-banks” that provide financial products and services to consumers may soon receive notice that they have a new federal regulator. The Consumer Financial Protection Bureau (Bureau) proposed a rule last week to establish procedures to determine when the Bureau has supervisory authority over companies and individuals that provide, or have provided, financial products or services to consumers that the Bureau deems “pose risks” to consumers.Continue reading this entry
In a brief filed Tuesday the CFPB argued to the Tenth Circuit Court of Appeals in Denver that a consumer need not file a lawsuit in order to rescind a home equity line of credit, second mortgage or refinance when proper disclosures have not been given.
Section 1635 of the Truth in Lending Act requires lenders to disclose certain terms. Consumers are entitled to rescind loans within three business days following the consummation of a transaction or the delivery of the required disclosures and rescissions forms. However, if proper disclosures and forms are not provided, the consumer has three years after the consummation of the transaction (or upon the sale of the property) to rescind.
Today the Consumer Financial Protection Bureau issued the first in a series of periodic bulletins it plans to issue on the policies and priorities of its Office of Enforcement.
Under CFPB Bulletin 2011-04 (Enforcement), the Bureau’s enforcement staff will have the discretion (but not an obligation) to notify potential enforcement targets of potential violations and give them an opportunity to respond before the Bureau recommends or commences an enforcement action. The Bureau will not give pre-enforcement notices if it deems them inappropriate, such as where urgent action is required or in cases of ongoing fraud.
Earlier today, the U.S. Senate’s Committee on Banking, Housing and Urban Affairs narrowly approved Richard Cordray’s nomination as the first Director of the Bureau of Consumer Financial Protection. All twelve Democrats on the Committee voted in favor of the nomination, and all ten Republicans on the Committee voted to oppose it.
Cordray’s nomination now proceeds to the full Senate, where its future remains uncertain. While most Democrats have voiced strong support for his nomination, over 40 Republicans–enough to filibuster the nomination–have vowed to oppose Cordray and any other nominee until Republicans’ demands to reform the Bureau’s structure are met.
As Secretary of the Treasury Timothy F. Geithner reminded the Committee in his testimony today, the Bureau will continue to lack enforcement powers over nonbank financial institutions, including consumer finance companies, mortgage brokers, payday lenders and private student loan lenders, until a Director is confirmed and assumes the office.
The Bureau of Consumer Financial Protection also released the proposed interim rules relating to investigations (Title 12, Chapter X, Part 1080, in case you’re keeping track). The rules apply to Bureau investigations conducted pursuant to section 1052 of the Act (12 U.S.C. 5562).
The interim rule went into effect today, July 28, 2011, regarding the process by which state officials are to notify the CFPB of actions or proceedings undertaken to enforce any requirements of the Consumer Financial Protection Act (“CFPA”).
State officials are required prior to initiating any action or proceeding in any court or other administrative or regulatory proceeding against any covered person o enforce any provision of the CFPA or any regulation prescribed thereunder, including but not limited to the filing of a complaint, motion for relief, or other document which initiates an action or proceeding.
The Bureau has initiated a “Dear Abby” type feature called “Explainer” which today answered the question “What is a nonbank, and what makes one ‘larger’?”, submitted by “Consumer.” In addition, the Bureau has posted a ”Notice and Request for Comment” related to the definition of larger nonbank participants under Title X of the Dodd-Frank Act.
With less than 30 days to go before July 21st – the Designated Transfer Date and the day on which the Bureau will inherit much of its considerable power - the Bureau remains the center of substantial controversy. Here is the latest:
INSIDE THE BUREAU
Elizabeth Warren, Harvard professor, Bureau transition team lead, and oft-cited front-running Obama appointee to be the Bureau’s first director, said last week that “We really are an agency. We’re not an implementation team anymore. We’re there.”