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 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.
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.
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
The Consumer Financial Protection Bureau launched its website today. It contains a blog, a Ron Howard video describing the agency, a place to make written or even video suggestions and pretty plain language about the bureau’s mission. The first page of the site has a prominently displayed shield, reminding everyone there is a new cop on the beat. The site makes heavy use of social media, having established both a Facebook page and a Twitter account. Check it out. Poke around and see what’s to come.
The Federal Deposit Insurance Corporation (“FDIC”) this week announced it is working with the FBI to investigate crime in federally insured financial institutions and to recover more money from persons formerly affiliated with such banks. The FDIC has long held the power to investigate member-insured institutions, as well as individuals, defined by statute as “institution-affiliated parties.” However, the FDIC has laid low for a decade, making some forget that it enjoys a lower standard of proof to recover civil remedies and a wide berth in the criminal arena as well. Current and former bank executives, as well as other individuals with relationships to financial institutions, should be prepared for several years of increased civil and criminal scrutiny.
Areas of particular interest to the investigation would include:
The Dodd-Frank Wall Street Reform and Consumer Protection Act (CFPA) directly addresses its own preemptive effect on State law and amends the National Bank Act to clarify the standards that apply to national banks. The CFPA greatly increases the powers of states to make and enforce laws designed to protect consumers in financial transactions. The default preemption standard for all covered persons is conflict preemption.
Conflict preemption occurs when a federal law is in “irreconcilable conflict” with State law. It arises when it is impossible to comply with both federal and State law or when State law stands as an obstacle to achieving some federal law objective.
No covered person is exempt from complying with State law unless that State law is inconsistent with the CFPA and then only to the extent of the inconsistency. The CFPA specifically provides that a State law is not inconsistent if the protection given to consumers is greater than the protection provided in the statute.
The Consumer Financial Protection Bureau (“Bureau”) has the power to determine what State laws are preempted, and we expect Courts to defer to the Bureau’s determinations as they would those of any administrative agency specifically empowered to interpret the law.
On June 8, 2010 Elizabeth Warren identified the critical issues likely to emerge as the House/Senate Conference Committee constructs the new Consumer Financial Protection Agency. Warren is a member of the Congressional Oversight Panel created to oversee the implementation of the Emergency Economic Stabilization Act, a Harvard law professor, and the leading champion of the proposed Consumer Financial Protection Agency. Guesting on NPR’s On Point, Warren was asked whether the final financial reform bill would include a credible Consumer Financial Protection Agency (or Bureau). She answered: “If you pick all of the best parts of the version from the House and the version from the Senate, you’ve got a really good bill. If you pick all of the worst parts from the House version and from the Senate version, walk out–because it’s not worth it at that point.” Warren’s comments are timely because the House/Senate Conference Committee meets today to begin reconciling their respective financial reform bills. According to Warren, here are some of the critical issues related to the CFPA for the Committee to reconcile:
1. Warren wants a bill with complete coverage. She wants products to be regulated the same regardless of who issues them. She said part of the reason we have a financial crisis is that mortgages were regulated differently depending on whether they were issued by a federally chartered bank, a state chartered bank or through a mortgage broker. Warren noted that right now a big question is whether auto dealers will be excluded from the proposed coverage. She said pay day lenders want out. Warren cautions that the rules and regulations should cover all.
2. Will bank safety and soundness regulators have veto power over the CFPA? If so, how would it work? Will one regulator have veto power or must several agree? And what is the standard? Does a CFPA action have to threaten the safety and soundness of the banking system to be vetoed? Or can the bank supervisors prohibit CFPA action simply because they do not like it? According to Warren, the consumer agency must have genuine independence to function.
3. How will budgeting work? Will the consumer agency have to plead for its life each year or will it be funded pursuant to some ongoing mechanism.
4. What body will have first line enforcement authority? The House bill says primary authority to enforce consumer protection regulation will lie with the bank supervisory agencies. The Senate bills gives more power to the CFPA.
How will the bills be reconciled? It is impossible to say, but Warren’s comments about the important differences might prove prescient. We will soon know, as the Congressional Conference Committee begins its work today. Look for regular reports here on that Committee’s work. Listen to the full Warren interview here.
After Senator Chris Dodd revealed his new financial regulation package on Monday, Ronald Orol of Market Watch reported that House Minority Leader John Boehner told attendees at an American Bankers Association meeting not to "let those little punk staffers take advantage of you and stand up for yourselves." Chairman of the House Committee on Financial Services, Barney Frank, took exception to the term "punk staffers."
In a letter to Boehner, Frank expresses his "disappointment" with "name calling," and urges Boehner to apologize to all staffers on Capital Hill. The letter, in its entirety, reads as follows:
In yet another twist in the debate over the CFPA, Republican Senator Richard Shelby has reportedly offered two proposals to Senator Dodd. Under the first proposal, a new consumer protection division would be created in the FDIC, which would have to approve of any new regulations. Under the second proposal, Senator Shelby proposes a Financial Products Consumer Protection Council. This head of this Council would be appointed by the President and other members would be bank regulators and the head of the FDIC.
Also, Politico is reporting this morning that Barney Frank wants to televise the negotiations between the House and Senate over the differences in their respective financial reform bills. Frank believes that he can win over Republican Senators by having them televise their remarks on C-SPAN. No response yet from the Senate, where Senator Dodd has been trying to create bipartisan support for a bill in which the CFPA would be not be independent, but housed in another agency.
It has been a busy day for debate over the Consumer Financial Protection Agency ("CFPA"). Elizabeth Warren recently gave an interview to the Huffington Post in which she stated that she is gearing up for a fight on the Senate floor:
"My first choice is a strong consumer agency," the Harvard Law professor and federal bailout watchdog said in an interview with the Huffington Post. "My second choice is no agency at all and plenty of blood and teeth left on the floor."
She believes that any CFPA, in order to be effective, must have four main components:
Responding to "Gridlock May Be Ending on Consumer Protection," an article published today in The New York Times by Edward Wyatt and Sewell Chan, Representative Barney Frank fired off a press release stating unequivocally that, "I do not support housing the Consumer Financial Protection Agency in the Federal Reserve."
According to The New York Times, regarding a Fed-based CFPA:
Mr. Frank said he could consider the idea if it were accompanied by robust ability to issue rules independently of other regulators. If not, he vowed, “I won’t bring it to the House.”
No sooner than the Times article hit the newsstands and the web, Rep. Frank issued a press release which provides, in its entirety:
House Financial Services Committee Chairman Barney Frank (D-MA) issued the following statement to clarify comments made in today’s New York Times that he would consider a financial consumer watchdog housed in the U.S. Federal Reserve. This is not the case.
“I do not support housing the Consumer Financial Protection Agency in the Federal Reserve. I continue to vigorously support the House-passed bill that establishes an independent agency with strong rule-writing authority and enforcement powers to implement consumer protections. I could, if necessary, support housing this important function in the Treasury Department, provided that the entity has sufficient independence and broad regulatory scope to accomplish the mission of protecting consumers.
“My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.”
Plainly, the debate over the issue of where to house the CFPA rages on. At this point, a possible compromise is less than evident.
Stay tuned to The Bulletin for the latest news.
Nobody knows the banking system like the Fed. What better place, then, to house a consumer financial protection agency (CFPA)? The Fed’s insight into the banking system leaves it well-positioned to develop, coordinate, and implement new and existing rules applicable to credit cards and other consumer financial services products. Rather than create a completely new federal bureaucracy to govern the regulation of consumer financial services products, as proposed by the House of Representatives, the Senate proposes a more measured response: house the CFPA in the Fed.
As Craig Torres and Yalman Onaran of Bloomberg Business Week are reporting in their article, “Consumer Agency Within Fed Seen as Victory for Banking Industry,” the debate about whether to have an independent CFPA boils down to this:
Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system. Consumer advocates say it’s a mistake because the Fed didn’t succeed in curbing abuses during the subprime lending boom that contributed to the worst financial crisis since the Great Depression.
Representative Barney Frank, chair of the powerful House Financial Services Committee, calls the Senate proposal “a joke,” and has lashed out at the Fed, calling its track record of consumer protection its “most conspicuous failure.” On the other hand, Senator Chris Dodd, chair of the Banking Committee, is pushing a CFPA that would create a bureau within the Treasury Department or within a new overarching bank regulator that would have authority to write consumer-protection rules.”
So what is the likely outcome? Negotiations in Washington are accelerating, but the issue is so divisive that attempts to find middle ground could thwart the entire effort. As Jim Kuhnhenn reported in the AP, “Dodd, Corker regulatory offer gets cool reception,” when the new proposal came up yesterday in the Banking Committee, it achieved virtually no traction.
The Washington Post‘s financial journalists David Cho and Brady Dennis recently published, "Obama may compromise on consumer agency to pass financial regulation," which reveals that the Obama administration is no longer insisting on an independent Consumer Financial Protection Agency (CFPA). The Administration is concerned about quickly passing the bill through Congress:
President Obama’s economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department, though they still prefer a stand-alone agency. In either case, they are insisting on a regulator with political autonomy and real teeth so it can effectively enforce rules designed to protect consumers of mortgages, credit cards and other financial products.
Treasury Timothy Geithner met with Senators Dodd and Corker Wednesday night to discuss a possible compromise on financial regulatory reform:
In one scenario under discussion, a consumer bureau would be set up within the Treasury Department. In another, a consumer protection division would be established inside a new national agency to regulate banks.
Meanwhile, Elizabeth Warren has not conceded defeat. She appeared on Real Time with Bill Maher last Friday to advocate for financial reform.
There is news today from all of the major players advocating for the Consumer Financial Protection Agency. Elizabeth Warren penned an op-ed for the Wall Street Journal in which she slammed Wall Street for eroding public trust and again advocated for an independent Consumer Financial Protection Agency:
Within the thousands of pages of print in the “Restoring American Financial Stability Act” now before the Senate, the consumer agency is the only proposal that would help families directly. Even those most concerned about the role of personal responsibility concede that it is hard for families to make smart decisions and to compare products when the paperwork on mortgages, credit cards and even checking accounts has morphed into reams of incomprehensible legalese.
The consumer agency is a watchdog that would root out gimmicks and traps and slim down paperwork, giving families a fighting chance to hang on to some of their money. So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.
Meanwhile, the Huffington Post is reporting that the Senator Dodd will propose a CFPA housed in the Treasury Department that will have:
- The authority to write and enforce rules governing mortgages, credit cards and consumer loans;
- Its own budget, one not subject to the Congressional appropriations process so it can’t be harmed by lawmakers bent on taking away its power;
- A unitary executive nominated by the president and confirmed by the Senate;
- And the power to police both banks and non-bank financial firms like payday lenders and mortgage finance companies.
Barney Frank also released a statement praising Professor Warren and Senator Dodd for their continued efforts on the CFPA:
I welcome Senator Dodd’s intention to fight to preserve an independent consumer agency, as we were able to do against the opposition of the financial industry in the House. Professor Warren’s statement today is a beginning to the national debate that we should have on this issue in the coming weeks.
It looks like the proposed Consumer Financial Protection Agency may never see light of day. Republicans and democrats appear to be at an impasse over the amount of power and independence the CFPA would have. Senator Dodd has publicly stated that he will not go ”begging” for the 60th vote in the Senate, which makes the passage of the previously envisioned, all-powerful and independent CFPA highly unlikely. Read more here.
After reaching “an impasse” in negotiations with Senate Republicans on financial regulatory reform, Senator Dodd has stated that he will begin drafting legislation to present to the Senate Banking Committee. It will be interesting to see if Senator’s Dodd’s proposal appeases any Republicans since the Democrats no longer have 60 votes in their caucus.
Here is an article analyzing the differences between the House bill and the latest Senate approach.
Elizabeth Warren appeared on the Daily Show last night giving a passionate plea for tougher regulations on banks and other financial institutions. Although she did not specifically mention the Consumer Financial Protection Agency (“CFPA”), she argued that the current regulatory scheme is ineffective because it is spread out across seven different agencies. She ended her interview by urging viewers to write their Congressperson, and stating that ”either we fix this problem going forward or the game really is over.”
Elizabeth Warren, head of the TARP oversight panel and strong advocate of the proposed Consumer Financial Protection Agency, will be appearing on the Daily Show tonight. The show’s website states: ”Congress’ chief economic watchdog talks about her work overseeing the bank bailout.” Check back tomorrow for details on her appearance.
Representative Barney Frank, chair of the House Financial Services Committee (“FSC”), has issued a memorandum to the members of the FSC addressing certain issues raised by various news publications. The substance of the memorandum is as follows:
Some inaccuracies have appeared in the press about institutions exempted from the reach of the Consumer Financial Protection Agency in the House-passed financial reform bill. For instance, yesterday’s New York Times reported that it “exempted smaller community banks, credit unions, retail merchants …”. Not true. All of those institutions will be subject to all rules issued by the agency with respect to the extension of credit. They also will be subject to agency enforcement. The exemption for smaller financial institutions is only with respect to examination which will continue to be the responsibility of the institutions’ prudential regulators. However, the CFPA will have back-up inspection authority and may independently take enforcement action. And even this exemption is limited to institutions with less than 2% of bank assets.
Importantly, the new agency will also have authority with respect to the now lightly or unregulated institutions such as pay day lenders and check cashers firms which are especially important to lower income families. It also will have authority over independent mortgage brokers and lenders that led the industry in issuing subprime and abusive option ARM mortgages.
Consumer protection has long been a weak link in our system of financial regulation and the meltdown of the subprime mortgage market is only the most dramatic example of the consequences of our failure in this area. The President’s position on closing this gap is of great importance.
Leading consumer protection advocates unanimously support the President. Harvard professor Elizabeth Warren said when the House bill passed, “the banks lost today.” That same day, Travis Plunkett from the Consumer Federation of America said that “The CFPA will allow consumers to shop or take out a loan knowing that there is an agency looking out for their best interests.”
Click here to read the memo as it appears on the FSC’s website.
Amid reports that Senator Dodd was considering dropping plans for an independent Consumer Financial Protection Agency, the New York Times reports that President Obama met with Senator Dodd this week to discuss the administration’s stance:
While administration officials declined to discuss the Obama-Dodd meeting, one said the president’s proposal for a consumer protection office was “nonnegotiable.” The administration sees political advantage in that position, believing that a consumer protection agency is the element mostly likely to be popular with the public in a complicated bill.
Despite reports that Chris Dodd is going to drop plans for an independent Consumer Financial Protection Agency (“CPFA”), Elizabeth Warren, who is in charge of monitoring the bank bailout program, continues to push for an independent agency. In a letter to supporters, she asks them to show public support for the CFPA and organize calls and letter writing campaigns to the Senate Banking Committee.
Speculation continues about what will happen to the pending legislation promoted by retiring and now lame duck senator Chris Dodd. That legislation, of course, includes the creation of a new Consumer Financial Protection Agency (“CFPA”) and a whole host of bureaucratic additions to the federal government. You can read more about that from us by clicking here and here. The Wall Street Journal is now reporting that, in order to get something passed this year, Senator Dodd may jettison the CFPA as an independent agency, favoring instead a new body within an existing agency like the Treasury Department. If true, this proposal is a far cry from what the White House originally contemplated. We’ll keep you posted. Read more from the Journal article here.