CFPB Proposes Further Modifications to Mortgage Rules

In an effort to ease implementation of its January 2013 mortgage rules, the CFPB has proposed additional amendments containing clarifications and revisions to those rules. Although the proposed amendments impact various aspects of the mortgage rules, some of the more noteworthy changes include the following:

• Loss Mitigation: Generally under preexisting rules, a servicer must acknowledge receipt of a loss mitigation application within five days of receiving the application. The servicer must inform a borrower whether it considers the application to be complete or incomplete, and to identify any missing information in order to complete the application.  

• Under the newly proposed rules, however, a servicer can, in limited circumstances, still request additional information from a borrower who submitted an application that had been previously deemed to be complete. For those borrowers who did not submit a complete application, the servicer may select a “reasonable date” by which an incomplete application must be corrected.

• Foreclosure Process: Under the current rule, a servicer may not make a first notice or filing required for a foreclosure unless and until the loan is more than 120 days delinquent. The proposed amendments, however, would clarify that the prohibition means that the servicer is prohibited from filing any document that “would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law” during that 120-day period.  The amendment is likely to have a significant impact on the foreclosure process, particularly when considering requirements for mediation and right to cure notices in some states.

• Loan Originators: In response to creditors and loan originators expressing concern that tellers or administrative staff could be unintentionally classified as loan originators when engaging in routine service activities, the proposed amendments seek to clarify this definition. Specifically, tellers and staff would not be considered loan originators under the amendments merely because they provided an application form or discuss general credit terms with a consumer. Instead, in order to be considered a “loan originator,” the employee must discuss particular credit terms that are or may be available based upon the specific consumer’s financial information.  

The CFPB’s complete proposed amendments can be found here. 

CFPB Issues Guidance Relating to Self-Policing, Self-Reporting, Remediation, and Cooperation

On June 25^th, 2013, the CFPB issued a guidance regarding potential benefits for covered entities that engage in (i) self-policing, (ii) self-reporting, (iii) remediation, and (iv) cooperation. These activities are all referred to by the CFPB as “responsible conduct,” and may, when warranted, “favorably affect the ultimate resolution of a [CFPB] enforcement investigation.” In short, the CFPB asserts that it is seeking to encourage “activity that has concrete and substantial benefits for consumer and contributes significantly to the success of the [CFPB’s] mission.” 

According to the guidance, the CFPB generally considers the four above-referenced types of conduct when determining whether to award “affirmative credit” in an enforcement investigation. However, the CFPB notes that in order to receive such credit, the covered entity’s conduct “must substantially exceed the standard of what is required by law in its interactions with the [CFPB].” The CFPB describes the four categories of responsible business conduct as follows:

• Self-Policing: The CFPB notes that this can also be described as “self-monitoring” or “self-auditing.” It means that a covered entity demonstrates a “proactive commitment” to “use resources for the prevention and early detection of potential violations of consumer financial laws;”

• Self-Reporting: This factor involves an entity’s decision to promptly report its own violations, or potential violations, to the CFPB. When an entity engages in self-reporting, the CFPB notes that it benefits the CFPB by freeing CFPB resources for other investigations. In the guidance, the CFPB explains that it gives this factor “special emphasis” when evaluating a party’s conduct;

• Remediation: Under this factor, the CFPB encourages entities to, without CFPB involvement, implement measures to prevent identified violations from recurring – even when only a potential for violations exists; and 

• Cooperation: In order to receive credit for cooperation, the guidance states that a party “must take substantial and material steps above and beyond what the law requires in its interactions with the [CFPB].” Simply doing what is already required in an investigation will not, the CFPB notes, result in a reward of any special consideration.

In the guidance, which is available here, the CFPB further fleshes out each of the above-referenced activities, and provides specific questions that the CFPB will examine when determining whether an entity has engaged in “responsible business conduct.” 

CFPB Issues Rule on Supervising Nonbanks that Pose Risk to Consumers

On June 26^th, 2013, the CFPB issued its final rule to establish procedures to bring covered nonbanks under its supervisory authority – specifically, those nonbanks whose activities it has “reasonable cause” to determine pose risks to consumers. These entities would include those that offer or provide consumer financial products or services but do not have a bank, thrift or credit union charter. The move represents another step in the CFPB’s continued expansion of its authority.

The CFPB has indicated that it intends to use this supervisory authority over nonbank entities that it has reasonable cause to believe have engaged in conduct that may involve potentially unfair, deceptive, or abusive acts or practices, or any other conduct that potentially violates any federal consumer financial laws. Significantly, the rule does not define what constitutes “reasonable cause” when evaluating these entities. Nevertheless, the CFPB’s determination of such conduct will be based upon a variety of sources, including among others, complaint data collected by the CFPB, judicial opinions and administrative decisions. 

Under the final rule, the CFPB will provide targeted nonbank entities with notice that they are being considered for supervision since the CFPB may have reasonable cause to determine that they pose a risk to consumers. The rule outlines the information that will be contained in the notice, and also provides a reasonable opportunity for the targeted nonbank to respond to the notice.  Further, once determination is made to supervise the nonbank, the rule also creates a procedure by which a nonbank may subsequently file a petition to terminate the CFPB’s supervisory authority after a two year period.

The final rule is available here and will be effective 30 days after publication in the Federal Register.

CFPB Orders Auto Lenders to Refund Millions to Service Members

On June 27^th, 2013, the CFPB ordered U.S. Bank and one of its nonbank companies, Dealers’ Financial Services (DFS), to end deceptive marketing and lending practices targeting active-duty military. U.S. Bank and DFS were ordered to return approximately $6.5 million to service members for allegedly failing to properly disclose all of the fees charged to those members participating in the companies’ Military Installment Loans and Educational Services (MILES) auto loan program and for allegedly misrepresenting the true cost and coverage of add-on products financed with auto loans.

Specifically, the CFPB determined that U.S. Bank violated both the Truth in Lending Act and the Dodd-Frank Act by failing to disclose a monthly processing fee for automatic payroll allotments and failing to properly disclose to the service members the schedule of those payments. 

The CFPB determined that DFS also wrongfully understated certain costs and fees.  For example, DFS stated in marketing materials that the cost of vehicle service contracts would add just “a few dollars” to the service members’ monthly payments, but that the fees were actually $43 per month (on average). Similarly, DFS’s statements that insurance policies would cost only a few cents a day were, according to the CFPB, misleading since the true cost averaged 42 cents a day. 

In light of the foregoing, the CFPB ordered U.S. Bank and DFS to halt such practices and instead take steps to improve disclosure. In addition, U.S. Bank agreed to pay at least $3.2 million and DFS agreed to pay $3.3 million to over 50,000 service members who had outstanding MILES loans between January 1^st, 2010 and now. Further, U.S. Bank and DFS agreed to modify the MILES program so that service members are not required to use allotments in order to participate. Both companies must also submit a redress plan for approval by the CFPB, followed by subsequent reports to the CFPB demonstrating compliance with the order. 

Significantly, according to Richard Cordray, Director of the CFPB, the CFPB did not impose any civil monetary penalties upon U.S. Bank and DFS due to the companies’ level of cooperation with the CFPB to resolve the above issues.

 Rep. Spencer Bachus Introduces Legislation to Restructure the CFPB

Rep. Spencer Bachus (R-AL),who was the Ranking Member of the House Financial Services Committee during the passage of Dodd-Frank, has introduced legislation, the Responsible Consumer Financial Protection Regulations Act of 2013 (H.R. 2446), to replace the Director of the CFPB with a five person commission. The commission’s chair would be the CFPB’s principal executive officer.  

Under the proposal, each member of the panel would be appointed by the President, subject to Senate approval, for staggered five year terms. Each member could also serve after expiration of his or her term until a successor has been confirmed – but only for a maximum of one additional year.

The bill prohibits the Chair of the Commission from making requests for estimates related to appropriations without the prior approval of the commission.

H.R. 2446 has been referred to the House Committee on Financial Services.

CFPB Releases List of Rural and Underserved Counties for 2014

On July 2^nd, the CFPB published its 2014 list of rural and underserved counties.¹  Small creditors operating in “rural” or “underserved” counties are exempt from certain CFPB mortgage rules. Among other things, these creditors are exempt from the higher-priced mortgage loan (HPML) escrow rule - which requires creditors of HPMLs to maintain an escrow account for at least five years after consummation of the loan - and are eligible to originate balloon-payment qualified mortgages.²

To mollify small creditors whose counties no longer receive rural or underserved classification in 2014, the CFPB noted these creditors can still originate balloon-payment qualified mortgages until January 10^th, 2016, and that during the two year transition period, it would consider amending the definition of rural and underserved. The CFPB also noted its June 24^th proposal, which would enable all small creditors to originate balloon high-cost mortgages (provided the mortgage meet the general criteria for small creditor balloon-payment qualified mortgages).

Rep. Sean Duffy Introduces Legislation Relating to CFPB Data Collection

On July 2, Rep. Sean Duffy (R-WI) introduced the Consumer Right to Financial Privacy Act of 2013 (H.R. 2571). The legislation “amend[s} the Dodd-Frank Wall Street Reform and Consumer Protection Act to require the Bureau of Consumer Financial Protection to notify and obtain permission from consumers before collecting nonpublic personal information about such consumers and for other purposes.”

The legislation amends Section 1022(c)(9)(A) of the Dodd-Frank Wall Street Reform and Consumer Protection Act as follows³:

• Replaces “may not obtain from a covered person or service provider” with “may not request, obtain, access, collect, use, retain, or disclose”

• Replaces “personally identifiable financial” with “nonpublic personal”; and

• Replaces “from the financial records” and all that follows through the end of the sentence with “(i) the Bureau clearly and conspicuously discloses to the consumer, in writing or in an electronic form, what information will be requested, obtained, accessed, collected, used, retained, or disclosed; and (ii) before such information is requested, obtained, accessed, collected, used, retained, or disclosed, the consumer informs the Bureau that such information may be requested, obtained, accessed, collected, used, retained or disclosed.”

The legislation also applies to “any person directed or engaged by the Bureau to collect information to the extent such information is being collected on behalf of the Bureau.” Lastly, the act would remove the CFPB’s exemption to the Right to Financial Privacy Act.⁴

Senator Mike Crapo Calls for GAO Investigation into CFPB Data Collection.

On July 2^nd, Senator Mike Crapo (R-Idaho) – the Ranking Member of the Senate Committee on Banking, Housing and Urban Affairs - wrote Gene Dodaro – Comptroller General of the GAO - to “request that the GAO investigate CFPB’s data collection to determine its purpose, scope and intended use; specific legal authority pursuant to which the CFPB is collecting consumers’ data; how the CFPB secures and protects information it collects; the purchase and use of data from third parties and contractors; and the cost of this data collection for both the CFPB and the institutions that are providing information.”

Crapo suggested a non-exclusive list of detailed questions for the GAO to consider in conducting its investigation. The questions were classified in the following categories: (1) statutory limitations / legal authority, (2) scope and purpose, (3) privacy, (4) data security and (5) cost-benefit analysis

To support a GAO investigation, Sen. Crapo indicates that a previous Banking Committee hearing and several news reports have brought to his attention that CFPB is expending $20 million or more towards collection of consumer data. His letter acknowledges CFPB’s position that the data is not consumers’ personally identifiable information, but expresses concern that the exact nature of the information and the scope of the collection is not transparent. He also raises a concern that the Bureau’s Inspector General has reported deficiencies in CFPB’s ability to securely harbor consumer data.

At an April 23^rd, 2013 hearing before the Banking Committee, CFPB Director Cordray defended the CFPB’s data collection as “important for us to have data so that we can analyze it and we’re not dependent on asking the financial institutions what they think.” Director Cordray noted that other federal agencies routinely aggregate consumer data.

CFPB Posts Semiannual Update for Rulemaking Agenda

On July 3^rd, the CFPB posted its semiannual update to its rulemaking agenda, outlining its regulatory roadmap for the next 12 months.⁵ Aside from issuing clarifications to the mortgage rules already issued over the past year, the CFPB identified certain new rules it intends to write, including rules regulating the debt collection and prepaid card industries as well as a proposal to eliminate the requirement to send annual privacy policy notices if the policy has not changed. The CFPB also anticipates issuing further rules to bolster its supervision for certain nonbank entities. Many in the industry also expect the CFPB to issue a proposed rule later this year covering auto finance.

_{¹ The 2014 list can be viewed here. The 2013 list, which was released by the CFPB on May 16, 2013, is available here.}

_{² The CFPB has amended its qualified mortgage rule to allow a small creditor, regardless of whether it transacts business in a rural or underserved county, to originate balloon-payment qualified mortgages until January 10, 2016. See 12 C.F.R 1026.43(e)(6). The rule takes effect January 10, 2014.}

_{³ Section 1022(c)(9)(A) currently provides that “[t]he Bureau may not obtain from a covered person or service provider any personally identifiable financial information about a consumer from the financial records of the covered person or service provider, except— (i) if the financial records are reasonably described in a request by the Bureau and the consumer provides written permission for the disclosure of such information by the covered person or service provider to the Bureau; or (ii) as may be specifically permitted or required under other applicable provisions of law and in accordance with the Right to Financial Privacy Act of 1978 (12 U.S.C. 3401 et seq.).”}

_{⁴ 12 U.S.C. § 3413(r) provides that “[n]othing in this chapter shall apply to the examination by or disclosure to the Bureau of Consumer Financial Protection of financial records or information in the exercise of its authority with respect to a financial institution.”}

_{⁵ The agenda can be viewed here.}