April 4, 2013

CFPB Money Transfer Complaint Database Opens

The CFPB announced that its consumer response team now accepts money transfer complaints. To submit a money transfer complaint, the consumer should have the following information: (1) sender’s name and address; (2) the recipient’s name and address; (3) the date of the transfer; (4) the transaction number; (5) the name of the credit union, bank or money transfer entity that facilitates the transfer; and (6) the location where the money transfer occurred. The consumer response team had previously accepted consumer complaints related to credit cards, mortgages, bank accounts, credit reporting and private student loans. As of February 28, 2013, the CFPB received approximately 131,300 consumer complaints since its inception.

The database has recently come under criticism from consumer advocates and even industry representatives who protest the discrepancy in the amount of complaints the database contains for large and small financial institutions. The detractors have suggested that the CFPB create a second database to track complaints against smaller financial institutions.

CFPB Seeks to Promote Financial Awareness for Certain Consumers

The CFPB announced it was gathering information on the financial capabilities of consumers with disabilities, veterans and economically vulnerable consumers. The CFPB has solicited financial institutions, service providers and vendors to offer strategies to increase the financial capabilities of those classes of consumers that are particularly vulnerable to certain abusive practices.

CFPB Announces $15.4 Million Settlement with Mortgage Insurers

Director Cordray announced four proposed consent orders filed in the United States District Court in the Southern District of Florida in the amount of $15.4 million to settle CFPB enforcement actions brought against Genworth Mortgage Insurance Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty Insurance Corporation for alleged kickbacks to mortgage lenders in violation of the Real Estate Settlement Procedures Act (RESPA). Section 8 of RESPA prohibits an entity from accepting a “fee, kickback or thing of value” in exchange for referrals of settlement service business.

Mortgage insurance is generally required where the consumer fails to put at least 20 percent down at the closing. The CFPB alleged that the insurers provided kickbacks to mortgage lenders by purchasing captive reinsurance from the lender’s affiliate in exchange for referrals. The CFPB claimed that the captive reinsurance was “essentially worthless”. Reinsurance is purchased by mortgage insurers as protection against the risk of the consumer defaulting on the underlying loan.

In a press release discussing the settlement, Director Cordray explained that “we believe these mortgage insurance companies funneled millions of dollars to mortgage lenders for well over a decade. The orders announced today put an end to these types of arrangements and require these insurers to pay more than $15 million in penalties for violating the law.” In addition to the monetary penalty, the insurers have agreed for ten years to refrain from entering into new captive mortgage reinsurance arrangements with affiliates of mortgage lenders, and from obtaining captive reinsurance on any new mortgages, as well as allow regular compliance monitoring.  While the CFPB did not identify the lenders allegedly receiving the kickbacks, it is likely only a matter of time before the mortgage reinsurance probe targets the participating lenders.

April 10, 2013

CFPB Promulgates Small Entity Compliance Guide for ATR and QM Rules

The CFPB published its “Small Entity Compliance Guide for the Ability-to-Repay and Qualified Mortgage Rule.” On January 10, 2013, the CFPB issued the final ATR/QM Rule to implement sections 1411 and 1412 of the Dodd-Frank Act. The rule takes effect on January 10, 2014.

The CFPB published the guide to summarize the ATR/QM rule and explain issues that may hinder compliance by small entities. The guide is primarily intended to benefit small entities that originate closed-end residential mortgage loans. The CFPB explains that the ATR rule requires the creditor to make a “reasonable, good faith” determination based on verification of eight explicit underwriting factors relating to the consumer’s income, assets and credit history that the consumer has a “reasonable ability to repay the loan”. The CFPB also provides an example of how a creditor’s guidelines may measure ATR. 

The guide also sheds light on the “qualified mortgage” rule, including that a QM is subject to a rebuttable or conclusive presumption that the creditor complied with ATR requirements. ¹   The guide also points out that general QMs cannot contain negative amortization, balloon payments, loan terms in excess of 30 years or points and fees in excess of a certain percent of the loan balance.²  The guide explains which loans are subject to, as well as exempt from, the ATR/QM rule and reiterates that creditors must retain records showing compliance with the ATR/QM rule for “three years after consummation”. The complete guide is available here.

CFPB Affirms its Broad Investigatory Scope

Aspire Financial Inc. (Aspire) was subject to a CFPB Civil Investigative Demand (CID) and had petitioned the CFPB to modify or set aside the CID based, in part, on the argument that the CFPB is not entitled to demand materials that pre-date the existence of the Dodd-Frank Act and Regulation Z. On April 16, 2013, the CFPB denied Aspire’s Petition and reaffirmed its broad relevancy standard.

Although Aspire noted in its petition that the CFPB can enforce any violation of a consumer financial law or regulation as a violation of Title X of the Dodd-Frank Act, and that the statute of limitations for such violations was three years, Aspire argued that there was no indication that Congress intended for Title X to be retroactive.  In other words, Aspire asserted that because the CFPB’s enforcement powers are limited to “documentary material or . . . information[] relevant to a violation,” any information that pre-dated the existence of Dodd-Frank is ipso facto not relevant to a violation.

The CFPB rejected this argument and reaffirmed its prior ruling in PHH Corp., 2012-MISC-PHH Corp-0001 (CFPB Sept. 20, 2012) (hereafter PHH Corp.).  The CFPB explained that “[i]n PHH Corp., persuasive precedent was found which indicated that such evidence can be appropriately obtained because ‘the issue here is not whether all such information is itself actionable; rather, the issue is whether such information is relevant to conduct for which liability can be lawfully imposed.’”  Accordingly, the CFPB held that “[e]qually relevant to this investigation is whether and how Aspire has made adjustments to its business in order to comply with new legal requirements . . . .”  As a result, the CFPB found that “evidence from a “reasonable period” prior to the effective date of Dodd-Frank and Regulation N is relevant and within the scope of a CID. 

April 17, 2013

CFPB’s Acting Deputy Director Offers Insight into CFPB’s Mission and Methods

Steve Antonakes, the CFPB’s Acting Deputy Director, addressed the American Bankers Association offering “greater insight into how [the CFPB is] continuing to approach [its] varied responsibilities.”  The CFPB’s efforts, he explained, are directed at financial products – making them and their markets transparent and accountable.  He reiterated the CFPB’s focus on the products, and not whether such products were offered by banks or nonbanks.  Indeed, Deputy Director Antonakes noted that one of the CFPB’s specific charges was “to level the playing field between banks and non-bank entities relative to compliance with federal consumer financial laws.”  Accordingly, he noted, charter or license type is less germane in CFPB examinations and investigations.   

Instead, Mr. Antonakes noted four primary factors that guide the CFPB’s supervisory approach:  (1) the size of the overall market in which a regulated entity’s product line operates, (2) the potential for consumer risk related to a particular product market, (3) a regulated entity’s level of activity in the marketplace, and (4) field and market intelligence regarding management, other regulatory actions, default rates and consumer complaints.  He stated that the CFPB sees an obligation, both as mandated in certain respects and due to what it considers to be “good old-fashioned common sense,” to coordinate with other federal and state regulators about examinations and supervisory activity.  Such comments regarding this free and informal exchange of information confirms subject entities’ needs to diligently monitor and respond to complaints lodged against them – particularly those completely lacking in merit and which are unverified. 

April 18, 2013

CFPB Highlights Older Americans’ Confusion with Current Financial Advising Industry

The CFPB published a report entitled “Senior Designations for Financial Advisers:  Reducing Consumer Confusion and Risks” (the Report). The Report focuses on alleged problems associated with “senior designation” credentials that are routinely used by financial advisers when marketing their services to older Americans.  Indeed, it notes that there are more than 50 such designations used throughout the country without any meaningful verification and means of comparison. 

The Report, published under the CFPB’s charge to make recommendations to help older consumers identify the most appropriate financial adviser and verify such adviser’s credentials, sets forth certain findings with respect to older Americans’ financial confusion.  Specifically, the Report noted that, (1) the names and acronyms of senior designations confuse consumers because such designations can be similar and there is no clear method of vetting and verifying such designations, (2) there are varying training standards, and (3) there is no centralized supervisory authority. 

In response to the foregoing problems, the CFPB’s Report made certain recommendations to Congress and the U.S. Securities and Exchange Commission.  First, the Bureau recommends that state and federal regulators implement “rigorous criteria,” including training and accreditation standards, before bestowing senior-related designations upon advisers. Second, the CFPB recommends that regulators set “consistent and strict standards of conduct” when using such designations, including prohibiting the mischaracterization of marketing events to older Americans as educational or informational events.  And third, the CFPB recommends that the supervisory functions of state and federal regulators be expanded and strengthened. 

CFPB Proposes Clarifications of Ability to Repay/QM and Mortgage Servicing Rules

In what it classifies as an effort to ensure that newly-issued rules are “implemented accurately and effectively,” the CFPB issued a proposal to amend the Ability-to-Repay and QM rules that were issued on January 10, 2013.  The proposal, which is discussed in more detail below, will be published in the Federal Register and will be open for comment for 30 days from publication.

The proposal first addresses, and attempts to clarify, the method by which a consumer’s debt-to-income ratio (DTI) is determined.  For example, while a creditor was originally required to determine a consumer’s “probability of continued employment,” the CFPB now proposes to require creditors to examine past and current employment since employers are generally reluctant to confirm any type of future employment.  Similarly, the CFPB also proposes, among other things, to change how a consumer’s bonus and overtime income are used in determining eligibility.

Second, the proposal addresses QMs that must be eligible either for purchase or guarantee by Fannie Mae or Freddie Mac, or for guarantee or insurance by some federal agency.  The basis for these QMs is currently temporary and the CFPB is now proposing that instead of having to follow general Fannie/Freddie guidelines to constitute a QM, loans that otherwise meet eligibility requirements provided in separate and distinct agreements between a creditor and Fannie/Freddie (or some other agency) can also qualify as a QM. 

Third, the proposal seeks to expand eligibility for QM status by clarifying that a mortgage’s failure to satisfy certain procedural and technical requirements will not necessarily be excluded from QM classification.  Instead, the specific facts and circumstances of each loan would be relevant in that determination.

Fourth, the CFPB seeks to clarify and emphasize that although Regulation X implements the Real Estate Settlement Procedures Act, it does not preempt the field of possible mortgage servicing regulation by the states.

And finally, certain servicing rules for RESPA and the Truth in Lending Act that were issued in January 2013 included an exemption for small servicing operations from certain general requirements.  The limits of small servicing operations were unclear.  Now, however, the CFPB is proposing to remedy that gap and to clarify the scope of what constitutes a small servicing operation.

April 22, 2013

CFPB Launches Office of Financial Institutions and Business Liaison

The CFPB announced the establishment of the Office of Financial Institutions and Business Liaison in an effort to mollify industry concerns that it is hostile to industry concerns. The office is intended to promote collaboration and communications between the CFPB and bank and nonbank trade associations, financial institutions in order to make markets more accessible and efficient for consumers.

The CFPB announced that Dan Smith, Freddie Mac’s former Director for Industry and State Relations, will serve as the first Assistant Director for the newly-created Office of Financial Institutions and Business Liaison, while Catherine Galicia, former senior counsel to the Senate Banking Committee, will serve as the new Assistant Director for Legislative Affairs.

April 24, 2013

Government Turns Attention to Payday Loans and Deposit Advance Products

The CFPB issued a White Paper entitled “Payday Loans and Deposit Advance Products”, which provided a general overview of these popular financial products and raised concerns that these products are becoming “debt traps” for a majority of their users.  On April 25, 2013, the FDIC and OCC issued their Proposed Guidance on Deposit Advance Products which recommended certain safeguards that member institutions should implement in offering deposit advance products. The next day, the Federal Reserve Board joined the fray, by publishing a statement which, among other things, warned member institutions of the compliance risk in designing, marketing and collecting deposit advance loans. The reports make clear that payday lenders and banks that provide deposit advance products should be prepared to deal with stricter regulatory oversight in the coming months.

Greenberg Traurig issued special CFPB Alerts on the CFPB white paper and the OCC, FDIC and Federal Reserve Board Statements. Those Alerts can be found at here and here.

April 25, 2013

CFPB Determines That Electronic Fund Transfer Act Preempts Tennessee Abandoned Property Law

The CFPB issued a Notice of Determination as to whether the Electronic Fund Transfer Act and Regulation E preempted Maine and Tennessee abandoned property laws as to unclaimed gift cards. Specifically, the EFTA and Regulation E prohibit a person from issuing gift cards or gift certificates that expire prior to the later of the following: (1) five years after the date of issuance or (2) the card’s expiration’s date. EFTA preempts state law only to the extent of any inconsistency between the two statutes. Further, it is well-settled that state which offers greater protection to consumers is not inconsistent with EFTA.

The Maine abandoned property law deems certain gift cards as abandoned two years after the later of (1) December 31 of the year in which the obligation arose or (2) the most recent transaction involving the obligation. However, the Maine act does not impose a deadline for the consumer to redeem the card. As the issuer is required to honor an abandoned gift card, the CFPB determined that the Maine law is not inconsistent or preempted by the five year deadline in EFTA and Regulation E.

In contrast, the CFPB held that EFTA and Regulation E preempted a provision of the Tennessee abandoned property law.³  Similar to Maine, the Tennessee abandoned property law deems a gift card abandoned if unclaimed two years after the earlier of (1) the card’s expiration date or (2) two years from the date the certificate was issued. Unlike the Maine act, however, the Tennessee law does not require issuers to honor abandoned gift cards after the issuer has transferred the card to the state. The CFPB found the Tennessee Act inconsistent and thus preempted, because it authorizes issuers to reject gift cards only two years after issuance, while EFTA provides a five year period.

In issuing its determination, the CFPB rejected the position of numerous consumer and industry groups which advocated the establishment a national, uniform limitation period for redeeming gift cards.

April 26, 2013

Canning Likely Heads to the Supreme Court

The Solicitor General petitioned the Supreme Court for a writ of certiorari in the landmark Canning v. National Labor Relations Board. ⁴  A unanimous panel of the United States Court of Appeals for the District of Columbia Circuit had previously determined that President Obama’s three recess appointments to the NLRB were unconstitutional. The Court held that the President’s recess appointment authority only applies during a formal intersession recess and only applies to vacancies that arise during the recess period. Therefore, the NLRB appointments were subject to the advice and consent of Senate as prescribed by the Constitution.

Notably, if these recess appointments were unconstitutional, then the NLRB has lacked a quorum to conduct business since August 2011. The decision has major ramifications for the CFPB, as Director Cordray received an identical recess appointment as the three NLRB board members whose appointments were invalidated in Canning.

In its petition, the Solicitor General stated “review….is warranted to resolve the circuit conflict created by the decision below, to remove the resulting constitutional cloud over the acts of past and present recess appointees, and to restore the President’s capacity to fill vacant offices temporarily when the Senate is unavailable to give its advice and consent.” Noel Canning now has until May 28 to file a response. Given the ramifications of Canning, court observers overwhelmingly expected that the Supreme Court will accept the case.

 CFPB Permits “Access to Income” to Serve as Basis for Credit Cards

The CFPB has amended its rules to allow the extension of credit to a new segment of consumers in accord with what the CFPB calls an “example of the [CFPB’s] commitment to working with consumers and financial institutions in order to ensure responsible access to credit for American families.”

Under current regulations promulgated under the Credit Card Accountability Responsibility and Disclosure Act (the CARD Act), credit card providers were required to evaluate an individual consumer’s own ability to pay before extending or increasing credit.  This narrow focus on the card applicant’s independent income often rendered stay-at-home spouses and partners ineligible for their own credit card accounts, despite the fact that such persons were capable of managing such debt due to their spouse or partner’s income. 

In light of the foregoing, the CFPB has changed its focus from looking at an applicant’s independent ability to pay, and now enables providers to instead focus on the applicant’s more general “ability to pay”.  As a result, a card provider can now consider income from a third-party if the card applicant has a reasonable expectation of access to such income.  Thus, spouses and partners who do not have their own source of income but instead use and rely upon the income of their working spouse or working partner will now be given greater access to credit. 

April 30, 2013

CFPB Revises International Money Transfer Rules

The CFPB issued its final rule regarding establishing certain protections for consumers who transfer money internationally – the “remittance rule.”  The remittance rule was originally slated to go into effect on February 7, 2013, but was delayed by the CFPB due to the CFPB’s subsequent decision to propose further amendments.  The final rule now contains these amendments, which mainly address two areas: (1) disclosure of recipient institution fees and foreign taxes and (2) error resolution procedures. 

Under the revised final rule, a transfer provider must disclose certain fees – including the fees charged by the provider itself and any agent of that provider.  The provider’s agents are included in this disclosure requirement because the CFPB contends that such fee information should be readily obtainable by providers.  By contrast, however, the rule does not require a provider to disclose the fees that recipient institutions may charge in connection with the transfer or the associated foreign taxes.  Apparently recognizing the difficulties involved in a provider obtaining such information from foreign institutions, the CFPB instead made such disclosure optional.  At a minimum, however, the provider must at least give a disclaimer that recipient fees and foreign taxes may apply.

The revised final rule also addresses procedures and liability associated with incorrect remittance transfers.  Specifically, the rule now states that although a provider may be required to attempt to recover funds that were deposited into an incorrect account, a provider would not be required to bear the cost of the funds that cannot be recovered as long as the incorrect account number was the result of the sender’s error, and certain other conditions, such as providing the sender with notice of the risk of providing an incorrect account number, are satisfied. 

May 2, 2013

CFPB Issues Three New Small Entity Compliance Guides

As part of its ongoing attempts to ease implementation of recent regulations and to offer “plain language guidance”, the CFPB issued three new small entity compliance guides that address the following rules:

• 2013 Home Ownership and Equity Protection Act Rule – Effective January 10, 2014

• Equal Credit Opportunity Act (ECOA) Valuations Rule – Effective January 18, 2014

• TILA Higher-Priced Mortgage Loans Appraisal Rule – Effective January 18, 2014

Each of the compliance guides provide a summary of the referenced rule and assists businesses with highlighting salient issues to be addressed during its implementation.  As always, however, the CFPB warns that the compliance guides are not a substitute for the rules themselves.  In addition, each compliance guide notes that if they do not account for or consider other federal or state laws that may apply to covered topics.

CFPB Director Encourages Financial Education for America’s Youth and Releases Policy Guide

The CFPB’s Director, Richard Cordray, recently addressed the “Investing in Our Future Conference”.  During his speech, he noted that the recent financial crisis was exacerbated because “faced with the growing complexity of financial decisions around mortgages and other household credit, [consumers] were poorly equipped to deal with that complexity by making sound and sensible decisions.”  To remedy this problem, he noted, the CFPB focuses its efforts at “providing effective rules, consistent oversight, and evenhanded enforcement.”  Now, however, the CFPB seeks to delve into youth education as well in an effort to address the problem at its source. 

Accordingly, the CFPB has unveiled its recommendations for improving (or in many cases, creating) programs directed at youth financial education.  From kindergarten through high school, the CFPB is encouraging educators to make financial education a part of their curriculum. 

 The CFPB offers five main recommendations in its white paper entitled “Transforming the Financial Lives of a Generation of Young Americans” (the Policy):

• Introduce financial education beginning in kindergarten and make a “stand-alone financial education course” a graduation requirement for high school students;

• Include personal financial management questions on standardized tests;

• Provide youth with hands-on money management practice;

• Create incentives for teachers to take financial education training to better prepare them to teach the same to students; and

• Encourage parents to discuss money management topics with their children.

The Policy includes a number of examples of how to implement the foregoing, including suggested student banking programs, proposed sample SAT questions, and a number of online resources and tools that are available to teachers and parents. The complete policy is available here.

_{1 Specifically, a qualified mortgage is subject to a conclusive presumption  if the loan is not a “higher priced mortgage loan” while creditors that finance a qualified mortgage that is a “higher priced mortgage loans” only receive a rebuttable presumption of compliance with the ATR requirements. A QM is a “higher priced mortgage loan” if it is a senior mortgage, for which at the time the interest rate on the loan was set, the APR was 1.5 % or more over the Average Prime Offer Rate (APOR). A QM is a “higher priced mortgage loan” for a subordinate lien if the APR, at the time the interest rate, exceeds the APOR by 3.5%.}  

_{2 For example, a loan cannot be a QM if the points and fees total in excess of three percent of the loan balance, where the loan exceeds $100,000.00.}  

_{3 The specific Tennessee statute is §66-29-116.}  

_{4 Specifically, the questions presented in the petition were as follows:}

• _{Whether the President’s recess-appointment powers may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions of the Senate;}
• _{Whether the President’s recess-appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess.}

 _{A copy of the entire petition is available here.}