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FTC Releases Results of Credit Reporting Study
On February 11, the FTC released the results of its study of the U.S. credit reporting industry, including its finding that five percent of consumers had errors on one of their three major credit reports that could lead to them paying more for products. The study also found that (i) one in four consumers identified errors on their credit reports that might affect their credit scores; (ii) one in five consumers had an error that was corrected by a credit reporting agency (CRA) after it was disputed; (iii) four out of five consumers who filed disputes experienced some modification to their credit report, with slightly more than one in 10 noticing a change in their credit score after the agencies modified errors on their credit report; (iv) approximately one in 20 consumers had a maximum score change of more than 25 points and only one in 250 consumers had a maximum score change of more than 100 points. The main types of disputed and confirmed material errors identified by the study were errors in the trade line (consumer accounts) or collections information. The FTC report is the first major study that looks at the full range of participants in the credit reporting and scoring process, including consumers; data furnishers, which include creditors, lenders, debt collection agencies, and the court system; the Fair Isaac Corporation, which develops FICO credit scores; and the national CRAs. The FTC is required to conduct a study of credit report accuracy and provide interim reports every two years, through 2012, with a final report due in 2014. Late last year, the CFPB, which shares jurisdiction over CRAs, published a white paper on its review of how the three largest CRAs manage consumer data and complaints.
CFPB Schedules Consumer Advisory Board Meeting
On February 12, the CFPB announced that its Consumer Advisory Board will meet on February 20, 2013 in Washington, DC. The portion of the event open to the public will feature remarks from Director Cordray, Associate Director Zixta Martinez, and Consumer Advisory Board Chairman Jose Quinonez. The balance of the event is private, and the agenda includes (i) a presentation by the CFPB's Supervision Office, (ii) breakout sessions with various CFPB offices, including the Office of Fair Lending, and (iii) a review of recently issued mortgage rules and implementation plans. Members of the public that would like to attend the portion of the event open to the public must RSVP.
CFPB Releases First MOU with Tribal Government
On February 12, the CFPB released a memorandum of understanding (MOU) it entered into last month with the Navajo Nation Department of Justice, pursuant to which the parties will share information. The MOU provides for confidential treatment and protection from FOIA disclosure of Navajo Nation documents and information provided to the CFPB, and establishes a framework pursuant to which the Navajo Nation can seek information from the CFPB. Notably, nearly a year ago, in remarks to state attorneys general, CFPB Director Richard Cordray stated the CFPB's intent to focus on payday lenders associated with Native American tribes. The MOU could facilitate the CFPB's efforts to pursue such lenders.
CFPB Announces Plan for Mortgage Rule Implementation
On February 13, the CFPB announced a plan to implement its recently adopted mortgage rules, which go into effect in January 2014. To assist financial institutions with implementing the rules, the CFPB will (i) coordinate with other agencies that conduct examinations of mortgage companies to ensure all regulators have a shared understanding of the CFPB's new rules, (ii) publish plain-language guides in the spring, (iii) publish updates to the official interpretations, with priority given to issues that are important to a large number of providers or consumers, and that critically affect mortgage companies' implementation decisions, (iv) publish readiness guides, available this summer, and (v) work with the FFIEC to develop more in-depth examination procedures.
CFPB Plans Heightened Scrutiny of Mortgage Servicing Transfers
On February 11, the CFPB issued Bulletin 2013-01 to address concerns about "potential risks to consumers" posed by the increased number and size of recent servicing transfers between financial institutions. The guidance states that the CFPB generally will examine such transfers to determine compliance with consumer finance laws, but examiners also will focus on (i) how a transferor has prepared for the transfer of servicing rights, (ii) how a transferee handles the files transferred to it, and (iii) the policies and procedures adopted with regard to transferred loans with loss mitigation in process. The CFPB also plans to require, in appropriate cases, servicers engaged in "significant servicing transfers" to submit written plans detailing how the parties to a transfer will manage consumer risks, and information including: (i) the number of loans involved, (ii) the total servicing volume being transferred, (iii) the name(s) of the servicing platform(s) on which the transferor stored account-level information for transferred loans prior to transfer and information about compatibility with the transferee's systems, (iv) a detailed description of the transaction and system testing to be conducted to ensure accurate transfer of electronic information and a description of the summary report to be generated as a result of this testing, (v) a description of how the transferee will identify and correct errors identified in connection with the transfer, (vi) a description of the training plan and actual training materials for staff involved in reviewing, assessing, utilizing, or communicating information regarding the transferred loans, and (vii) a customer-service plan for responding to loss mitigation inquiries and identifying whether a loan is subject to a pending loss mitigation resolution or application. Servicers will not need CFPB approval of such plans prior to completing a transfer. Finally, the Bulletin offers guidance regarding policies and procedures to comply with the transfer-related aspects of CFPB's recently-issued servicing rules, which become effective on January 14, 2014.
Special Alert: Detailed Analysis of CFPB's Final Escrow Rule
On January 10, 2013, the Consumer Financial Protection Bureau issued its final rule on escrow account requirements for first-lien higher-priced mortgage loans. The rule amends existing escrow requirements and exemptions for such loans by, among other things, extending the required period of time during which escrow accounts must be maintained from one to five years, and creating a new exemption for small creditors that operate predominantly in rural or underserved areas. This Alert provides a detailed summary and analysis of the rule, which becomes effective June 1, 2013 and applies to loans for which creditors receive applications on or after this date. Click here to download our detailed analysis of CFPB's Final Escrow Rule.
Special Alert: HUD Issues Final Disparate Impact Rule
On February 8, HUD issued a final rule authorizing so-called "disparate impact" or "effects test" claims under the Fair Housing Act. The rule provides support for private or governmental plaintiffs challenging housing or mortgage lending practices that have a "disparate impact" on protected classes of individuals, even if the practice is facially neutral and non-discriminatory and there is no evidence that the practice was motivated by a discriminatory intent. The rule also will permit practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns.
In its final rule, HUD codified a three-step burden-shifting approach to determine liability under a disparate impact claim. Once a practice has been shown by the plaintiff to have a disparate impact on a protected class, the final rule states that the defendant would have the burden of showing that the challenged practice "is necessary to achieve one or more substantial, legitimate, nondiscriminatory interests of the respondent . . . or defendant . . . . A legally sufficient justification must be supported by evidence and may not be hypothetical or speculative." As proposed, the defendant would have had the burden of proving that the challenged practice "has a necessary and manifest relationship to one or more legitimate, nondiscriminatory interests."
HUD explained in the rule's preamble that, although it declined to use the term "business necessity" in the second prong of the disparate impact analysis, the phrase "substantial, legitimate, nondiscriminatory interest" is "equivalent to the 'business necessity' standard found in the Joint Policy Statement. The standard set forth in this rule is not to be interpreted as a more lenient standard than 'business necessity.'" HUD also highlighted the removal of the word "manifest," which was replaced by the language "a legally sufficient justification must be supported by evidence and may not be hypothetical or speculative." HUD noted that the revised language is "intended to convey that defendants and respondents . . . must be able to prove with evidence the substantial, legitimate, nondiscriminatory interest supporting the challenged practice and the necessity of the challenged practice to achieve that interest."
With respect to the less discriminatory alternative prong, HUD clarified in the preamble that the alternative must also serve the specified interest supporting the challenge. However, HUD declined to specify in the rule that the less discriminatory alternative must be "equally effective" as the challenged policy - which would have made the rule consistent with the legal standard set forth in the Supreme Court case Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989).
Other noteworthy aspects of the final rule include:
- HUD's decision not to address comments raising objections to the rule based on the fact that the disparate impact standard is inconsistent with that set forth in Smith v. City of Jackson Miss., 544 U.S. 228 (2005) and Wards Cove.
- HUD's statement that the rule applies to pending and future cases because it is not a change in HUD's position but rather a formal interpretation of the Fair Housing Act that clarifies the appropriate standards for proving a violation under an effects theory. HUD also chose not to conduct a cost/benefit analysis on this basis.
- HUD's clarification that the Fair Housing Act provides in these cases awards of damages, both actual and punitive.
- New language in the regulation stating that unlawful discriminatory conduct under the Fair Housing Act includes "servicing of loans or other financial assistance with respect to dwellings in a manner that discriminates, or servicing loans or other financial assistance which are secured by residential real estate in a manner that discriminates, or providing such loans or financial assistance with other terms or conditions that discriminate" on a prohibited basis.
- Language in the preamble restating HUD's position that the Fair Housing Act applies to homeowner's insurance.
Notwithstanding HUD's view that the final rule merely clarifies the existing interpretation of the Fair Housing Act, we expect that this rule will pose substantial compliance challenges for financial institutions.
CFPB Partners with Newark on Consumer Complaint Hotline
On February 7, the CFPB announced that, through a pilot partnership with Newark, New Jersey, the CFPB will accept and respond to questions and complaints about financial products and services posed directly to the Bureau by local residents. The agreement will allow Newark consumers to dial a local hotline and be connected with the Consumer Response team, which will screen complaints for completeness, jurisdiction, and non-duplication. As with consumer complaints submitted to the CFPB through other channels, hotline complaints from Newark residents that meet the initial screening criteria will be sent to the subject company for review. These companies are expected to respond within 15 days, and to close most complaints within 60 days. Consumers lodging a complaint via the hotline can log into the CFPB’s website to check the status of their complaint and to provide feedback about the company’s response. The CFPB currently is accepting complaints regarding credit cards, mortgages, deposit products and services, consumer loans, student loans, and credit reporting.
House Democrats Urge President Obama to Nominate FHFA Director
On February 7, 45 Democratic Members of the House of Representatives sent a letter to President Obama requesting he nominate a permanent director for the FHFA to replace Acting Director Edward DeMarco. The Members object to the FHFA’s decision not to direct Fannie Mae and Freddie Mac to offer principal reduction assistance to troubled borrowers. The FHFA and Mr. DeMarco believe that principal forgiveness does not improve foreclosure avoidance while reducing costs to taxpayers relative to existing policies. In their letter, the Members argue that the FHFA’s decision under Mr. DeMarco is contrary to the intent of the federal law that created the FHFA as conservator. Further, the Members charge that Mr. DeMarco’s stated reasoning has been contradicted by the FHFA’s own data, which indicates that principal reduction loan modifications could save U.S. taxpayers billions of dollars compared to both allowing underwater homes to go into foreclosure, and the FHFA’s preferred alternative of principal forbearance. In support of their position that a new director is needed to properly implement congressional directives meant to support the housing market, the Members also cite (i) the FHFA’s decision not to allow the implementation of a principle forgiveness pilot program, and (ii) recently proposed increased state-level guarantee fees charged by Fannie Mae and Freddie Mac in certain states.
OCC Personnel Changes Elevate Role of Enterprise Governance and Ombudsman, Indicate Increased Focus on Fair Lending
On February 7, the OCC announced that Larry Hattix will serve as Senior Deputy Comptroller for Enterprise Governance and Ombudsman. The move also elevates enterprise governance to the OCC’s Executive Committee. In the new position, Mr. Hattix will oversee the agency’s enterprise governance function, national bank and savings association appeals program, and the agency’s customer assistance group. Mr. Hattix has served as Ombudsman since January 2008, prior to which he served as Assistant Deputy Comptroller for the Cincinnati/Columbus Field Office, where he directly supervised 40 banks. On the same day, the OCC announced Donna Murphy as Director for Community and Consumer Law, a position that oversees the OCC’s law department division that provides legal interpretations and advice on consumer protection, fair lending, and community reinvestment and development issues. Ms. Murphy had served as Principal Deputy Chief for the Housing and Civil Enforcement Section, Civil Rights Division, at the Department of Justice since October 2010. Prior to that, she served as Deputy Chief and Acting Chief for the Housing and Civil Enforcement Section.