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Agencies finalize new standards for AVMs
On June 20, the CFPB, OCC, Fed, FDIC, NCUA and FHFA (the financial services regulators) issued a final rule implementing new provisions governing the use of automated valuation models (AVMs), which are commonly used by mortgage originators and secondary-market issuers to estimate a property’s value for loan underwriting and portfolio monitoring. The rule, which was proposed in June 2023 (covered by InfoBytes here), had mortgage servicers adopt policies and procedures ensuring that AVMs operate with certain quality control standards, designed to operate with a high level of confidence. These estimates should be produced to protect against data manipulation and avoid conflicts of interest. The rule included requirements to conduct random sampling testing and reviews, and to comply with nondiscrimination laws. The financial services regulators noted that despite comments that lending institutions have little control over how AVMs were created, the rule “will allow the implementation of the standards to evolve along with changes in AVM technology and minimize compliance costs.”
In announcing the final rule, FDIC Chairman Martin Gruenberg emphasized that the rule created an independent requirement “to ensure that AVMs used in connection with making credit decisions or covered securitization determinations adhere to quality control standards designed to comply with applicable nondiscrimination laws,” and that the “new requirement would further mitigate potential discrimination risk in lenders’ use of AVMs.” In its announcement, the OCC stated that the rule “supports Acting Comptroller of the Currency Michael J. Hsu’s priority to reduce inequality and elevate fairness in banking.”
The final rule will go into effect the first day of the calendar quarter 12 months after its publication in the Federal Register.
CFPB extends its small business lending rule and opens comment period
On June 25, the CFPB released its formal action to extend the compliance dates for its small business lending rule, section 1071 (covered by InfoBytes here). The extension of 290 days represented the time elapsed between the Texas court’s first issuance of a stay last year and the Supreme Court’s decision in CFPB v. CFSA last month. As previously covered by InfoBytes, the CFPB notified the public of these changes in May but has now issued its interim final rule with a request for public comment. The new rule will implement section 1071 by adding subpart B to Regulation B of the rule, and the CFPB estimated this rule will affect at most 1,900 banks, savings associations and credit unions with $10 billion or less in total assets.
Under the new rule, the following dates will go into effect:
- Tier 1 institutions (highest volume lenders): The new compliance date will be July 18, 2025, and the first filing deadline will be June 1, 2026.
- Tier 2 institutions (moderate volume lenders): The new compliance date will be January 16, 2026, and the first filing deadline will be June 1, 2027.
- Tier 3 institutions (lowest volume lenders): The new compliance date will be October 18, 2026, and the first filing deadline will be June 1, 2027.
The CFPB also included the previous rule’s 12-month grace period wherein the Bureau would not assess penalties for errors made in good faith in data reporting. To add clarity to these changes, the Bureau issued an unofficial redline of its final changes. The new rule will go into effect 30 days following its publication in the Federal Register.
CFPB settles HMDA lawsuit with large mortgage lender for $3.95 million
On June 18, the CFPB filed a proposed stipulated final judgment and order in its lawsuit against a large mortgage lender for violating HMDA, Regulation C and the CFPA. The mortgage lender agreed to pay a civil money penalty of $3.95 million. As previously covered by InfoBytes, the CFPB filed its complaint against the Florida-based nonbank mortgage lender in October 2023 to obtain relief and penalties associated with the lender’s alleged repeated failure to comply with HMDA reporting requirements and the terms of a 2019 Consent Order. In addition to the monetary penalty, the proposed order will prohibit the mortgage lender from violating HMDA, and require the development of additional policies, and issued controls to prevent errors in recording consumer and loan data and HMDA data reporting. Under the proposal, the mortgage lender must also establish an HMDA Compliance Subcommittee that will include the CEO, COO, CRO, and CLO, and retain a third-party independent auditor to perform HMDA data transaction testing, perform a root cause analysis, and issue written reports for five years. Within 30 days of the date the order will be entered by the court, the mortgage lender must create a compliance plan outlining detailed steps, designed policies, board notifications, and specific timelines. In agreeing to the proposed stipulation, the mortgage lender neither admitted nor denied the allegations in the complaint.
CFPB bans two companies for reverse mortgage servicing violations
On June 18, the CFPB issued an order against two reverse mortgage servicing companies (along with certain affiliates and subsidiaries), after determining that the companies misrepresented loan defaults and failed to respond appropriately to borrower communications to effectively service their reverse mortgages, leading to unnecessary costs and foreclosure fears for borrowers. Specifically, the CFPB alleged the companies failed to respond to borrower communications – including requests for information and payoff statements – in violation of RESPA. The companies also sent false repayment letters to older adult homeowners stating that their reverse mortgage loans were due and must be paid within 30 days due to a default, when no such trigger event had occurred. Further, the companies allegedly had inadequate resources and staffing to handle as many as 150,000 borrowers, leading to systematic regulatory failures.
Both companies were ordered to permanently cease reverse mortgage servicing activities and pay a civil money penalty (although for one company, the civil money penalty was $1 due to an inability to pay). The other company was ordered to pay over $11 million in consumer redress and $5 million in civil money penalties.
CFPB reports negative equity findings from the Auto Finance Data Pilot
On June 17, the CFPB published the first report in a series that will analyze detailed information from nine major auto lenders – including banks, finance companies, and captive lenders – following the launch of its Auto Finance Data Pilot. The initiative aimed to monitor the market to better understand loan attributes that may result in increased consumer distress.
This report analyzed financing of negative equity, “where the trade-in value offered for a consumer’s vehicle is less than the outstanding loan balance and the unpaid balance is rolled into the new loan.” According to the CFPB’s report, between 2018 and 2022, 11.6 percent of all vehicle loans in the dataset collected by the CFPB from industry participants included negative equity, ranging from about 8 percent of such loans in 2022, to about 17 percent in 2020. Among other findings, the report also highlighted that when compared to consumers who had a positive trade-in balance, consumers who financed negative equity: (i) financed larger loans; (ii) had lower credit scores and household income; (iii) had longer loan terms; and (iv) were more than twice as likely to have their account assigned to repossession within two years. The Bureau concluded that a higher proportion of consumers buying less expensive vehicles tended to finance negative equity into their auto loans compared with those purchasing more expensive vehicles. The CFPB said data from the pilot suggested that financing negative equity can result in unfavorable outcomes for consumers, with both the occurrence and the amount of negative equity financed increasing through 2023.
CFPB highlights updated guidance on unemployment benefit delivery, prepaid card fees
On June 17, the CFPB published a blog post highlighting The Department of Labor’s recently updated Unemployment Insurance Program Letter which clarified regulatory obligations regarding the delivery of unemployment benefits by state workforce agencies. The revised guidance came in response to CFPB research which identified issues with prepaid debit cards such as “junk fees” that lessen the value of benefits for recipients, the CFPB said. The guidance will aim to ensure that unemployment insurance, particularly highlighted during the Covid-19 pandemic, was delivered efficiently and with minimal additional costs to beneficiaries.
The guidance reiterated that recipients of unemployment benefits must be given a choice in how they receive their payments. It is unlawful for a state to require recipients to receive any unemployment payments on a state-administered debit card, even if they have the option of moving funds to another account later. The CFPB found that certain fees associated with prepaid cards, including ATM and customer service fees, can be burdensome for users, and states were encouraged to negotiate terms that reduce or eliminate additional fees. Recipients facing issues with prepaid cards will be advised to file a complaint with the CFPB or reach out to their state unemployment offices for assistance.
CFPB proposes order against co-trustees for concealing assets to avoid fine
On June 17, the CFPB filed a stipulated order and judgment, subject to court approval in the U.S. District Court for the District of Kansas, in an action against two individuals to resolve a lawsuit accusing them of concealing assets. The CFPB averred the defendants engaged in multiple fraudulent transfers over two years to avoid paying a fine owed to the Bureau. As previously covered by InfoBytes, the CFPB filed a complaint last year accusing the individuals of concealing assets to avoid paying $38 million in restitution and $12.5 million in civil penalties owed by the company and an individual defendant related to their payday lending practices. The Bureau will be seeking recovery of the transferred funds by declaring the transactions fraudulent and imposing liens on properties, as well as pursuing monetary judgment against the wife of one of the individual defendants and her trust.
The stipulated order and judgment would release freezes and holds on defendants’ accounts and require defendants to pay about $7.3 million of an imposed $12.3 million judgment, with the remainder suspended due to a demonstrated inability to pay more. The payment will apply toward satisfying one defendant’s existing $43 million judgment, which included consumer redress and civil money penalties. That defendant must also share their filed federal and state income taxes with the Bureau until the fine is paid. If any additional financial information is found or if defendants made any financial misrepresentations, then defendants would be required to pay the fine in full.
CFPB’s payday lender rule to begin in March 2025
On June 14, the CFPB published a press release announcing that its payday lender rule from 2017, titled “Payday, Vehicle Title and Certain High-Cost Installment Loans,” will take effect on or around March 30, 2025. The rule will target unfair and abusive practices in short-term lending and will aim to curb lenders’ repeated attempts to withdraw payments from consumers’ accounts even after knowing the accounts may have nonsufficient funds. The CFPB found that such practices resulted in accumulated fees for consumers such as nonsufficient fund fees and overdraft fees. The Bureau also maintained that repeated attempts to withdraw payment from a consumer’s account rarely benefitted lenders because once a withdrawal fails, consecutive attempts are unlikely to succeed.
As previously covered by InfoBytes, the Bureau’s payday lender rule included a “two-strikes-and-you’re-out” rule, which would prohibit lenders from attempting further withdrawals after two failed attempts without the borrower’s explicit authorization. The rule was supposed to take effect in 2019 – however, the rule’s implementation was delayed due to a challenge by an industry trade group. A court order pausing the rule will expire 286 days after the Supreme Court issued a decision in CFPB v. CFSA, which it did so on June 17. In CFPB v. CFSA, the Supreme Court held that the CFPB’s funding structure was constitutional (covered by InfoBytes here).
Chopra testifies at House, Senate committee hearings
On June 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing to address the CFPB’s Semi-Annual Report to Congress. The CFPB Director, Rohit Chopra, in his opening statement addressed the Committee to report on the agency's recent activities and initiatives including its efforts in financial data privacy, open banking rules, and the protection of financial data from surveillance and misuse. Additionally, Chopra highlighted the CFPB’s work in the credit card market, having issued rules seeking to reduce certain credit card fees, foster competition, and protect consumers’ points and rewards. Chopra expressed a willingness to collaborate with the Committee to further address the country’s financial challenges.
Ranking Member Tim Scott (R-SC) warned that the Supreme Court’s recent ruling on the constitutionality of the CFPB’s funding structure was “not a green light for your progressive wish list.” Ranking Member Scott also questioned the CFPB’s issuance of civil investigative demands (CIDs), providing an example of a lengthy multi-year audit that resulted in no CFPB action. Additionally, Senator Reed (D-RI) raised concerns about the Buy Now, Pay Later (BNPL) market, noting that unlike credit card companies, BNPL firms do not consistently report consumer repayments to credit bureaus. He noted that the situation could lead to issues where consumers do not receive credit score benefits for responsible credit usage and where the industry lacks visibility into a consumer's total debt burden. Director Chopra acknowledged Reed’s concerns, citing that auto and mortgage lenders are worried about the lack of BNPL data in credit reports, which could affect their ability to assess borrowers' creditworthiness. Chopra suggested that while reporting is not currently mandated by federal law, it was an area of concern for the CFPB. Additionally, Senator Lummis (R-WY) highlighted “junk fees” and how the concept is being applied in the mortgage industry. Lummis mentioned a working paper by CFPB staff that credited consumer education provided by banks for a particular finding regarding rural borrowers’ understanding of the mortgage process. She followed by asking Chopra if the Bureau considered consumer education a valuable service provided by community banks because, according to Lummis, the cost to educate consumers was being labeled as a “junk fee” by the administration. Chopra’s response noted that there was no attempt to label all mortgage closing costs as “junk fees.” Senator Kennedy (R-LA) expressed confusion regarding the funding of the CFPB, referencing a distinction between revenue and earnings. He cited the statute that governs the CFPB's funding, which stated the agency received its funds from the combined earnings of the Fed. Kennedy pointed out that since September 2022, the Fed had been losing money and therefore had no earnings to transfer, questioning how the CFPB was entitled to any funds under these circumstances. Director Chopra acknowledged the concern and suggested that it was a theory the CFPB has previously explored.
The following day, the House Financial Services Committee also held a hearing to address the CFPB’s Semi-Annual Report. Representative McHenry (R-NC) reflected on the Supreme Court's decision to uphold the funding structure of the CFPB as established by the Dodd-Frank Act. He interpreted the court's opinion as affirming Congress's authority over funding mechanisms and suggested that Democrats join Republicans in creating legislative plans to make the CFPB more accountable. McHenry criticized Director Chopra's leadership, claiming the CFPB under Chopra had become politicized and was neglecting consumer protection in favor of political objectives. He also accused the CFPB of unfairly characterizing financial institutions and questioned Chopra's involvement in the FDIC's internal issues, referencing a toxic workplace culture and leadership problems. On the other hand, Representative Waters (D-CA) highlighted that the CFPB was “combating excessive and illegal junk fees, fighting against housing discrimination and redlining, and holding mega-banks accountable for breaking the law and harming consumers.”
Addressing the Bureau’s proposed rule under Section 1033 of the Dodd-Frank Act, which governed consumer access to financial records, McHenry expressed concerns that the CFPB's proposed regulations might “entrench” those in the financial industry by valuing their hold on financial data. Director Chopra responded by emphasizing the need to prevent practices like bait-and-switch, where financial products such as auto loans are offered with the ulterior motive of “harvesting” and selling data. When McHenry asked for a timeline, Chopra indicated the aim to finalize the rule by October.
Among questions from other representatives, Representative Wagner (R-MO) questioned Director Chopra about the principles of risk-based pricing in the financial industry. Chopra stated that while it was not mandated, risk-based pricing was commonly used by institutions to appropriately measure risk. Wagner expressed concerns that the CFPB's new rules on credit card late fees and overdrafts could undermine this principle. Chopra disagreed, arguing that the rules would encourage better risk-based pricing, and he did not see a connection between aligning late fees with Congressional guidelines and undermining risk-based pricing. Wagner then suggested the new rules could increase persistent debt among consumers. Throughout the discussion, Chopra insisted that the CFPB's actions were in line with common sense and Congressional prohibitions against unreasonable fees.
CFPB bans medical debt in credit reporting decisions
On June 11, the CFPB released a proposed rule to ban obtaining or using medical information for credit eligibility determinations. Specifically, the proposed rule would amend the FCRA to remove the medical financial information exception and limit credit reporting of medical debt.
In 2003, Congress amended the FCRA to restrict creditors’ use of medical information for purposes of making credit eligibility determinations, and it authorized the banking agencies to issue exemptions from the restriction through rulemaking. In 2005, the banking agencies issued a regulatory exception to permit creditors to obtain and use consumers’ medical financial information when making credit eligibility determinations if certain conditions were met. The CFPB’s proposed rule would roll back the 2005 exception, in addition to other changes. First, the proposed rule would remove the financial information exception that permits creditors to obtain and use medical and financial information (including regarding medical debt) in connection with credit eligibility decisions (with certain limited exceptions). Second, the proposed rule would limit consumer reporting agencies’ ability to furnish medical debt information to creditors.
CFPB Director Rohit Chopra noted in prepared remarks that the proposed rule would eliminate the “loophole” that allowed lenders to access and use medical debt information, which he argued would align regulations with congressional intent. A fact sheet from the White House, published on behalf of Vice President Kamala Harris and Director Chopra, stated that this action builds on prior efforts by the Biden-Harris administration to reduce the burden of medical debt.
As previously covered by InfoBytes, the Bureau announced this initiative in September 2023. The CFPB signaled its interest in proposing this rule when it threw its support behind Connecticut SB 395, which bans the inclusion of medical debt in consumer reports (covered by InfoBytes here). The proposed rule would go into effect 60 days following publication in the Federal Register.