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Trade Groups Lobby for Exemption of Small Independent Mortgage Lenders from CFPB Examinations
On September 18, the Community Home Lenders Association and the Community Mortgage Lenders of America sent a joint letter to Treasury Secretary Mnuchin urging relief for smaller independent mortgage bankers from CFPB supervision, enforcement, and vender management audits. Specifically, the trade groups requested support for legislation that would help eliminate the risk of enforcement actions from the CFPB for smaller nonbanks. The letter cites the conclusions drawn in the Treasury Report on financial regulations, released in June (this report was a product of the February Executive Order, covered by a Buckley Sandler Special Alert). Of particular interest from the trade groups was the report’s conclusion that Congress should repeal the CFPB’s supervisory authority and return the supervision of nonbanks to state regulators.
FTC, Department of Education Announce Education Technology Workshop to Explore Privacy Issues
On October 4, the FTC and the Department of Education issued a notice announcing a joint Ed Tech (education technology) workshop to examine the challenges concerning privacy implications as more schools are using school-issued personal computing devices. The workshop will discuss issues surrounding the FTC’s Children’s Online Privacy Protection Act Rule (COPPA) as it applies to schools and how it intersects with the Department of Education’s Family Educational Rights and Privacy Act, which is designed to protect the privacy of students’ education records. The workshop, which is open to the public, will be held in Washington, D.C., on December 1.
As previously covered in InfoBytes, the FTC made modifications to COPPA’s safe harbor program this past July that now require all participants to conduct a comprehensive annual internal assessment of any third-party or service provider that collects personal information from children on their websites or through online services, in addition to issuing updates in June regarding resources companies can use to ensure COPPA compliance.
CFPB Issues Final Rule Regarding Payday, Title, Deposit Advance, and Other Installment Loans
On October 5, the CFPB published its final rule (Rule) addressing payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans (collectively, “covered loans”). The CFPB previously announced the proposed rule in June 2016 (covered by a Buckley Sandler Special Alert). The final rule makes it an abusive and unfair practice for lenders to make a covered short-term loan or covered longer-term balloon loan without determining upfront that the borrower has the ability to repay (known as the “full-payment test”). The full-payment test varies depending on the covered loan, but in essence, requires the lender to reasonably determine that the borrower can meet basic living expenses and major financial obligations and still afford their highest monthly payment(s). The Rule puts a limitation of three on the number of loans that can be made in quick succession (within 30 days of each other).
Lenders may avoid the requirement of a “full-payment test” with covered loans by offering small-dollar, short-term loans that allow the borrower to pay down the principal more gradually or are determined to pose less financial risk to the borrower. In addition, loans that meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration are excluded, as are no-cost advances and wage advance programs that meet certain conditions, though the Rule does impose restrictions on using these exceptions based on the borrower’s loan history.
In addition to requirements surrounding the borrower’s ability to repay, the CFPB also finalized rules regarding payment withdrawals and reporting requirements. The Rule prevents lenders from attempting to withdraw a payment from a borrower’s account after two consecutive withdrawal attempts have failed, unless the borrower has given specific authorization to do so. This restriction applies to covered loans as well as longer-term loans with account access and an APR above 36 percent. The Rule requires lenders to use Bureau-registered credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option.
The provision regarding the registration information systems takes effect 60 days after publication in the Federal Register. The rest of the Rule takes effect 21 months after publication in the Federal Register.
Buckley Sandler will follow up with a more detailed summary of the CFPB’s final rule.
CFPB Issues Interim Final Rule Regarding Foreclosure Communications; Seeks Comment on Proposed Rule About Periodic Statements During Bankruptcy
On October 4, the CFPB announced one change and one proposed change to the amendments to its mortgage servicing rules under Regulations X and Z. These amendments, which were previously covered by a Buckley Sandler Special Alert, are scheduled to take effect in two phases on October 19, 2017 and April 19, 2018.
First, the CFPB amended the amendments to Regulation X’s provision regarding early intervention notices in order to address timing issues that result when a borrower has invoked his or her cease in communication rights under the FDCPA. Had the most recent amendment not been made, a mortgage servicer subject to a cease in communication request would have been required to provide a modified early intervention notice to the borrower every 180 days but not more than once during any 180-day period, leaving no margin for error and creating operational challenges if the 180th day fell on a weekend or holiday. Based on concerns from the mortgage industry the CFPB issued an interim final rule without advance public comment to give servicers a 10-day window to provide the modified notices at the end of the 180-day period. The interim final rule becomes effective on October 19, 2017, at the same time the broader amendments to the early intervention requirements take effect.
Second, the CFPB proposed to update technical aspects of the upcoming periodic statement requirements for borrowers in bankruptcy. Specifically, the CFPB is seeking public comment on changes to the transition rules for borrowers who enter or leave bankruptcy, including replacing the single-billing-cycle exemption with a single-statement exemption for the next periodic statement the servicer would have to provide regardless of when in the billing cycle a triggering event occurs. The Bureau proposed that these amendments take effect on April 19, 2018, at the same time as the new periodic statement requirements for borrowers in bankruptcy.
The comment period on both the interview final rule and the proposed rule will close 30 days after publication in the Federal Register.
OCC Releases Bank Supervision Operating Plan for Fiscal Year 2018
On September 28, the OCC’s Committee on Bank Supervision released its bank supervision operating plan (Plan) for fiscal year (FY) 2018. The Plan outlines the agency’s supervision priorities and specifically highlights the following supervisory focus areas: (i) cybersecurity and operational resiliency; (ii) commercial and retail credit loan underwriting, concentration risk management, and the allowance for loan and lease losses; (iii) business model sustainability and viability and strategy changes; (iv) Bank Secrecy Act/anti-money laundering compliance management; and (v) change management to address new regulatory requirements.
The annual Plan guides the development of supervisory strategies for individual national banks, federal savings associations, federal branches, and federal agencies, and service providers.
The OCC will provide updates about these priorities in its Semiannual Risk Perspective, as InfoBytes has previously covered.
CFPB Publishes Updated Reference Material for HMDA
On September 28, the CFPB released, on its website, updates to the reference material for the Home Mortgage Disclosure Act (HMDA). The Bureau updated the, (i) institutional coverage criteria; (ii) transactional coverage criteria; and (iii) key dates timeline.
These updates are associated with the changes, previously reported in InfoBytes, that the CFPB made in the 2017 HMDA final rule.
Federal Banking Regulatory Agencies Issue Proposed Rulemaking to Simplify Regulatory Capital Rule
On September 27, the Federal Reserve Board, the FDIC, and the OCC (agencies) issued a joint notice of proposed rulemaking to simplify capital rule compliance requirements and reduce the regulatory burden in accordance with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Among other things, the proposed rule will “apply a simpler regulatory capital treatment” for mortgage servicing assets, certain deferred tax assets, investments in unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties, or minority interest. To assist banks in evaluating the potential impact of the proposal, the agencies provided an estimation tool template and summary of the proposal. As previously discussed in InfoBytes, the agencies—all members of the Federal Financial Institutions Examination Council (FFIEC)—issued a report in March following an EGRPRA review, in which the agencies outlined initiatives designed to reduce regulatory burdens, particularly on community banks and savings associations. In a statement issued by FDIC Chairman Martin J. Gruenberg, commenters are encouraged to also consider methods for simplifying existing regulatory capital rules impacting community banks. Comments on the joint proposed rule are due 60 days after publication in the Federal Register.
CFTC Director of Enforcement Offers Incentives to Regulated Companies for Self-Reporting and Cooperation
On September 25, the U.S. Commodity Futures Trading Commission Director of the Division of Enforcement James McDonald spoke before the New York University Institute for Corporate Governance & Finance to address the Division’s priorities and outline its self-reporting and cooperation program. Director McDonald described the Division’s enforcement actions as part of a “broader mission to facilitate healthy, robust, and resilient markets,” with the goal of deterring misconduct. “Optimal deterrence,” he stressed, requires receiving buy-in from regulated companies and financial institutions, which is the premise of the Division’s cooperation and self-reporting program. The Division’s program requires companies to comply with three specific criteria: (i) voluntarily report wrongdoing to the Division in a timely and fully disclosed manner prior to the announcement of a government investigation; (ii) proactively cooperate with the Division throughout the investigation; and (iii) engage in timely and appropriate remedial measures to prevent future misconduct, and implement fixes to internal compliance and control programs. Should a company follow these steps, Director McDonald stated, the Division “will recommend a substantial reduction in the penalty,” and in “extraordinary circumstances . . . may recommend declining to prosecute a case.”
OIG Report: Potential for Improvement Within CFPB Examiner Commissioning and On-the-Job Training Programs
On September 20, the Office of Inspector General (OIG) for the CFPB issued findings in a report entitled The CFPB Can Enhance the Effectiveness of Its Examiner Commissioning Program and On-the-Job Training Program (the Report) stemming from an evaluation to assess the Bureau’s effectiveness when designing, implementing, and executing these two programs.
Examiner Commissioning Program (ECP). The Report found that, despite efforts to enhance the program since it began in 2014, the CFPB's Supervision Learning and Development Division (SL&D)—which is responsible for examiner training—presented several areas in need of improvement, including: (i) where examiners appeared to pursue commissioning before being fully prepared or required multiple attempts to pass commissioning components, which in turn affected the number of examiners available for examinations; (ii) where examiners commenced components of the ECP, despite inadequate training, developmental opportunities, or exposure to certain internal processes; (iii) findings that SL&D lacked a formal method for evaluating and updating the ECP, thus reducing opportunities to identify potential areas for improvement; (iv) inconsistent delivery of ECP requirements to prospective employees; and (v) a lack of clarity on when the start of the five-year time requirement begins for examiners trying to obtain their commissioning, which can create the risk of examiners moving through the ECP before being ready.
On-the-Job Training Program (OJT). The OIG also identified areas for improvement in the CFPB’s implementation of the OJT program. Specifically, the OIG found that due to inconsistent implementation of the OJT program, examiners are unable to clearly understand the program’s requirements and expectations.
Recommendations. The OIG presented the following recommendations: (i) issue guidance documenting an examiner’s readiness, including recommendations from regional management; (ii) update ECP guidance to better prepare examiners in understanding the program’s requirements, including the starting point of the five-year requirement; (iii) implement a formal method to evaluate the ECP program; (iv) develop guidelines for applicants of the ECP program; and (v) reassess the OJT program timeline for module development, communicate guidelines effectively at all regional offices, and develop guidelines for OJT program expectations.
OCC Acting Comptroller Shares Thoughts on Agency’s Innovation Efforts
On September 25, OCC Acting Comptroller of the Currency Keith Noreika spoke before the 2017 Online Lending Policy Summit in Washington, D.C. to discuss ways the maturing banking industry can respond to changing market conditions through the adoption of new business models and adjustments to long-term strategies. “Some pundits see the growth of the online lending industry as a response to the nation’s banking industry. And some say that if the industry had been sufficiently agile and fully met the need for lending, alternative lenders would not have grown so rapidly,” Noreika stated. “I do not share that view. I see the growth of online lending and marketplace lenders as the natural evolution of banking itself.”
According to Noreika, about $40 billion in consumer and small business loans in the United States have been originated by marketplace lenders during the past decade, and since 2010, online lending has doubled each year. In fact, Noreika noted, “some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025.” However, the online industry faces certain challenges and “adapting to new market conditions and effectively managing evolving risks” is pertinent to their success. Noreika highlighted recent innovation efforts by the OCC, such as the agency’s Office of Innovation’s “Office Hours,” which was created to facilitate discussions related to fintech and financial innovation. (See previous InfoBytes coverage here.) Another example is the OCC’s plan to develop “regulatory sandboxes” and bank pilot programs to “foster responsible innovation by OCC-supervised banks” as a means to expand the OCC’s own knowledge in this space. Importantly, Noreika addressed the OCC’s position concerning chartering of fintech companies that seek to expand into banking, along with the possibility of “offering special-purpose national bank charters to nondepository fintech companies engaged in the business of banking”—a concept currently being contested by both the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS). According to Noreika, the OCC has not yet decided whether it will exercise its authority to issue special purpose bank charters. (See previous InfoBytes coverage of CSBS’ and NYDFS’ challenges here and here.)
Finally, Noreika offered support for a legislative approach that would clarify the “valid when made” doctrine central to Madden v. Midland Funding, LLC by reducing uncertainty in establishing that “the rate of interest on a loan made by a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan” and serving to reestablish a legal precedent that had been in place prior to the Madden decision, in which an appellate panel held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act from state law usury claims. (See previous InfoBytes coverage here.)