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On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.
On July 12, the FTC extended the comment deadline on proposed changes to its Telemarketing Sales Rule (TSR). In May, the FTC proposed to prohibit the use of certain payment methods it believes are favored by “fraudulent telemarketers,” and sought comments by July 29, 2013. Because a slightly modified version of the original proposal was published in the Federal Register on July 9, 2013, the FTC now will accept comments through August 8, 2013.
Recently, HUD published a notice seeking public comments on “ways to improve the efficiency and effectiveness” of FHA’s quality assurance process (QAP). In the notice, HUD explains that it is seeking to enhance its oversight of FHA single-family lenders by evaluating single family quality assurance alternatives that would better align with FHA’s mission. Specifically, HUD aims to ensure that it maintains and improves a quality assurance framework that (i) does not hinder or dissuade lending to FHA-targeted populations; (ii) enhances the efficiency and effectiveness of the QAP; (iii) ensures compensation to FHA for defects resulting from the lender manufacturing process; and (iv) applies fairly to all lenders. In addition, HUD also endeavors to establish a framework that ensures that loans are reviewed within a reasonable time period, post-endorsement; in order to allow FHA to use loan quality findings to improve credit policy and to allow lenders to improve their FHA origination practices. HUD particularly seeks public comments on (i) the types of loan manufacturing or compliance defects found in the QAP that should be subject to indemnification or other administrative remedies or a combination of responses; (ii) how the FHA’s review and comparison of early defaults and claims may achieve an improved assessment of a mortgagee’s performance – for example, HUD is considering establishing a specific standard of defaults and claims which mortgagees should not exceed within a given construct; (iii) whether FHA should establish a threshold manufacturing (or loan deficiency) risk tolerance; and (iv) whether FHA should establish a process to review a statistically significant random sample of loans for each mortgagee within a prescribed time frame after loan endorsement to estimate defect rates. Comments on the potential changes are due by September 9, 2013.
On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.
This afternoon, the CFPB issued CFPB Bulletin 2013-6, which identifies four pillars of “responsible conduct” on the part of potential targets of enforcement action by the Bureau. The CFPB expressly states that such conduct may be rewarded with (i) resolution of an investigation with no public enforcement action; (ii) treatment of subject conduct as a less severe type of violation; (iii) reduction in the number of violations pursued; or (iv) reduction in sanctions or penalties. The Bulletin, titled “Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation,” states that such conduct has “concrete and substantial benefits for consumers and significantly contributes to the success of the Bureau’s mission” because it speeds detection and increases investigative and enforcement efficiency, thereby enabling the Bureau to pursue a larger number of investigations.
The Bulletin has interesting parallels to the SEC Seaboard Report and the DOJ’s Thompson and McNulty Memoranda. The four factors to be considered by the CFPB—self-policing, self-reporting, remediation, and cooperation—are discussed in further detail below.
- Self-Policing. In deciding whether to provide favorable consideration for self-policing, the Bureau will evaluate the nature of the violation (duration, pervasiveness, and significance); how it was detected (effectiveness of internal mechanisms); prior or relative performance of compliance management and audit functions; and the institution’s “culture of compliance.”
- Self-Reporting. The Bureau notes that it views self-reporting to be “special” among the four factors, and will evaluate for favorable consideration the completeness, effectiveness, and timeliness of the disclosure, as well as the degree to which the disclosure was purely proactive or a violation otherwise was likely to be discovered.
- Remediation. Remediation activity will be credited based on a review of how timely potential misconduct was addressed and how quickly it was remediated; whether responsible individuals were disciplined; whether information and extent of harm were documented and preserved promptly; and the Bureau’s confidence that misconduct is unlikely to recur.
- Cooperation. In evaluating cooperation with enforcement efforts, the Bureau will look for “substantial and material steps above and beyond what the law requires,” including cooperation from start to finish and the identification of any additional misconduct; proper steps taken to complete an objective internal investigation and share findings with the Bureau; encouragement of employee cooperation; and facilitation of enforcement actions against other potential targets.
The Bulletin should be considered carefully by any entity facing enforcement action by the CFPB because, among other things, the way in which these factors will be applied remains an open question. Despite the encouragement of self-policing, self-reporting, remediation, and cooperation, the Bulletin notes that there is no consistent formula that can be applied to the crediting of responsible conduct, and satisfaction of some or all of the factors will not bar the Bureau from bringing any enforcement action or pursuing any remedy. The Bulletin also states that there may be misconduct so egregious or harm so great that enforcement actions or penalties cannot be mitigated.
On April 24, the CFPB published a white paper on payday loan and deposit advance products that claims to show those products lead to a “cycle of high-cost borrowing.” On April 25, the FDIC and the OCC proposed guidance relating to deposit advance products based on similar concerns. The CFPB paper reflects the results of what the CFPB characterizes as a year-long, in-depth review of short-term, small-dollar loans, which began with a January 2012 field hearing. Although it acknowledges that demand exists for small dollar credit products, that such products can be helpful for consumers, and that alternatives may not be available, the CFPB concludes that such products are only appropriate in limited circumstances and faults lenders for not determining whether the products are suitable for each customer. The CFPB paper does not propose any rule or guidance, but is instead intended to present a clear statement of CFPB concerns. The paper notes that a related CFPB study of online payday loans is ongoing. The FDIC and OCC proposed guidance outlines the agencies’ safety and soundness, compliance, and consumer protection concerns about deposit advance products, and sets forth numerous expectations, including with regard to consumer eligibility, capital adequacy, fees, compliance, management oversight, and third-party relationships. For example, under the guidance the agencies would expect banks to offer a deposit advance product only to customers who (i) have at least a six month relationship with the bank, (ii) do not have any delinquent or adversely classified credits, and (iii) meet specific financial capacity standards. The guidance also would require, among other things, that (i) each deposit advance loan be repaid in full before the extension of a subsequent loan, (ii) banks refrain from offering more than one loan per monthly statement cycle and provide a cooling-off period of at least one monthly statement cycle after the repayment of a loan before another advance is extended, and (iii) banks reevaluate customer eligibility every six months.
On March 21, the CFPB issued Bulletin 2013-02, which provides guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and specifically addresses the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The CFPB explains that indirect auto lenders are creditors under ECOA and Regulation B if they regularly participate in making credit decisions. Based on information the Bureau has collected to date, it believes the “standard practices” of indirect auto lenders constitute participation in a credit decision.
The CFPB contends that by permitting dealer markup and compensating dealers on that basis, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios. As such, the CFPB urges indirect lenders to (i) impose controls on, or otherwise revise, dealer markup and compensation policies, and monitor the effects of those policies and address unexplained pricing disparities on prohibited bases; or (ii) eliminate dealer discretion to mark up buy rates and compensate dealers in some other way.
The guidance also identifies what the CFPB considers to be core aspects of a robust fair lending compliance program, including: (i) an up-to-date fair lending policy statement; (ii) regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and board members; (iii) ongoing monitoring for compliance with fair lending and other policies and procedures intended to reduce fair lending risk; (iv) review of lending policies for potential fair lending violations, including potential disparate impact; (v) depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction; (vi) regular assessment of the marketing of loan products; and (vii) meaningful oversight of fair lending compliance by management and, where appropriate, the institution’s board.
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