InfoBytes Blog

CFPB Director Defends Mortgage Rules, Discusses Plans In Other Markets

On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.

The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.

Mortgage Rule Implementation / Impact

Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.

The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members.

Several committee members, including Reps. Sherman (D-CA), and Huizenga (R-MI) raised the issue of the requirement that title insurance from affiliated companies must be counted in the QM three percent cap. Mr. Cordray repeated that the CFPB believes Congress made a determination to include affiliate title protections in numerous places in the Dodd-Frank Act. That said, the CFPB is looking at the data on the impacts and meeting with stakeholders. Rep. Huizenga was most forceful, stating that while the CFPB has sought to limit the impact of the three percent cap, it is not enough. He raised again his bill, HR 1077, Rep. Meeks’ HR 3211, and ongoing work with Senators Vitter (R-LA) and Manchin (D-WV). He cited a survey conducted by the Real Estate Settlement Providers Council that found the inclusion of title charges causes 60 percent of loans under $60,000 to fail as qualified mortgages, and such loans actually become high-cost HOEPA loans. The survey also found that 45 percent of affiliated loans between $60,000 and $125,000 failed to qualify as qualified mortgages, and that 97 percent of the loans that failed as QMs were under $200,000 simply due to the inclusion of title insurance. Director Cordray did not have time to respond in full, but indicated the CFPB is waiting to see data on the actual impact.

Rep. Capito focused on the QM rule impact on Habitat for Humanity and other 501(c)(3) entities. Director Cordray stated that he spoke with the Habitat CEO prior to the hearing and believes the CFPB can address all of that organization’s concerns through rule amendments. He added that the CFPB already amended the rule to address Habitat’s first set of concerns, and that its latest concerns are new.

HMDA Rule Amendments & Small Business Fair Lending Rule

As she has done several times in the past, Rep. Velazquez (D-NY) raised the status of rulemaking required by Dodd-Frank Act section 1071 regarding small and minority/women-owned business lending. As he has in the past, Director Cordray explained that the CFPB is having difficulty addressing this rule given it is the only area in which the CFPB is required to address business lending. He added that the CFPB has determined that as it moves forward with the rule to amend HMDA data collection, which is underway now, the Bureau will attempt to fold the small business lending element into that process. He stated that the CFPB is working with the Federal Reserve Board on “overhauling that whole [HMDA] database” and “it feels to me that the right spot for this, and we've talked to a number of folks both from industry and consumer side on this, is to make [the small business lending requirements] part of the later stages of that, so it's coming, but not immediate.”

Auto Finance

Rep. Bachus (R-AL) asked Director Cordray to specify appropriate dealer compensation alternatives. Mr. Cordray responded that the CFPB does not know all the mechanisms yet that would be satisfactory. It is “open to auto lenders and others bringing those to [the CFPB’s] attention, but [the CFPB] did say flat fees are one possibility. A flat percentage of the loan might be a possibility. Some combination of that with different durations of the loan, different levels, and potentially other things that [the CFPB has not] thought of but others in the industry may think of and bring to [its] attention. So [the CFPB is] open-minded on that.”

Reps. Scott (D-GA) and Barr (R-KY) also were critical of the CFPB’s auto finance guidance and suggested the CFPB should have met with industry stakeholders in advance or should have conducted a rulemaking. Mr. Scott asserted that auto credit is tighter and more expensive now. Mr. Cordray defended the guidance, as he has in the past, as a restatement of existing law. He does not believe the guidance has impacted or will impact the health of the auto market.

Rep. Beatty (D-OH) raised a recent proposal from the National Association of Auto Dealers on alternative dealer compensation models. Mr. Cordray acknowledged having seen it, and said that as long as all parties agree that the CFPB is respecting its jurisdictional lines in the auto context, the Bureau is willing to sit down with dealers and others to work on a “broader solution.”

Credit Reporting

Rep. Velazquez (D-NY) asked for an update on the CFPB’s efforts to regulate consumer credit reporting agencies. Director Cordray described the CFPB’s efforts to, for the first time, provide federal supervision of the major credit reporting agencies. He stated that those agencies are not used to such supervision and that, in his view, it has been an adjustment for them. The CFPB has had examination teams into each of the three largest credit reporting agencies and is discussing “various issues” with them and areas of concern. He informed the committee that as a result of the CFPB’s efforts the credit reporting agencies, for the first time, are forwarding the documentation that consumers send them about problems and potential errors in their credit reports to the furnishers to be evaluated. The CFPB still is concerned about errors and error resolution.

Prepaid & Overdraft

In response to an inquiry from Rep. Maloney (D-NY), Mr. Cordray stated that the CFPB is continuing to work on the prepaid card proposed rule to address “a hole in the fabric” of consumer protection. He said the rule likely will address disclosures and add new protections. On overdraft, he acknowledged the CFPB is not as far along—the agency is still studying the market.

Payday & Internet Lending

Rep. Luetkemeyer (R-MO) stated the FDIC and DOJ have admitted to working to shut down online lending. He confirmed that the Oversight Committee is considering investigating DOJ on Operation Choke Point (its payment processor investigations). He asked Director Cordray to support, perhaps with a letter of some sort, legitimate online lending businesses and processors. Mr. Cordray agreed that there is plenty of appropriate online lending, but declined to offer specific help absent further context.

Rep. Murphy (D-FL) later suggested that the CFPB look at the “good regulation and great enforcement” in Florida. Director Cordray responded that the CFPB is looking at “a number of states that have developed different provisions on short-term, small-dollar payday lending” including Florida, Colorado, and Washington.

Rep. Heck (D-WA) inquired as to the status of proposed Military Lending Act regulations. Director Cordray explained that the CFPB has been “actively engaged” on writing new rules with the Department of Defense, the Federal Reserve, the FDIC, the OCC, Treasury Department, and the FTC. It stated that it has been difficult to get multiple agencies to work together, and asked Congress to “keep our feet to the fire and make it clear that you want to see that quickly.”

Mobile Payments & Emerging Products/Providers

Rep. Ellison (D-MN) asked about the CFPB’s views on emerging financial service providers, citing recent reports about T-Mobile’s efforts. Mr. Cordray stated that the CFPB is watching very closely and trying to keep up with the rapidly changing products and markets. He stated that it will present challenges to the current regulatory structure, particularly when phone companies are involved, and that the CFPB will need to coordinate with other regulators and probably will need legislation from Congress. Rep. Heck asked the CFPB to conduct a front-end in-depth analysis of consumer protection issues across various emerging mobile payments platforms. Mr. Cordray did not commit.

Student Lending

Rep. Peters (D-MI) raised his FAIR Student Credit Act bill, HR 2561. The bill, which is co-sponsored by Reps. Bachus (R-AL), Capito (R-WV), and seven other Republicans and 11 Democrats, would amend FCRA with respect to the responsibilities of furnishers of information to consumer reporting agencies. It would provide for the removal of a previously reported default regarding a qualified education loan from a consumer report if the consumer of the loan meets the requirements of a loan rehabilitation program, where the number of consecutive on-time monthly payments are equal to the number of payments specified in a default reduction program under the Higher Education Act of 1965. The bill would limit such rehabilitation benefits to once per loan. Rep. Peters indicated the Committee will consider the legislation, and that he has met with lenders who stated they could start offering rehabilitation immediately after the bill is enacted. Director Cordray stated that without having read the bill, it sounded promising, and that he would ask Rohit Chopra to work with the Congressman.

CFPB Payday Lending Nonbank Supervision Mortgage Origination Prepaid Cards Auto Finance Student Lending Consumer Reporting Overdraft Mobile Payment Systems Enforcement U.S. House Bank Supervision Internet Lending

Prudential Regulators Announce Final Changes To Call Report

On January 14, the Federal Reserve Board, the OCC, and the FDIC announced final changes to the Call Report to implement the Basel III capital standards and consumer data collection after delaying certain changes last year. The agencies now plan to implement in March 2014 the proposed reporting requirements for (i) depository institution trade names; (ii) a modified version of the reporting proposal pertaining to international remittance transfers; (iii) the proposed screening question about the reporting institution’s offering of consumer deposit accounts; and (iv) for institutions with $1 billion or more in total assets that offer such accounts, the proposed new data items on consumer deposit account balances. The agencies would then implement the proposed breakdown of consumer deposit account service charges in March 2015, but only for institutions with $1 billion or more in total assets that offer consumer deposit accounts. The proposed instructions for these new items also were revised. In addition, the agencies will not at this time proceed with the proposed annual reporting by institutions with a parent holding company that is not a bank or savings and loan holding company of the amount of the parent holding company’s consolidated total liabilities.

FDIC Federal Reserve OCC Bank Supervision

Special Alert: Federal Reserve Board Guidance on Managing Outsourcing Risks Mirrors Recent OCC Guidance

On December 5, 2013, the Federal Reserve Board (FRB or the Fed) issued Supervision and Regulation Letter 13-19, which details and attaches the Fed’s Guidance on Managing Outsourcing Risk  (FRB Guidance).  The FRB Guidance sets forth risks arising out of the use of service providers and the regulatory expectations relating to risk management programs. It is substantially similar to OCC Bulletin 2013-29, which the Office of the Comptroller of the Currency (OCC) issued on October 30, 2013.

The FRB Guidance supplements existing guidance relating to risks presented by Technology Service Providers (TSPs) to reach service providers that perform a wide range of business functions, including, among other things, appraisal management, internal audit, human resources, sales and marketing, loan review, asset and wealth management, procurement, and loan servicing.

While a complete roadmap of the FRB Guidance would be largely duplicative of our recent Special Alert relating to the OCC Bulletin 2013-29, key supervisory and enforcement themes emerge from a comparison of the two guidance documents.  Like the OCC, the Fed signals broadly that failure to effectively manage the use of third-party service providers could “expose financial institutions to risks that can result in regulatory action, financial loss, litigation, and loss of reputation.” The Fed also emphasizes the responsibility of the Board of Directors and senior management to provide for the effective management of third-party relationships and activities.  It enumerates virtually the same risk categories as the OCC, including compliance, concentration, reputational, operational, country, and legal risks, though its discussion of those risks is slightly less comprehensive.

The FRB Guidance makes clear that service provider risk management programs should focus on outsourced activities that are most impactful to the institution’s financial condition, are critical to ongoing operations, involve sensitive customer information, new products or services, or pose material compliance risk. While the elements comprising the service provider risk management program will vary with the nature of the financial institution’s outsourced activities, the Fed’s view is that effective programs usually will include the following:

• Risk assessments: Institutions should evaluate the implications of performing an activity in-house versus having the activity performed by a service provider and also consider whether outsourcing an activity is consistent with the strategic direction and overall business strategy of the organization. This section of the FRB Guidance closely aligns with the section titled “Planning” in OCC Bulletin 2013-29.

• Due diligence and selection of service providers: Institutions should address the depth and formality of due diligence of prospective service providers consistent with the scope, complexity, and importance of the planned outsourcing arrangement. The Fed emphasizes processes designed to diligence a potential service provider’s (i) business background, reputation, and strategy; (ii) financial performance and condition; and (iii) operations and internal controls. This section is less detailed, but nonetheless consistent with the section titled “Due Diligence and Third-Party Selection” in OCC Bulletin 2013-29.

• Contract provisions and considerations: Service provider contracts should cover certain topics, including, but not limited to: (i) the scope of services covered; (ii) cost and compensation; (iii) right to audit; (iv) performance standards; (v) confidentiality and security of information; (vi) indemnification; (vii) default and termination; (viii) limits on liability; (ix) customer complaints; (x) business resumption and contingency plan of the service provider; and (xi) use of subcontractors. The key provisions noted generally mirror the “Contract Negotiation” section of OCC Bulletin 2013-29.

• Incentive compensation review: Institutions should establish an effective process to review and approve any incentive compensation arrangements that may be embedded in service provider contracts to avoid encouraging “imprudent” risk-taking. While OCC Bulletin 2013-29 does not break out incentive compensation as a separate program feature (it is included among factors to be considered in due diligence and selection), it does identify the need for banks to review whether fee structure and incentives would create burdensome upfront fees or result in inappropriate risk-taking by the third party or the bank.

• Oversight and monitoring of service providers: Institutions should set forth the processes for measuring performance against contractually-required service levels and key the frequency of performance reviews to the risk profile of the service provider. This section of the FRB Guidance, consistent with the “Ongoing Monitoring” section of OCC Bulletin 2013-29, also recommends the creation of escalation protocols for underperforming service providers and monitoring of service provider financial condition and internal controls, which may also trigger escalation if the service provider’s financial viability or adequacy of its control environment are compromised during the course of the relationship.

• Business continuity and contingency plans: Institutions should develop plans that focus on critical services and consider alternative arrangements in the event of an interruption. The Fed specifically notes that financial institutions should: (i) ensure that a disaster recovery and business continuity plan exists with regard to the contracted services and products; (ii) assess the adequacy and effectiveness of a service provider’s disaster recovery and business continuity plan and its alignment to their own plan; (iii) document the roles and responsibilities for maintaining and testing the service provider’s business continuity and contingency plans; (iv) test the service provider’s business continuity and contingency plans on a periodic basis to ensure adequacy and effectiveness; and (v) maintain an exit strategy, including a pool of comparable service providers. Notably, OCC Bulletin 2013-29 addresses business continuity and contingency plans under third-party risk management, rather than as separate program features.

Finally, the FRB Guidance notes a number of “additional risk considerations” not singled out by OCC Bulletin 2013-29, which cover: (i) confidentiality of Suspicious Activity Report (SAR) reporting functions; (ii) compliance by foreign-based service providers with U.S. laws, regulations, and regulatory guidance; (iii) prohibitions against outsourcing internal audit functions in violation of Sarbanes-Oxley; and (iv) alignment of outsourced model risk management with existing Fed Guidance on Model Risk Management (SR 11-7).

Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

• Jeffrey P. Naimon, (202) 349-8030
• Christopher M. Witeck, (202) 349-8051
• Elizabeth E. McGinn, (212) 600-2370
• Jon David Langlois, (202) 349-8045

Federal Reserve OCC Bank Compliance Vendors Bank Supervision

Second Annual CFPB Ombudsman Report Recommends Exam Changes

On December 3, the CFPB Ombudsman’s Office submitted its second annual report to the Director of the CFPB. The report contains an update on the systemic recommendations made last year and new recommendations stemming from the Ombudsman’s review of (i) how the CFPB shares information, (ii) caller experience with the CFPB contact center, and (iii) the supervisory examination process. The Ombudsman’s recommendations relate primarily to further standardizing and clarifying what a financial entity may expect throughout the examination lifecycle and to ensuring industry and consumer access to CFPB information in a consistent and timely manner. According to the Ombudsman, the Bureau was receptive to all suggestions and feedback.

Specifically, the Ombudsman recommended that the CFPB cite to the examination manual in written communications to examinees; describe at the onset what the financial entity can expect to receive at the end of the examination process; provide updates on examination status at regular intervals after the onsite portion of examinations; and better inform financial entities about the methods available for elevating examination concerns. The Ombudsman also recommended that the CFPB add a digest to all updates to consumerfinance.gov, along with more user-friendly subscription “sign up” options; maintain a public events calendar and announce events with consistent minimal lead time; make basic information about the CFPB speaker request process more accessible; and explain to consumers contacting the CFPB contact center that providing an email address will result in consumer complaint notifications solely via email.

In addition, the report summarizes and identifies trends in the individual inquiries submitted to the Ombudsman during the review period. The majority of inquiries related to the consumer-complaint process, and more than half of the consumer complaints received concerned mortgages. The report also addresses growth within the Ombudsman’s Office since last year and the Ombudsman’s external outreach efforts and internal dialogue with CFPB leaders across divisions and offices.

CFPB Examination Nonbank Supervision Bank Supervision

Report On CFPB's Auto Finance Forum

This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.

Some of the highlights include:

• Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
• Much of the discussion focused on potential alternatives to the current dealer markup system.  The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
• There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences.  Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups.  When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
• Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines.  The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same.  The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
• Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.

Additional detail from each panel follows. Please note that these details are based on notes taken during the event and could differ from actual statements made during the event. The entire report is subject to alteration or clarification, particularly if a transcript or archived video are made available.

Opening Remarks

Director Cordray opened the forum. He stressed the importance of vehicles to individual consumers and to the broader economy. He stated that some consumers may be subject to discrimination that may result in millions of dollars in consumer harm each year.

As he did in a Senate hearing earlier this week, Mr. Cordray emphasized that neither the 2012 fair lending bulletin nor the March 2013 auto finance bulletin were new; they simply served as a reminder to finance companies of liability under ECOA, particularly with regard to indirect auto finance.

He stated that the CFPB uses proven statistical methods and publicly available data to assess the probability that a particular customer belongs to a particular racial group or is of a particular national origin.

The March bulletin provided guidance about steps auto finance companies might consider taking to ensure they are ECOA-compliant. One approach described by the Director is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. The bulletin also stated that finance companies could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup. Director Cordray stated that such mechanisms include: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns.

He acknowledged that dealers are entitled to fair compensation, but stressed that the CFPB wants to make sure the process is transparent. He stated it is worth considering further how the disclosure of markup practices actually works.

Panel 1

Patrice Ficklin (CFPB): Ms. Ficklin described and defended the March bulletin, asserting that the CFPB did not provide any new legal interpretations, but rather reminded finance companies about existing law. She noted and defended the CFPB’s proxy methodology, as described recently in letters to Congress, but did not provide additional detail. She stated that the CFPB’s supervisory and enforcement work in this area is more substantial than it was in March, and continues to indicate fair lending risk—the CFPB has found “substantial and statistically significant” disparities between African Americans, Hispanics, and Asians and similarly situated white borrowers.  The CFPB has identified numerous institutions with disparities over 10 basis points, and several over 20 or 30 basis points.

Going forward, the CFPB is committed to continuing a constructive dialogue with industry, a dialogue in which alternative compensation structures has been the key theme to date.

Melissa Yap (FRB): Ms. Yap described the Fed’s ECOA authority post-Dodd-Frank. She stated that pricing remains the greatest area of risk. The Fed employs the 2009 interagency fair lending procedures and looks at (i) financial incentives, (ii) the amount of discretion, and (iii) disparities in note rate and markup over buy rate. She described the Fed’s proxy methodology, which differs slightly from the CFPB’s, but which the Fed believes is appropriate for the size and complexity of the institutions it supervises. For race, the Fed geocodes and defines majority-minority census tracts as those over 50%. She defended name proxies for gender and ethnicity, stating they are as likely to over count as under count. She also referenced two webinars the Fed and other hosted this year, which included discussion of these issues, see e.g., August webinar.

Steven Rosenbaum (DOJ): Mr. Rosenbaum described the DOJ’s broad authority to enforce ECOA and noted that it has a number of investigations ongoing, including joint investigations with the CFPB. He stated that Congress created the issue that requires the use of proxies, given that ECOA protects classes in consumer lending but does not require data collection similar to HMDA. The DOJ is using the CFPB’s method on joint investigations, but it continues to “kick the tires” on its methods and analyses and invites finance companies to do the same.

He stated, twice, that ECOA does not require nor prohibit discretion in pricing; risk from discretion can be managed, for example by setting caps or requiring justifications and documentation.

Mr. Rosenbaum added that the DOJ also enforces SCRA, and stated that if finance companies have not thought about SCRA compliance in their auto finance programs, they ought to do so.  He also acknowledged the DOJ’s ongoing investigation of buy-here, pay-here dealers, though the issues differ in that those dealers may be offering predatory products in minority neighborhoods.

Keith Ernst (FDIC): Mr. Ernst similarly described the FDIC’s jurisdiction and addressed in broad terms its approach to indirect auto financing. He stated that all examination and statistical results that are consistent with a violation are subject to independent review and all statistical analyses are reviewed by a team. The FDIC provides institutions with the results, data, and methods and provides an opportunity for questions and other feedback. Mr. Ernst also noted that this dialogue includes providing institutions with the opportunity to provide non-discriminatory explanations for statistical disparities. According to Mr. Ernst, the FDIC has amended analyses as part of these processes. The FDIC believes the vast majority of its banks are effectively managing fair lending risk in auto finance, but that examinations can reveal compliance management systems concerns that fall short of a fair lending violation.

Tonya Sweat (NCUA): Ms. Sweat stated that the practices identified in the CFPB bulletin are not prevalent in the credit union industry, but NCUA still examines for fair lending risk and safety and soundness. The NCUA advises credit unions that sound practices include sampling and testing of loans, particularly to ensure third-party compliance. Credit unions should implement written policies that require written approval of any changes to underwriting criteria.

Donna Murphy (OCC): Ms. Murphy provided only brief comments, and generally referenced and incorporated what others had said on proxies. The OCC is revising and updating its methods for fair lending risk assessments and scoping based on changes in markets, the legal environment, and technology. These changes are intended to result in more consistency in examinations and the ability of the OCC to conduct more analysis across banks.  For auto finance, the OCC is looking at how it gathers factors regarding use of third-parties. Ms. Murphy also noted the OCC’s attention to SCRA, stating that last year it revised examination procedures and enhanced examiner training for SCRA, including in auto finance, and that those enhancements are reflected in this year’s examination cycle.

Panel 2

The second panel was moderated by the CFPB’s Rohit Chopra and featured remarks from the National Association of Minority Automobile Dealers (NAMAD), the National Consumer Law Center (NCLC), the Consumer for Auto Reliability and Safety (CARS), and the NAACP.

Stuart Rossman from the NCLC described his part in a series of class actions against auto finance companies in the 2000s. Those actions, as he described, resulted in markup caps, the last of which sunsetted last year. He asserted that the market forces that led to those actions persist, as do fundamental problems in discretionary pricing policies.  Citing more restrictive class action requirements and less access to critical data, he called on the CFPB to take the lead in enforcement.

NAMAD acknowledged the possibility that bad actors exist in the market, but argued against eliminating discretion. NAMAD called for approval and documentation requirements for discretionary programs. NAMAD supports uniform data collection, enhanced proxies, training and education for dealers and consumers.

CARS noted California’s markup cap statute and reported that a proposal for a ballot proposition outlawing dealer discretion has been filed with the state attorney general. CARS also encouraged the CFPB to look at the impact of percentage rate markups in the motor home market.

Panel 3

Bill Himpler, American Financial Services Association (AFSA): Mr. Himpler stressed that the current indirect auto finance model is efficient and proven. He noted that auto finance complaints are at record lows, and pointed out that even the CFPB’s database shows a small number of complaints compared to other markets.  Since the CFPB has refused to assess the impact of a broad market shift towards flat fee compensation structures or other alternatives, AFSA is commissioning an independent study to assess the present model and evaluate costs and benefits of alternative models.

Chris Kukla, Center for Responsible Lending (CRL): Mr. Kukla countered that the current compensation model gives rise to potential discrimination and should be ended. Consumers have no ability to know what part of their rate is based on risk and what is due to compensation. He defended the CRL’s 2011 study on indirect auto finance from attacks, including those that followed Senator Warren’s reference to the study during a Senate hearing earlier this week.  That study concluded that consumers pay $26 billion each year in markups. Mr. Kukla explained that CRL never said consumers would not otherwise be charged a portion of those fees, and only sought to define the size of the market. He referenced other research that indicates a market-wide adoption of flat fee arrangements would have little impact on dealers.

Paul Metrey, National Automobile Dealers Association (NADA): Mr. Metrey outlined a preferred approach by federal regulators to unintentional disparate impact discrimination: (i) understand the market, (ii) develop appropriate methods, and (iii) if present, address in a manner that assists consumers. He called for the CFPB to pursue more open processes on this issue, including by identifying its complete statistical methodology and fully accounting for neutral legitimate factors. He presented NADA’s case against flat fee arrangements, in part on the basis that dealers still will have discretion to select among finance sources that may offer different flat fee arrangements.

Rich Riese, American Bankers Association (ABA): Mr. Riese challenged the CFPB’s post hoc approach to obtaining input on its auto finance program, stating that the forum does not substitute for the kind of engagement the issue requires. He argued that the guidance should have been proposed and subject to notice and comment.  The ABA believes proxies should be viewed with skepticism; they can be useful to identify risks and can be useful in compliance programs, but they should not be used to prove violations. Citing the 1999 interagency exam procedures, he argued that discretion is not an appropriate area to apply disparate impact, and, before straying too much from prior policy, regulators should recognize that Reg. B applies to creditors determination of creditworthiness and the discretion being applied in auto finance is for compensation and is not part of a creditor’s determination of creditworthiness.

The panelists also discussed the comparison of indirect auto finance to the mortgage market, particularly the use of broker yield spread premiums. Mr. Riese pointed out that in the mortgage context, brokers were alleged to have steered borrowers into “bad” loans without considering suitability; that is not the case in the auto market where there are no option arms, teaser rates, etc. Mr. Himpler and Mr. Metrey agreed. Mr. Metrey added that the comparison is apples to oranges—the markets have performed differently; there is nothing going on in auto ABS like there was in MBS. He added that Congress directed an end to yield spread premiums and there has been no similar action in auto, and the Fed tested to see if a fix was necessary but there has been no similar testing in auto.

Mr. Kukla responded that the mechanics may be different, but the impact and incentives are the same.  A broader view of “steering” covers any instance in which a consumer is provided a loan with less advantageous terms than the consumer otherwise would have received.

FDIC CFPB Nonbank Supervision Federal Reserve OCC NCUA Auto Finance Fair Lending ECOA DOJ Enforcement Bank Supervision

OCC Releases Comptroller Handbook Addition And Revisions

On November 6, the OCC issued two bulletins to announce an addition and revisions to the Comptroller’s Handbook. The OCC also rescinded certain Handbook provisions. Bulletin OCC 2013-30 adds to the Handbook the “Qualified Thrift Lender” (QTL) booklet, which includes the “Qualified Thrift Lending Test,” issued June 2002 as part of the Office of Thrift Supervision’s Examination Handbook. The revisions are statutory in nature and include, among other things, new language pursuant to the Dodd–Frank Act regarding QTL failure and the violation of HOLA section 5 and additional limitations in the payment of dividends. Bulletin OCC 2013-31 updates the “Insider Activities” booklet and provides guidance for examiners and bankers on how national banks and federal savings associations may legally and prudently engage in transactions with insiders. The booklet explains how to implement risk management processes that provide for the appropriate control and monitoring of insider activities and how examiners review and assess insider activities during the supervisory process.

OCC Bank Compliance Bank Supervision

Federal Reserve Board Issues Final Large Bank Assessment Rule

On August 16, the Federal Reserve Board issued a final rule establishing the process by which it will assess annual fees for its supervision and regulation of large financial companies. The Dodd-Frank Act directed the Board to collect assessment fees equal to the expenses it estimates are necessary or appropriate to supervise and regulate bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets and nonbank financial companies designated by the Financial Stability Oversight Council. The final rule outlines how the Board will (i) determine which companies are assessed, (ii) estimate the total anticipated expenses, (iii) determine the assessment for each of the covered companies, and (iv) bill for and collect the assessment from the companies. For the 2012 assessment period, the first year for which assessment fees will be collected, the Board will notify each company of the amount of its assessment when the rule becomes effective in late October.  Payments for the 2012 assessment period will be due no later than December 15, 2013. The Board estimates it will collect about $440 million for the 2012 assessment period. Beginning with the 2013 assessment period, the Federal Reserve will notify each company of the amount of its assessment fee no later than June 30 of the year following the assessment period.  Payments will be due by September 15.

Dodd-Frank Federal Reserve FSOC Bank Supervision

CFPB Issues Report on Examination Findings, Other Supervisory Activities

This afternoon, the CFPB released its summer 2013 Supervisory Highlights report, which covers supervisory activity from November 2012-June 2013.  This is the second such report the CFPB has released; the first report came out in October 2012 and covered activity from July 2011 through September 2012.

The report provides a brief review of the CFPB’s public enforcement actions and non-public supervisory actions and developments in the supervision program, including the issuance of bulletins, the issuance of new fair lending examination procedures, and the reorganization of supervision staff. The report also reviews the CFPB’s risk-based approach to examinations, including the “Institution Product Lines” approach, and outlines the factors that influence examination priorities.  The report does not identify any planned supervisory activities.

The bulk of the report, however, summarizes the CFPB’s examination findings. Key findings are discussed below.

Compliance Management Systems (CMS)

• CMS Elements
  • Although the report states no specific CMS structure is required, it also states that, based on the CFPB’s supervisory experience, an effective CMS commonly has the following components:  (i) board and management oversight; (ii) compliance program; (iii) consumer complaint management program; and (iv) independent compliance audit.  The report provides additional discussion on each component.
• Nonbanks
  • The report states that nonbanks are more likely than banks to lack a robust CMS. The CFPB found one or more instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits. According to the CFPB, the lack of an effective CMS has, in a number of instances, resulted in violations of Federal consumer financial laws. In these instances, the CFPB has required appropriate corrective action.
  • The report notes that CMS deficiencies in nonbanks are generally related to the supervised entity’s lacking a CMS structure altogether. CFPB examinations have found instances where nonbanks do not have a separate compliance function; rather, compliance is embedded in the business line, which can lead to deficiencies.
• Banks
  • The CFPB found that banks generally had an adequate CMS structure; however, several institutions lacked one or more of the components of an effective CMS.
  • The most common weakness the CFPB identified in banks is a deficient system of periodic monitoring and independent compliance audits. An entity that lacks periodic monitoring and instead relies on an annual independent compliance audit to identify regulatory violations and CMS deficiencies increases its risk that violations and weaknesses will go undetected for long periods of time, potentially leading to multiple regulatory violations and increased consumer harm.

   

Mortgage Servicing

• Servicing Transfers
  • Examiners found noncompliance with RESPA’s requirement to provide disclosures to consumers about transfers of the servicing of their loans.
  • Examiners also noted lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan.
  • Examiners noted that one servicer did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.
  • At another servicer, examiners determined that documentation the servicer received in the transfer was not organized or labeled, and as a result, the servicer did not utilize loss mitigation information provided to the prior servicer in its loss mitigation efforts.
• Payment Processing
  • A servicer provided inadequate notice to borrowers of a change in the address to which they should send payments, which constituted a potentially unfair practice impacting thousands of borrowers. The entity acted promptly to ensure that it did not impose late fees or other delinquency fees, or any other negative consequences.
  • A servicer decided – without notice to borrowers – to delay property tax payments from December of one year to January of the next, resulting in the borrowers’ inability to claim a tax deduction for the prior year, which the CFPB cited as an unfair practice.
  • A servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and solicit information about any additional harm. If any such harm is identified, the servicer will remediate it.
  • Examiners have found violations of the Homeowners Protection Act (HPA) at several servicers. In one examination, examiners found excessive delays in processing borrower requests for private mortgage insurance (PMI) cancellation. Additionally, in cases where PMI was canceled, the servicer improperly handled unearned PMI premiums in violation of the HPA. The CFPB required the servicer to amend its policies and procedures relating to PMI cancellation. The servicer also must conduct a review to determine whether borrowers were subject to additional harm caused by delays in processing PMI cancellations.
  • Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees. Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements. Servicers have refunded these fees to borrowers.
• Loss Mitigation
  • Examiners have found issues related to: (i) inconsistent borrower solicitation and communication; (ii) inconsistent loss mitigation underwriting; (iii) inconsistent waivers of certain fees or interest charges; (iii) long application review periods; (iv) missing denial notices; (v) incomplete and disorganized servicing files; (vi) incomplete written policies and procedures; and (v) lack of quality assurance on underwriting decisions.
  • The CFPB states that weak compliance management surrounding loss mitigation processes creates fair lending risk and that it expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are ECOA compliant. The CFPB states that servicers should conduct fair lending training for loss mitigation staff and engage in effective and timely fair lending risk assessments, compliance monitoring, and testing.

Fair Lending

• ECOA
  • The report states that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. The CFPB has found instances where supervised entities violated ECOA and Regulation B by failing to comply with either the provision, content, or timing requirements for adverse action notices and has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations.
  • The report specifically notes that loan servicers should have systems in place to determine whether borrowers who apply for a change in the terms of credit are entitled to adverse action notices. The CFPB notes that some institutions may find it helpful to arrange for independent, internal reviews of loan files to ensure that the documentation supports the action taken and that all timing requirements are met. In addition, the report states that institutions should provide comprehensive periodic training to management and staff regarding compliance with ECOA and Regulation B, including compliance with provisions on adverse action notices.

CFPB Nonbank Supervision Mortgage Servicing Fair Lending Compliance Bank Supervision Loss Mitigation

August Beach Read Series: CFPB's Supervision of Student Lending and Servicing Takes Shape

Over the past year, the CFPB has started to publicly outline its supervisory approach to student lending and servicing. In doing so, it repeatedly has identified similarities between the lending practices that led to the subprime mortgage crisis and the escalating default rate in the burgeoning level of student loan debt. Rather than wait for a student loan crisis, the CFPB is attempting to put in place a program it hopes can help prevent one.

As part of that program, at the end of 2012, the CFPB released its student loan examination procedures. Also in 2012 the CFPB released two reports (July 2012 and October 2012) aimed at curbing purported violations of law, and it has continued to highlight student loan issues this year, including in a recent update on student loan complaints. In addition, in March of 2013, partly to address the complaints of student loan debtors, the CFPB announced its intention to supervise and examine the larger non-bank education loan servicers. That rule should be finalized next month.

Student lenders and servicers also should take note of the CFPB’s recently issued debt collection guidance, which, among other things, holds CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts.  Many of the guideposts set forth in the guidance reflect the standards to which third-party debt collectors are held accountable under the FDCPA.

For more information about the CFPB’s debt collection guidance, please see a recent article by BuckleySandler Partner Valerie Hletko. Over the coming months, look for additional articles from BuckleySandler attorneys about the CFPB’s activities in the area of student loans and other non-mortgage consumer financial products and services.

CFPB Examination Nonbank Supervision Student Lending Debt Collection Bank Supervision

CFPB Plans Study of Bundled Financial Products

Today, the CFPB published a notice indicating that it will review bundled financial products and services. The CFPB is seeking comments on its plans to survey “low-income, underserved consumers” about their savings, credit score, and size of their debt to income ratio for the purpose of understanding whether such bundled products and services have an impact on asset building and financial capability. The CFPB is accepting comments on the planned survey through September 30, 2013.

Credit Cards CFPB Responsible Banking Bank Supervision