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With recent changes in the regulations implementing the Military Lending Act (“MLA”), creditors are now reevaluating their compliance plans to ensure they are prepared for the new regulations. Although there is no formal guidance on what federal regulators will look for in reviewing MLA compliance, the commentary that accompanied both the proposed and final rule gives some insight as to where regulators will focus examination and enforcement resources. Below, we discuss some of these likely areas of focus, and offer suggestions for how institutions can prepare for regulatory scrutiny.
Determining military service and MLA safe harbor provisions
The MLA only applies to a “covered borrower,” which is either a servicemember (as defined under the MLA) or a servicemember’s dependent. The MLA provides two safe harbors to determine if a consumer is a covered borrower: (1) a set of results from the DoD’s MLA database, or (2) a military status indicator in a consumer report.
Although both of these approaches are optional—and a creditor may use a different method to determine if an individual is eligible for MLA protection—they provide several benefits. They are both determinative, so even if the borrower is in fact a servicemember a safe harbor check that shows otherwise will govern. Both checks can also be done without
inconveniencing the consumer or requiring them to attest to their military status.
However, these safe harbor approaches are only effective if the results are actually retained by the creditor. Since military status checks must be performed at origination, we recommend that the results of these checks be retained with the origination documents. Not only does the outcome of the military status check determine the substantive terms of the actual credit obligation, but by keeping all of these documents together, a creditor can ensure that they have all of the governing origination documents are in a single, secure location.
Ancillary products and calculation of the Military APR (“MAPR”)
In crafting the new MLA rules, the Department of Defense expanded the list of items to include in calculating the MAPR. One of the most significant changes is the addition of fees paid “for a credit-related ancillary product sold in connection with the credit transaction.” Although the MAPR limit is 36%, ancillary product fees can add up and—especially for accounts that carry a low balance—can quickly exceed the MAPR limit. This broad definition of the interest rate under the MLA also coincides with the expansive approach that federal regulators have taken regarding enforcement of the interest rate limitations under another military protection statute, the Servicemembers Civil Relief Act. The CFPB has made no secret of the fact that it reviews add-on products closely, and we expect the Bureau to use the MLA as another method of targeting ancillary products.
Prohibition against mandatory arbitration
Although most of the focus has been on the revised MAPR requirements in the new rules, the MLA has prohibited mandatory arbitration for eligible accounts since 2007. While this provision remains the same under the new MLA rules, what has changed since 2007 is a renewed focus on mandatory arbitration by federal regulators. Since the CFPB’s creation in 2011, mandatory arbitration—and its impact on consumers—has been a key area of focus for the Bureau. With the CFPB’s Office of Servicemember Affairs closely watching any practices that may harm military borrowers and the Bureau’s overall focus on arbitration, we expect the arbitration provisions of the MLA to become a keen area for regulatory review.
MLA disclosure requirements compliance
Finally, the MLA requires special disclosure requirements for eligible loans. While most creditors are familiar with the Truth in Lending Act (“TILA”) and Regulation Z disclosure requirements, the MLA also requires that the servicemember receive “a statement of the MAPR applicable to the extension of credit.” This disclosure must be provided before or at the same time that the servicemember enters into the transaction.
To ensure compliance with the MLA, we recommend a streamlined, product-specific set of disclosures that an MLA-eligible consumer can receive at origination. To protect against borrower claims of insufficient disclosures and post hoc regulatory scrutiny, we recommend that creditors retain copies of the MLA disclosures along with the original check of the MLA website and credit agreement.
Compliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017. However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly. Therefore, institutions should begin planning now. The following are answers to three key questions that can help you start the planning process.
- Which products will be covered by the revised MLA regulations?
The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today. Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:
- Primarily for personal, family, or household purposes; and
- Either subject to a finance charge or payable by a written agreement in more than four installments.
However, the following types of credit are excluded:
- Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
- Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
- Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
- TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.
Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending. The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products. Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations.
- How will I determine who is a covered borrower?
If a product is covered by the MLA regulations, the next question is whether the borrower is also covered. Creditors must build the systems and train their employees to determine whether the consumer is a “covered borrower” at the time the consumer becomes obligated or establishes an account. To be a covered borrower, the consumer must be either:
- A “covered member,” which is a member of the armed forces who is serving on: (1) active duty under titles 10, 14, or 32 of the United States Code under a call or order that does not specify a period of 30 days or fewer; or (2) active guard and reserve duty under 10 U.S.C. 101(d)(6); or
- A “dependent” of a covered member as described in 10 U.S.C. 1072(2)(A), (D), (E), or (I), which includes: (1) a spouse; (2) a child under 21 (or 23 in certain circumstances); (3) a parent or parent-in-law dependent on the covered member for over one-half of their support and residing in the member’s household; and (4) certain persons over whom the covered member has legal custody.
While a creditor is permitted to use its own method to determine whether a consumer is a covered borrower, the revised regulations provide a safe harbor if the creditor relies on:
- Information obtained directly or indirectly from the DoD’s database; or
- A “statement, code, or similar indicator” of the consumer’s status in a consumer report obtained from a nationwide credit bureau meeting certain criteria.
- What must be done for extensions of credit subject to the MLA?
When a covered consumer credit product is provided to a covered borrower, the creditor must comply with both substantive restrictions and disclosure requirements.
- Substantive requirements
The Military Annual Percentage Rate (“MAPR”) cannot exceed 36 percent on a closed-end loan or in any billing cycle for an open-end credit account. Accordingly, creditors must develop systems for calculating the MAPR.
The MAPR is generally calculated consistent with the APR in Regulation Z (for open end transactions, the MAPR is calculated like the “effective APR”). However, while the Regulation Z APR includes only finance charges, the MAPR also includes credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other things. For certain credit card accounts, the MAPR excludes “bona fide” fees that are comparable to fees “typically imposed by other creditors for the same or a substantially similar product or service.”
A number of additional restrictions apply to covered transactions:
- For certain non-depository creditors, roll-overs and vehicle title loans are prohibited.
- The covered borrower cannot be required to waive legal recourse under State or Federal law, submit to arbitration, or comply with “onerous” or “unreasonable” notice requirements.
- The covered borrower cannot be required to establish an allotment to repay the obligation and certain limitations apply to the use of checks or other methods of access to a deposit, savings, or other financial account maintained by the covered borrower.
- Prepayment penalties and restrictions on prepayment are prohibited.
- Disclosure requirements
Creditors must also build systems and train their employees to provide certain written and oral disclosures.
- Written disclosures
In addition to the applicable Regulation Z disclosures, a covered borrower must receive “a statement of the MAPR applicable to the extension of consumer credit” before or at the time the borrower becomes obligated on the transaction or establishes an account.
However, rather than providing the numerical value of the MAPR, the following or a substantially similar statement may be included in the agreement with the covered borrower:
Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit. In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent. This rate must include, as applicable to the credit transaction or account: The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).
- Oral disclosures
The creditor must also orally provide the above MAPR statement and a “clear description of the payment obligation” (such as a Regulation Z payment schedule or account-opening disclosure) either in person or through a toll-free telephone number included on the application form or in a written disclosure.
On July 22, 2015, the Department of Defense (“Department”) released its final rule amending the regulations that implement the Military Lending Act (“MLA”), which means that a wider range of credit products—including open-end credit—offered or extended to active duty service members and their dependents (“covered borrowers”) will now be subject to the MLA and its “all-in” 36% military annual percentage rate (“MAPR”) cap.
Specifically, the Department expanded the definition of “consumer credit” to be consistent with credit that is subject to the Truth-in-Lending Act (“TILA”)—credit offered or extended to a covered borrower primarily for personal, family, or household purposes, and that is (i) subject to a finance charge or (ii) payable by a written agreement in more than four installments.
In response to the initial proposed rule, financial services industry stakeholders undertook a substantial effort to show how proposed modifications to the MLA regulations were overly broad and, in parts, inconsistent with the Department’s mandate under the MLA. At a high level, industry comment letters fell into five categories:
- The Department was asked to provide creditors with “a substantial time period” to implement the operational changes needed to comply with the regulation.
- The Department was asked to take a more targeted approach to redefining “consumer credit,” either by focusing exclusively on certain predatory loans or by excluding certain products (such as credit cards) entirely or narrowing the requirements for such products. A link to BuckleySandler’s comment letter in this regard can be found here.
- The Department was asked to exempt from the final rule certain institutions (such as all insured depository institutions).
- The Department was asked to exempt certain charges, such as application or participation fees, from the MAPR calculation.
- The Department was asked to broaden the safe-harbor methods for determining whether a consumer is a covered borrower.
The final rule largely rejected the requests and instead retains the approach in the proposed rule. Three features stand out in this regard:
- The final rule tracks the proposed rule regarding how the regulation defines the “consumer credit” products to which it applies.
- The Department did not provide an exemption for insured depository institutions or insured credit unions.
- While credit card issuers were given until October 3, 2017 to come into compliance, the Department gave other creditors until October 3, 2016, which is only 12 months from the October 1, 2015 effective date, to comply with the final rule, as opposed to “at least 18 months,” which some commenters requested.
With that said, the final rule does contain some positive modifications that relieve onerous compliance burdens, including abandonment of the proposed requirement that a “bona fide” fee charged to a credit card account also be “customary.” These modifications are discussed below.
Modifications or requests that the Department denied
First, the Department rejected requests to change the scope of the definition of “consumer credit,” either by targeting only specific types or by excluding entirely certain types. The Department stated that, in its view, a broad definition of “consumer credit” was preferable, in part, because expanding the scope of products subject to MLA compliance would “preserve access to a wide range of products” while protecting covered borrowers. Next, the Department refused to exempt credit card accounts from the “consumer credit” definition because it determined that compliance with the CARD Act could not displace the benefits of the MLA. The Department expressed concern that lenders could exploit such an exemption by transforming high-cost open-end products into credit cards, which do not have a maximum interest rate under the CARD Act.
Second, the final rule does not completely exempt insured depository institutions or insured credit unions. Broadly speaking, the arguments for exemption included that (i) failing to provide exemption would lead to the exclusion of service members from credit products and services, and (ii) a robust regulatory and supervisory framework already exists for such institutions. The Department responded that it was “confident that…[these institutions] could find appropriate methods to provide borrowers credit products that comply with the [MLA] interest-rate limit….” Next, the Department rejected the notion that the robust regulatory and supervisory regime for insured depository institutions justifies an exclusion from the MLA because that regime was not designed to lower the costs of credit for covered borrowers.
Many commenters requested that the Department provide “a substantial period of time for compliance,” such as “at least 18 months,” because of the operational difficulties presented. The Department stated that creditors need only a “reasonable period of time” to modify their operations. Therefore, except for credit card accounts (discussed more fully below), creditors have only 12 months to comply with the requirements in the final rule.
Modifications or requests that the Department granted
In general, credit card issuers were the largest beneficiary of the Department’s modifications, notwithstanding that the Department declined to exempt credit card accounts from the final rule. First, the Department granted a complete exemption from the definition of “consumer credit” for credit extended to a covered borrower under a credit card account for a minimum of two years. The exemption expires on October 3, 2017.
Second, the final rule continues to provide a qualified exclusion for credit card accounts from the MAPR calculation for a “bona fide” fee, but it modified the proposed rule to eliminate the requirement that the bona fide fee be “customary.” This provides relief from the operational difficulties and uncertainties associated with defining “customary,” and means that credit card issuers will have a wider berth for innovation in products and services without the risk of liability under the MLA insofar as fees could be deemed not “customary.”
Finally, the final rule included the following positive modifications:
- For insured credit unions and insured depository institutions, an application fee may be excluded from the computation of the MAPR for a short-term, small amount loan, subject to certain conditions.
- The Department adopted a new “covered borrower” safe harbor to permit a creditor to “legally conclusively determine” that a consumer is a covered borrower by using information obtained in a “consumer report from a nationwide consumer reporting agency or a reseller who provides such a report.” The final rule retains the original safe harbor—permitting creditors to “legally conclusively determine” that a consumer is a covered borrower by using information obtained directly or indirectly from the MLA database—thereby giving creditors two safe-harbor options.
- Removed the “actual knowledge” clawback from the “covered borrower” safe harbor, meaning that a creditor who concludes that a borrower is not a covered borrower after conducting a covered-borrower safe-harbor check using either the MLA database or a permissible consumer report will not be liable even if the consumer is a covered borrower.
On September 29, a proposed amendment to the U.S. Department of Defense’s regulation that implements the Military Lending Act (MLA) was published in the Federal Register, with comments due by November 28. Most importantly, the amendment expands the protections of the MLA by defining “consumer credit” to be consistent with closed- and open-end credit products already regulated under TILA, which would include all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards. Currently, the MLA only applies to (i) closed-end payday loans up to $2,000 with a term of 91 days or fewer; (ii) closed-end auto title loans with a term of 181 days or fewer; and (iii) closed-end tax refund anticipation loans. However, the proposed regulation would continue to exclude residential mortgages and purchase-money loans for personal property from coverage, including motor vehicles. The MLA was passed in 2006 and provides active duty servicemembers and their dependents with, among other protections, a 36% interest rate cap, military-specific disclosures, and a prohibition on creditors against requiring the servicemember to submit to arbitration in the event of a dispute.
CFPB Director Announces Indirect Auto Finance Proxy Methodology White Paper, Discusses Numerous Other Initiatives
On June 18, in an appearance before the House Financial Services Committee, CFPB Director Richard Cordray stated that later this summer the CFPB hopes to release a white paper on the proxy methodology it employs to identify alleged discrimination in indirect auto financing. The white paper follows repeated attempts by members of the Committee to force the CFPB to reveal more details about its approach to indirect auto finance enforcement. Director Cordray also revealed that the CFPB is working on a white paper regarding manufactured housing finance.
The hearing covered numerous additional topics, some of which overlapped with those addressed during Mr. Cordray’s recent appearance before the Senate Banking Committee. Among the new issues raised before the House Committee, Mr. Cordray expressed openness to developing a limited advisory opinion process for the CFPB. In response to a question from Rep. Ed Royce (R-CA), Mr. Cordray explained that the CFPB regularly provides informal advisory opinions. He acknowledged other agencies’ use of advisory opinions and their potential benefit, and indicated that advisory opinions could be a useful tool for the CFPB on certain specific issues. Nevertheless, he resisted committing to the implementation of a formal advisory opinion process. The Committee recently approved, along party lines, legislation that would require the CFPB to establish an advisory opinion process.
In response to criticism from Rep. Denny Heck (D-WA) about the pace of an anticipated Military Lending Act (MLA) rulemaking, Mr. Cordray promised that the Department of Defense’s (DOD) proposal to revise the Military Lending Act regulations is nearly ready for submission to the OMB. The DOD recently released a report that previewed the forthcoming rulemaking.
Finally, Director Cordray also fielded a significant volume of questions regarding the CFPB’s collection and use of data, a continuing area of focus for the Committee’s Republican majority.
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.”
Senator Menendez raised concerns about “automatic defaults” in the student loan context, an issue raised in the CFPB Student Loan Ombudsman’s mid-year report on student loans. In that report, the CFPB stated, based on an unidentified number of consumer complaints, that “industry participants are automatically placing loans in default – even when a borrower is paying as agreed” – in circumstances such as when a co-signer dies or goes into bankruptcy. The Ombudsman acknowledged that financial institutions may have legitimate business purposes for exercising contractual acceleration options which demand the full balance of a loan when a borrower’s co-signer has died or filed for bankruptcy. Senator Mendendez described legislation to address the issue. Senator Brown (D-OH) also focused on student loan issues, picking up on the CFPB’s common refrain that problems in the student loans servicing market are similar to those seen in mortgage servicing. He called for the CFPB to establish student loan servicing standards. Director Cordray acknowledged that the two markets are different, but pointed to “poor customer service, problems with transfers, lack of information, and harm to consumers” as “eerie” examples of problems seen in both markets.
Small Dollar Loans
On small dollar loans, Senator Brown expressed concern that an eventual CFPB rule on traditional payday loans could lead to arbitrage and leave gaps in consumer protection related to other small dollar loans, including, for example, online loans, auto title loans, and installment loans. Director Corday described this issue as one of “extreme importance” as the CFPB addresses the small dollar loan market. He stated that implementation of the Military Lending Act has given rise to similar problems, which the CFPB is working with the Department of Defense to address. He explained that the CFPB’s process on a payday loan rule is taking longer as the Bureau attempts to deal with these issues, but believes “it's well worth a little additional time in order to make sure that what we do won't be made a mockery of by people circumventing it through just transforming their product slightly.”
Senator Warren (D-MA) turned her attention, which recently has focused on student loans, to the issue of arbitration. She stated that “arbitration stacks the deck against customers in favor of large corporations,” and that it is “no surprise that many big banks, and other big corporations, force customers to agree to arbitration clauses to get credit cards, or open checking accounts, knowing that this means that the customer will have no real remedy if things go wrong.” Director Cordray responded that in hearing from corporations and consumers on the issue of arbitration clauses, there is almost no relation between the two, which is contrary to CFPB’s experience on other issues. He explained that while the Dodd-Frank Act barred arbitration in mortgage contracts, he only directed the CFPB to study and consider interventions related to arbitration in other consumer finance contracts. He said the CFPB has pursued a very thorough process to conduct the required study, which the Director believes will be completed this year. Senator Warren pressed him to commit to new rules if the study presents evidence such rules are required. Director Cordray declined to describe any possible policy judgments or actions that could follow the study, but promised the CFPB will fulfill its obligation to engage in policymaking that appropriately reflects the conclusions of the study.
Recently, the Department of Defense (DOD) published a report on the Military Lending Act (MLA), as requested in the House report that accompanied the fiscal year 2013 National Defense Authorization Act (FY 2013 NDAA). The MLA generally covers short-term, small dollar loans, including payday, car title, and refund-anticipation loans, but current DOD regulations exclude credit cards, overdraft loans, military installment loans, and all forms of open-end credit. Consumer advocates, state attorneys general, and others have called for the MLA regulations to be expanded to cover other products. The DOD report provides a summary of responses the DOD received in response to a 2013 advance notice of proposed rulemaking related to the potential expansion of the MLA regulations, and reviews state and federal policy developments, as well as changes in the markets for small dollar products. The DOD concludes that the MLA regulations need to be amended, but that simply extending the definition of covered credit products is not sufficient. The DOD is therefore “redrafting” the MLA regulations and plans to take a more “comprehensive approach” that could cover all short-term, small dollar credit products under the MLA regulations and provide exceptions as appropriate. Notably, the FY 2013 NDAA also clarified the CFPB’s enforcement authority under the MLA and granted the CFPB an opportunity to influence the content of the MLA regulations by adding the CFPB to the list of agencies with which the DOD must consult regarding implementation of the MLA’s protections.
On March 6, the CFPB released a “snapshot” of servicemember complaints prepared by the Office of Servicemember Affairs (OSA), which analyzes the military consumer complaints received since July 2011. According to the report, servicemembers, veterans, and their families have submitted 14,100 complaints to the Bureau since its opening and have recovered more than $1 million. The volume of servicemember complaints has continued to increase over time, rising 148% from 2012 to 2013.
Notably, although “debt collection” was not added as a complaint category until July 2013, approximately 3,800 complaints received relate to collection practices. Nearly half of these complaints concern attempts to collect non-existent debts, with the remainder concerning improper collection tactics and procedural issues related to collection. The category that received the most complaints—approximately 4,700—was mortgage. Concerns raised relate primarily to practices undertaken when a borrower defaults, but also to loan origination and making payments. The remainder of the complaints received relate to consumer loans, private student loans, payday loans, credit cards, credit reporting, banking services, and money transfers. Along with debt collection practices, the report identifies payday loans—and specifically, compliance with the Military Lending Act's interest-rate restrictions—as a point of focus for OSA.
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month.
Mortgage Rule Implementation
Several committee members asked the Director about the CFPB’s compliance expectations for financial institutions when the various mortgage rules take effect in January. Director Cordray reiterated statements he has made recently in other forums: (i) the CFPB believes the vast majority of financial institutions, both large and small, will be in substantial compliance by January, (ii) the CFPB is sticking with the January implementation deadline, and (iii) “in the early months” the CFPB will not be looking for strict compliance, but rather will assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Senator Coburn (R-OK) sought clarification on the terms “early months” and “good faith effort.” On the former, the Director stated that it remains undefined. With regard to the latter, the Director explained that the CFPB will look to see whether institutions generally are taking the rules seriously and if they have compliance management system is in place that allow for monitoring and reporting to the institution’s board. He added that the CFPB does not intend to play “gotcha.”
Several Republican members raised concerns about the CFPB’s approach to auto finance supervision and enforcement and specifically the indirect auto finance bulletin issued earlier this year. For example, Senator Moran (R-KS) urged Director Cordray to provide more specific answers to questions recently posed by a bipartisan group of Senators, including more detail on the CFPB’s statistical methodology for determining disparate impact and its use of proxies. Director Cordray’s November 4 response to the Senate letter largely re-stated the CFPB’s response to a similar inquiry submitted by a group of House members over the summer.
In the most recent letter, Director Cordray explained further the CFPB’s integrated methodology for proxying race and national origin, which combines probabilities about an individual’s race or ethnicity based on surname and geocoding. In a related blog post, the CFPB’s Assistant Director of Fair Lending and Equal Opportunity described proxy methodologies employed by “responsible lenders,” and attempted to further justify the CFPB’s methodology. During the hearing, Director Cordray asserted that the CFPB’s approach to both is time honored and well-tested. He explained that the CFPB’s proxy methodology is a refinement of that used by the Federal Reserve Board and is “state of the art.” He acknowledged that some may have a problem with the state of the art, but asserted that the methodology is proven in social science literature and used beyond the lending context, and added that the CFPB has to have confidence in the approach knowing that it could be tested in court.
Director Cordray expressed concern about discussing the CFPB’s specific methods in detail because they relate to ongoing investigative processes the CFPB is pursuing with the DOJ. He also repeatedly referenced today’s auto finance forum as a venue in which these issues will be discussed in more detail, and one that will provide industry an opportunity to weigh in on the CFPB’s approach. He dismissed concerns that the CFPB’s activities in the auto finance realm—in particular its push towards flat fee compensation arrangements for dealers—might constrain credit or raise consumer costs, citing the “red hot” car market.
Senator Warren (D-MA) commented on dealer markups, citing “studies” that show markups cost consumers $26 billion a year and that minorities pay a higher share of those costs. She called for Congress to remove the Dodd-Frank Act exemption for dealers and provide the CFPB authority over all auto lending. Director Cordray later stated that the law drew an “unnatural line” between finance companies on the one hand and dealers on the other, but that the CFPB understands its jurisdiction and does not want to be perceived to be extending its reach to cover dealers.
Student loans were the only product that received special, though not new, attention in the CFPB Director’s written testimony. There and in his oral statement he highlighted the comments and complaints the CFPB has received on student lending issues and again identified problems in the student loan market that the CFPB believes mirror those seen in the mortgage market prior to the financial crisis.
Senator Coburn posited that some of the student debt problem is attributable to borrowers maxing out loans for purposes other than paying for costs not directly associated with education and suggested that Congress look at limiting acceptable uses of federal loans.
Military Lending Act
In response to a question from Senator Reed (D-RI), Director Cordray stated that the CFPB, the DOD and other agencies are close to proposing new rules under the MLA. He indicated that the proposal is pending OMB review.
Senator Menendez (D-NJ) complained about prepaid card fees and stated he plans to reintroduce his prepaid card bill. Director Cordray generally agreed that the CFPB has concerns about the prepaid market and noted the Bureau’s 2012 ANPR. The CFPB’s spring rulemaking agenda indicated the CFPB could propose a prepaid card rule before the end of this year. However, the Director did not provide an updated timetable for issuing a prepaid card rule during his testimony.
GLB Act Privacy Notices
CFPB Data Collection
Much of the hearing again centered on the CFPB’s collection and use of personally identifiable information (PII). Sen. Crapo (R-ID) continued to press the issue for Republicans, and was joined by Senators Vitter (R-LA) and Toomey (R-PA). Those members asked Director Cordray to describe the types of data the CFPB collects and how that data is protected. Sen. Crapo focused primarily on the credit card account data that the CFPB obtains from Argus, which the Senator estimated to include 900 million accounts. Senator Crapo believes that even though the data may be “de-identified,” the possibility exists that it could be reverse engineered to allow CFPB staff to obtain PII or review individual accounts. Director Cordray repeatedly explained that the CFPB’s interest in that data set is to monitor market trends and the broad treatment of card holders, and the CFPB is not interested in monitoring individual accounts. He asserted the CFPB lacks the capability or interest to obtain or use consumer PII in that context. He pointed out that other regulators have had and continue to have access to the same data. Senator Crapo noted that he has requested a GAO review of this issue; Director Cordray welcomes the audit.
CFPB Rulemaking and Examination Processes
Senators Corker (R-TN) and Toomey (R-PA) brought up the recent Bipartisan Policy Center report on the CFPB to make the case that the CFPB should pursue open rulemakings instead of issuing guidance. Director Cordray stated that the CFPB will continue to use guidance when it is restating or clarifying the law, but otherwise will use open rulemakings. He admitted the auto finance guidance process could have been more open or inclusive, but again cited the upcoming forum as a way to address those concerns. He defended the CFPB’s debt collection bulletin and its 2012 fair lending bulletin.
Director Cordray stated that the CFPB still is only 80% staffed on supervision. While he agrees that the CFPB may have been slow on closing out examinations, the CFPB deliberately chose quality and consistency over speed while it staffed-up. He asserted that speed and responsiveness have greatly improved in recent months and will continue to improve next year.
- Jonice Gray Tucker to join CFPB panel at CBA’s Washington Forum
- Jonice Gray Tucker to moderate “Pandemic relief response and lasting impacts on access, credit, banking, and equality” at the American Bar Association Business Law Section Spring Meeting
- Jeffrey P. Naimon to discuss "Post-pandemic CFPB exam preparation" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Making fair lending work for you" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Reading the tea leaves of President Biden’s initial financial appointees" at LendIt Fintech
- Moorari K. Shah to discuss “CA, NY, federal licensing and disclosure” at the Equipment Leasing & Finance Association Legal Forum
- Jonice Gray Tucker to discuss "Compliance under Biden" at the WSJ Risk & Compliance Forum
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference