Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Special Alert: CFPB specifies pandemic foreclosure protections and signals tight supervision and enforcement around servicer efforts
The Consumer Financial Protection Bureau’s Covid-relief mortgage servicing rule issued yesterday steered away from a nationwide foreclosure freeze as initially proposed, instead creating heightened protections for those borrowers who became seriously delinquent during the pandemic. The distinction may not prove to be a game-changer for servicers, however, which will be obligated to carefully document outreach efforts and decisions to advance borrowers into foreclosure — with little margin for error.
The bureau’s final rule, which takes effect Aug. 31, obligates a servicer to continue specifying, with substantial detail, any loss mitigation options that may help the borrower resolve their delinquency. It also largely preserves the proposed streamline modification option on the basis of an incomplete loss mitigation application, although most servicers already have been offering many of these modifications since the early days of the pandemic.
On June 16, the CFPB issued an interpretive rule explaining the reversal of its prior determination that it lacked the authority to examine supervised financial institutions for compliance with the Military Lending Act (MLA). As previously covered by InfoBytes, in 2018, the Bureau discontinued MLA-related examination activities, contending the law does not explicitly prescribe the Bureau the authority to examine financial institutions for compliance with the MLA. In January 2019, the Bureau issued a statement from former Director Kathy Kraninger announcing that she had asked Congress to grant the agency “clear authority to supervise for compliance with the [MLA],” and in March 2019, Senate Democrats issued a letter urging the resumption of reviews for compliance with the MLA during routine lender examinations (covered by InfoBytes here and here).
The CFPB’s interpretive rule states that the Bureau has statutory authority to conduct MLA examinations “[b]ecause conduct that violates the MLA is associated with activities that are subject to TILA and the CFPA.” The Bureau also indicated it may “conduct examinations of very large banks and credit unions for purposes of detecting and assessing those ‘risks to consumers’ that are ‘associated’ with ‘activities subject to’ Federal consumer financial laws.” The interpretive rule states that the Bureau can use formal administrative adjudications, civil enforcement actions, and other authorities to enforce the MLA, which is “complemented by the Bureau’s use of the examination process to detect and assess risks to consumers arising from violations of the MLA.” The rule also points out that the Bureau “believes that the very harmful conduct that Congress sought to prevent in the MLA, which the Bureau has the authority to remedy through its other authorities (specifically enforcement action), sits within the core of this authority.” CFPB acting Director Dave Uejio further emphasizes in the Bureau’s press release that “[t]hrough our enforcement of the MLA, companies that harmed military borrowers have been ordered to pay millions of dollars in redress and civil penalties. To fulfill its purpose and protect military borrowers we must supervise financial institutions and hold them accountable for endangering consumers.” With the issuance of the interpretative rule, the Bureau will now resume MLA-related examination activities.
On June 15, the FDIC Board of Directors met in open session to discuss Real Estate Lending Standards and Minority Depository Institutions (MDIs), among other things. According to FIL-41-2021, the FDIC issued a proposed rule to amend the Interagency Guidelines for Real Estate Lending Policies “to conform the method for calculating the ratio of loans in excess of the supervisory loan-to-value (LTV) limits with the capital framework established in the community bank leverage ratio (CBLR) rule.” The proposed amendments would provide a consistent approach for calculating the ratio of loans in excess of the supervisory LTV limits at all FDIC-supervised institutions by, among other things, establishing supervisory LTV criteria for certain real estate lending transaction types and allowing exceptions to the supervisory LTV limits. Comments on the proposed rule are due 30 days after publication in the Federal Register.
During the meeting, the FDIC Board of Directors also approved and released an updated Statement of Policy Regarding Minority Depository Institutions to enhance the agency’s efforts to preserve and promote MDIs. In August 2020, the FDIC approved a proposed statement of policy, which updated and clarified the agency’s policies and procedures related to MDIs (covered by InfoBytes here). The recently updated statement of policy replaces the 2002 Statement of Policy and includes, among other things:
- Clarification of the FDIC’s expectations for technical assistance and illustration of opportunities for engagement with members of FDIC staff;
- Outreach efforts by the FDIC including, among other things, the establishment of the MDI Subcommittee of the Advisory Committee on Community Banking and enhanced activities to promote collaboration with MDIs;
- Definitions of terms utilized in the MDI program, detailed reporting requirements, and specific methods used to measure the effectiveness of MDI program activities; and
- Clarification of considerations made by examination staff when evaluating performance and assigning ratings.
After considering the comment letters, the FDIC revised the proposed statement of policy to identify, specifically, “state bankers associations as collaboration partners, along with other trade associations that support MDIs in the development of education and training events and other initiatives for MDIs.”
On May 7, Michael J. Hsu was designated acting Comptroller of the Currency, effective May 10. Previously, Hsu served as an associate director in the Federal Reserve’s Division of Supervision and Regulation where he led the Large Institution Supervision Coordinating Committee Program, which supervises global systemically important banking companies operating in the U.S. Hsu’s career over the past 19 years also included positions at the SEC, Treasury Department, and International Monetary Fund. In accepting the position, Hsu stated his focus “will be on solving urgent problems and addressing pressing issues until the 32nd Comptroller is confirmed.”
Hsu issued a statement to agency staff the same day outlining planned areas of focus including:
- Addressing the “disproportionate impact” of the Covid-19 pandemic on rural and minority communities;
- Confronting the risks and challenges of climate change, as well as the acceleration of technological development and digitization in the industry;
- Understanding how “complacency about risk-taking is of increasing supervisory concern as [the industry enters] a phase of growth and heightened competition”; and
- Reviewing key regulatory standards, as well as other matters pending before the agency, which will take into account both external and internal views.
On March 31, the CFPB rescinded, effective April 1, the following policy statements, which provided temporary regulatory flexibility measures to help financial institutions work with consumers affected by the Covid-19 pandemic:
- A March 26, 2020, statement addressing the Bureau’s commitment to taking into account staffing and related resource challenges facing financial institutions related to supervision and enforcement activities.
- A March 26, 2020, statement postponing quarterly HMDA reporting requirements. (Covered by InfoBytes here.)
- A March 26, 2020, statement postponing annual data submission requirements related to credit card and prepaid accounts required under TILA, Regulation Z and Regulation E. (Covered by InfoBytes here.)
- An April 1, 2020, statement on credit reporting agencies and furnishers’ credit reporting obligations under the Fair Credit Reporting Act and Regulation V during the Covid-19 pandemic. The Bureau notes that the rescission “leaves intact the section entitled “Furnishing Consumer Information Impacted by COVID-19” which articulates the CFPB’s support for furnishers’ voluntary efforts to provide payment relief and that the CFPB does not intend to cite in examinations or take enforcement actions against those who furnish information to consumer reporting agencies that accurately reflect the payment relief measures they are employing.” (Covered by InfoBytes here.)
- An April 27, 2020, statement affirming that the Bureau would not take supervisory or enforcement action against land developers subject to the Interstate Land Sales Full Disclosure Act and Regulation J for delays in filing financial statements and annual reports of activity. (Covered by InfoBytes here.)
- A May 13, 2020, statement providing supervision and enforcement flexibility for creditors to resolve billing errors during the pandemic. (Covered by InfoBytes here.)
- A June 3, 2020, statement providing temporary flexibility for credit card issuers regarding electronic provision of certain disclosures during the Covid-19 pandemic in accordance with the E-Sign Act and Regulation Z. (Covered by InfoBytes here.)
The rescission also withdraws the Bureau as a signatory to the April 7, 2020, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (covered by InfoBytes here), and the April 14, 2020, Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (covered by InfoBytes here).
Additionally, the Bureau issued Bulletin 2021-01 announcing changes to how it communicates supervisory expectations to institutions. Bulletin 2021-01 replaces Bulletin 2018-01 (covered by InfoBytes here), which previously created two categories of findings conveying supervisory expectations: Matters Requiring Attention (MRAs) and Supervisory Recommendations (SRs). Under the revised Bulletin, the Bureau notes that examiners “will continue to rely on [MRAs] to convey supervisory expectations” but will no longer issue formal written SRs, as the agency believes that MRAs will more effectively convey its supervisory expectations. The Bulletin further states that “Bureau examiners may issue MRAs with or without a related supervisory finding that a supervised entity has violated a Federal consumer financial law.”
On March 31, the Federal Reserve Board issued a final rule codifying the Interagency Statement Clarifying the Role of Supervisory Guidance issued by the CFPB, FDIC, NCUA, and OCC on September 11, 2018 (2018 Statement). As previously covered by InfoBytes, an October 2018 joint proposal amended the 2018 Statement by (i) clarifying that references in the 2018 Statement limiting agency “criticisms” includes criticizing institutions “through the issuance of [matters requiring attention] and other supervisory criticisms, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations”; and (ii) adding that supervisory criticisms should be “specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.” The final rule is effective 30 days after publication in the Federal Register, and mirrors final rules issued by the CFPB, OCC, FDIC, and NCUA.
On January 28, newly appointed CFPB acting Director, Dave Uejio, released a statement he sent to staff announcing his immediate priorities for the Bureau as: (i) relief for consumers facing hardship and economic crisis due to the Covid-19 pandemic, and (ii) racial equity. Acknowledging the recently released Covid-19 Supervisory Highlights (covered by InfoBytes here), Uejio stated he was “concerned” about the findings, which noted issues with mortgage servicing, auto loan servicing, student loan servicing, and small business lending (including banks' practice of only offering Paycheck Protection Program loans to pre-existing customers). Uejio stated that going forward, the Bureau will “take aggressive action to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic,” noting that companies will have already received or should expect to receive a letter dictating “remediat[ion] [to] all of those who are harmed” and should “change policies, procedures, and practices to address the root causes of harms.” Moreover, Uejio will be reversing policies put into place by the previous administration, including reinstating examinations of the Military Lending Act and rescinding “public statements conveying a relaxed approach to enforcement.”
Additionally, Uejio said fair lending enforcement is a “top priority,” calling it “time” for the CFPB to “take bold and swift action on racial equity.” Uejio noted plans to “elevate and expand existing investigations and exams,” as well as add new ones and focus broadly on “unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”
On January 19, the FDIC issued FIL-04-2021 announcing the adoption of revised Guidelines for Appeals of Material Supervisory Determinations (Guidelines). The Guidelines, originally proposed last August (covered by InfoBytes here), will establish a new, independent Office of Supervisory Appeals (Office) replacing the current Supervision Appeals Review Committee. The new Office will have final authority to resolve appeals by a panel of reviewing officials and will be independent from other divisions within the FDIC that have authority to issue material supervisory determinations. The Guidelines provide that appeals submitted to the Office will be decided by a panel of term-appointed reviewing officials with bank supervisory or examination experience. Additionally, the division director will make an independent supervisory determination without deferring to the judgments of either party, with communications between the Office and members of either the supervisory staff or the appealing institution to be shared with the other party to the appeal. The Guidelines will also permit an institution to request expedited review of its appeal, and will amend the procedures and timeframes for considering formal enforcement-related decisions through the supervisory appeals process. The Guidelines will take effect once the new Office is fully operational. In the meantime, the current guidelines will remain in effect.
On January 19, the CFPB released a special edition of Supervisory Highlights detailing the agency’s Covid-19 prioritized assessment (PA) observations. Since May 2020, the Bureau has conducted PAs in response to the pandemic in order to obtain real-time information from supervised entities operating in markets that pose an elevated risk of pandemic-related consumer harm. According to the Bureau, the PAs are not designed to identify federal consumer financial law violations, but are intended to spot and assess risks in order to prevent consumer harm. Targeted information requests were sent to entities seeking information on, among other things, ways entities are assisting and communicating with consumers, Covid-19-related institutional challenges, compliance management system changes made in response to the pandemic, and service provider data. Highlights of the Bureau’s findings include:
- Mortgage servicing. The CARES Act established certain forbearance protections for homeowners. The Bureau pointed out that many servicers faced significant challenges, including operational constraints, resource burdens, and service interruptions. Consumer risks were also present, with several servicers (i) providing incomplete or inaccurate information regarding CARES Act forbearances, failing to timely process forbearance requests, or enrolling borrowers in unwanted or automatic forbearances; (ii) sending collection and default notices, assessing late fees, and initiating foreclosures for borrowers in forbearance; (iii) inaccurately handling borrowers’ preauthorized electronic funds transfers; and (iv) failing to take appropriate loss mitigation steps.
- Auto loan servicing. The Bureau noted that many auto loan servicers provided insufficient information to borrowers about the impact of interest accrual during deferment periods, while other servicers continued to withdraw funds for monthly payments even after agreeing to deferments. Additionally, certain borrowers received repossession notices even though servicers had suspended repossession operations during this time.
- Student loan servicing. The CARES Act established protections for certain student loan borrowers, including reduced interest rates and suspended monthly payments for most federal loans owned by the Department of Education. Many private student loan holders also offered payment relief options. The Bureau noted however that servicers faced significant challenges in implementing these protections. For certain servicers, these challenges led to issues which raised the risk of consumer harm, including (i) provision of incorrect or incomplete payment relief options; (ii) failing to maintain regular call center hours; (iii) failing to respond to forbearance extension requests; and (iv) allowing certain payment allocation errors and preauthorized electronic funds transfers.
- Small business lending. The Bureau discussed the Small Business Administration’s Paycheck Protection Program (PPP), noting that when “implementing the PPP, multiple lenders adopted a policy that restricted access to PPP loans beyond the eligibility requirements of the CARES Act and rules and orders issued by the SBA.” The Bureau encouraged lenders to consider and address any fair lending risks associated with PPP lending.
The Supervisory Highlights also examined areas related to credit card accounts, consumer reporting and furnishing, debt collection, deposits, prepaid accounts, and small business lending.
On January 19, the CFPB issued a final rule codifying the Interagency Statement Clarifying the Role of Supervisory Guidance issued by the CFPB, OCC, Federal Reserve Board, FDIC, and the NCUA on September 11, 2018 (2018 Statement). As previously covered by InfoBytes, the October 2018 joint proposal amended the 2018 Statement by (i) clarifying that references in the Statement limiting agency “criticisms” includes criticizing institutions “through the issuance of [matters requiring attention] MRAs and other supervisory criticisms, including those communicated through matters requiring board attention, documents of resolution, and supervisory recommendations”; and (ii) adding that supervisory criticisms should be “specific as to practices, operations, financial conditions, or other matters that could have a negative effect on the safety and soundness of the financial institution, could cause consumer harm, or could cause violations of laws, regulations, final agency orders, or other legally enforceable conditions.”
The Bureau notes that it chose to issue a final rule that is specific to the Bureau and Bureau-supervised institutions, rather than a joint version including the five agencies as it did with the proposal. However, the final rule adopts the proposed rule without substantive change. The final rule is effective 30 days after publication in the Federal Register.
- Daniel R. Alonso to moderate an interactive roundtable at the Latin Lawyer and GIR Connect: Anti-Corruption & Investigations Conference
- APPROVED Checkpoint Webcast: You have license renewal questions, we have answers
- Jonice Gray Tucker to discuss “Fintech trends” at the BIHC Network Elevating Black Excellence Regional Summit
- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel R. Alonso to discuss anti-money-laundering at FELABAN Spanish-language webinar “Perspective for banks: LAFT, FINCEN, OFAC, Cryptocurrency”
- Daniel R. Alonso to discuss "What’s new in BSA/AML compliance?" at the Institute of International Bankers Regulatory Compliance Seminar
- Marshall T. Bell and John R. Coleman to speak at 2021 AFSA Annual Meeting
- Jon David D. Langlois to discuss "Regulatory update: What you need to know under the new boss; It won’t be the same as the old boss" at the IMN Residential Mortgage Service Rights Forum (East)
- Daniel R. Alonso to discuss internal investigations at the Institute of Internal Auditors of Argentina Spanish-language webinar
- Benjamin B. Klubes to discuss “Creating a Fantastic Workplace Culture”
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek