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Last month, the Government Accountability Office delivered a report at the request of Senators Elizabeth Warren (D-MA) and Sherrod Brown (D-OH) on the CFPB’s oversight and enforcement of fair lending laws after the agency’s 2018 reorganization which moved the Office of Fair Lending and Equal Opportunity from the Supervision, Enforcement, and Fair Lending Division to the Office of the Director and shifted certain responsibilities. GAO’s investigation focused on how the Bureau (i) “managed the reorganization of its fair lending activities”; (ii) “monitored and reported on its fair lending performance”; and (iii) used new HMDA data reported by some lenders since 2018 in its fair lending activities. The investigation team examined documents related to the Bureau’s fair lending activities, including strategic and performance reports and policies and procedures, and interviewed Bureau staff. GAO concluded that the Bureau “did not substantially incorporate key practices for agency reform efforts GAO identified in prior work” during the reorganization, and identified challenges related to the reorganization such as “loss of fair lending expertise and specialized data analysts,” which “may have contributed to a decline in enforcement activity in 2018.” The report also pointed out that the Bureau’s decision to stop reporting fair lending supervision and enforcement performance goals and measures has reduced transparency. However, the report noted that the Bureau has incorporated loan-level HMDA data to support its fair lending activities and that the new data points have improved the agency’s ability to compare how different institutions price loans, helping staff identify potentially discriminatory lending practices.
GAO’s report recommended that the Bureau: (i) collect and analyze information on the outcomes of its fair lending reorganization and use that assessment to address any related challenges or unintended consequences; and (ii) “develop and implement performance goals and measures specific to its efforts to supervise and enforce fair lending laws.” The Bureau agreed with both recommendations and affirmed its commitment to implementing them.
On June 2, the CFPB released new FAQs regarding the Mortgage Servicing Rule and Regulation X and Regulation Z relating to escrow account guidance and analysis. General highlights from the FAQs are listed below:
- Regulation X provides that (i) an escrow account is any account established or controlled by a servicer for a borrower to pay taxes or other charges associated with a federally related mortgage loan, including charges that the servicer and borrower agreed to have the servicer collect and pay; and (ii) the computation year for an escrow account is a 12-month period that the servicer establishes for the account, starting with the borrower’s first payment date and including each subsequent 12-month period, unless the servicer issues a short year statement.
- Servicers must send the borrower an annual escrow account statement “within 30 days of the completion of the escrow account computation year.”
- Disbursement date is defined as “the date the servicer pays an escrow item from the escrow account.”
- “The initial escrow statement is the first disclosure statement that the servicer delivers to the borrower concerning the borrower’s escrow account,” and must include: (i) “the amount of the monthly mortgage payment”; (ii) “the portion of the monthly payment going into the escrow account”; (iii) “itemized anticipated disbursements to be paid from the escrow account”; (iv) “anticipated disbursement dates”; (v) “the amount the servicer elects as a cushion”; and (vi) “trial running balance for the account.”
- The annual escrow statement must include, among other things, “an account history that reflects the activity in the escrow account during the prior escrow account computation year and a projection of the activity in the account for the next escrow account computation year.”
- An escrow account analysis is the accounting a servicer conducts in the form of a trial running balance for an escrow account to: (i) “determine the appropriate target balances”; (ii) “compute the borrower’s monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account”; and (iii) “determine whether a shortage, surplus, or deficiency exists.”
- “If there is a shortage that is equal to or more than one month’s escrow account payment, the servicer may accept an unsolicited lump sum repayment to resolve the shortage. However, the servicer cannot require or provide the option of a lump sum payment on the annual escrow account statement. In addition, Regulation X does not govern whether borrowers can freely pay the servicer to satisfy an escrow account shortage. Therefore, “the acceptance of a voluntary, unsolicited payment made by the borrower to the servicer to satisfy an escrow account shortage is not a violation of Regulation X.”
- Servicers may inform borrowers that borrowers “may voluntarily provide a lump sum payment to satisfy an escrow shortage if they choose to” if “the communication is not in the annual escrow account statement itself and does not appear to indicate that a lump sum payment is something that the servicer requires but rather is an entirely voluntary option.”
On June 3, the CFPB published correcting amendments to its Official Interpretations to Regulation Z (TILA) that were not part of the final rule published in February, which exempts certain insured depository institutions and credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). As previously covered by InfoBytes, under the final rule, any loan made by an insured depository institution or credit union that is secured by a first lien on the principal dwelling of a consumer would be exempt from Regulation Z’s HPML escrow requirement if (i) the institution has assets of no more than $10 billion; (ii) “the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year”; and (iii) the institution meets certain existing HPML escrow exemption criteria.
The amendments add one comment to the CFPB’s commentary that was not incorporated into the Code of Federal Regulations “due to an omission in an amendatory instruction,” and revise a second comment that inadvertently did not appear in the final rule. The amendments to the commentary relate to (i) Regulation Z section 1026.35(b)(2)(vi)(B), which covers requirements for escrow exemptions for HPMLs; and (ii) Regulation Z section 1026.43(f)(1)(vi), which addresses the exemption associated with balloon-payment qualified mortgages made by certain creditors under the minimum standards for transactions secured by a dwelling. The corrections took effect June 3.
On June 2, CFPB acting Director Dave Uejio published a blog post highlighting Bureau efforts to address issues regarding racial injustice and the long-term economic effects of the Covid-19 pandemic on consumers. In January, as previously covered by InfoBytes, Uejio released a statement announcing his immediate priorities for the Bureau as: (i) relief for consumers facing hardship due to the Covid-19 pandemic and the related economic crisis; and (ii) racial equity. In the recent blog post, Uejio acknowledged that the “pandemic has created economic and financial insecurity for millions of Americans,” and has disproportionally impacted communities of color in terms of health and the related financial crises. Uejio also pointed out that, as acting director, his top priority is to “take bold and swift action to address issues of pervasive racial injustice and the long-term economic impacts of the COVID-19 pandemic on consumers” and noted that it is his “intent that the CFPB use all of [its] tools and authorities to protect and fight for fairness and equity.”
On June 4, the CFPB released eight new FAQs regarding compliance with the Electronic Fund Transfer Act (EFTA) and Regulation E. Highlights from the FAQs are listed below:
- As explained by the commentary to Regulation E, unauthorized electronic funds transfers (EFTs) include transfers by a person who obtained an access device from a consumer through fraud or robbery. “Similarly, when a consumer is fraudulently induced into sharing account access information with a third party, and a third party uses that information to make an EFT from the consumer’s account, the transfer is an unauthorized EFT under Regulation E.”
- “If a third party fraudulently induces a consumer to share account access information,” subsequent EFTs initiated using that information are not excluded from the definition of an unauthorized EFT under the exclusion for transfers initiated by persons who “furnished the access device to the consumer’s account by the consumer.”
- Financial institutions cannot consider a consumer’s negligence when determining liability for unauthorized EFTs under Regulation E because it establishes “the conditions in which consumers may be held liable for unauthorized transfers, and its commentary expressly states that negligence by the consumer cannot be used as the basis for imposing greater liability than is permissible under Regulation E.”
- Financial institutions cannot rely on a consumer agreement that “includes a provision that modifies or waives certain protections granted by Regulation E, such as waiving Regulation E liability protections if a consumer has shared account information with a third party” when determining whether the EFT was unauthorized and what liability provisions apply. The EFTA “includes an anti-waiver provision stating that ‘[n]o writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by [EFTA].’”
- Less protective rules do not change a financial institution’s Regulation E obligations, even if private network rules and other agreements provide additional consumer protections beyond Regulation E.
- “A financial institution must begin its investigation promptly upon receipt of an oral or written notice of error and may not delay initiating or completing an investigation pending receipt of information from the consumer.”
- “If a consumer has provided timely notice of an error under 12 CFR § 1005.11(b)(1) and the financial institution determines that the error was an unauthorized” EFT, Regulation E’s liability protections under Section 1005.6 would apply. “Depending on the circumstances regarding the unauthorized EFT and the timing of the reporting, a consumer may or may not have some liability for the unauthorized EFT.”
On June 1, the U.S. Court of Appeals for the Ninth Circuit granted Seila Law’s request to stay a mandate ordering compliance with a civil investigative demand (CID) issued by the CFPB. The order stays the appellate court’s mandate (covered by InfoBytes here) for 150 days, or until final disposition by the U.S. Supreme Court should the law firm file its expected petition of certiorari. Last month, Seila Law announced its intention to ask the Court “whether the ratification of the CFPB’s civil investigative demand is an appropriate remedy for the separation-of-powers violation identified by the Supreme Court.” In its motion, Seila Law claimed that the Bureau’s “alleged ratification” was not legally sufficient to cure the constitutional defect and that “an action taken by an agency without authority cannot be ratified if the principal lacked authority to take the action when the action was taken.” Seila Law further argued that the only appropriate remedy is dismissal of the petition to enforce the CID. The Bureau countered that former Director Kraninger’s ratification was valid, emphasizing that the majority of the 9th Circuit denied en banc rehearing last month (covered by InfoBytes here). The Bureau further contended that Seila Law did not demonstrate good cause for the stay or suggest that it would suffer irreparable harm should the motion be denied, pointing out that “equities now weigh overwhelmingly in favor” of requiring Seila Law’s compliance with the CID.
On June 1, the FTC announced that it submitted its 2020 Annual Financial Acts Enforcement Report to the CFPB. The report covers the FTC’s enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include:
- TILA and CLA. FTC enforcement actions concerning TILA/Regulation Z and CLA/Regulation M include: (i) efforts to combat deceptive automobile dealer practices; (ii) a payday lending action involving deceptive charges and tactics used to overcharge customers on loan repayments; and (iii) credit repair and debt relief schemes, including a student loan debt relief scheme involving illegal fees and false claims loan payments.
- EFTA. The FTC reported eight new or ongoing cases related to EFTA/Regulation E. These include: (i) negative option plans involving, among other things, companies applying recurring charges to consumers’ debit or credit card numbers for goods or services without obtaining proper written authorization; and (ii) use of robocalls for marketing deceptive products.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) collaboration with Department of Defense’s interagency group on preauthorized electronic fund transfer issues; (ii) a small business financing forum that provided “an overview of small business lending and the emergence of new online options available to businesses seeking finance”; and (iii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
On May 27, the CFPB announced a settlement with a Florida-based lender and the CEO of the company (collectively, “defendants”) to resolve allegations that the defendants violated the Consumer Financial Protection Act by misrepresenting the risks associated with their deposit product and the annual percentage rate (APR) associated with their consumer loans. The settlement resolves a complaint against the defendants filed in the U.S. District Court for the Southern District of Florida in November 2020 (covered by InfoBytes here). The CFPB alleged that the company took deposits from consumers to fund loans, claiming their deposits would have a fixed and guaranteed 15 percent annual percentage yield and would be deposited at FDIC-insured institutions. However, according to the complaint, the representations were false in that the funds were not held in FDIC-insured accounts and the rate of return was not guaranteed. The CFPB also alleged that most deposited funds were used to fund short-term, high-interest personal loans that were deceptively marketed as having an APR of 440 percent when the actual APRs are alleged to have been more than 900 percent, well in excess of the rate permitted under Florida’s criminal-usury law, causing the loans to be uncollectable and creating risk that obligations could not be met to depositors who sought to withdraw their deposited funds. The complaint claimed that the defendants had loaned a total of more than $30 million to consumers since 2017.
Under the terms of the stipulated order, the defendants are (i) subject to a judgment for monetary relief and damages for the full amount defendants received from consumers who purchased their financial products and services, around $1 million, plus all interest due to consumers under the terms of the advertised products and services purchased; and (ii) required to pay a $100,000 civil money penalty. The order also permanently bans the defendants from engaging in deposit-taking activity and from making deceptive statements to consumers.
On May 27, the CFPB released a report providing insights into manufactured housing financing, which is a source of lending for millions of manufactured housing homeowners. The report utilizes new information about manufactured housing that was added in 2018 to the list of HMDA data. The report also examines the differences between mortgage loans for site-built homes, mortgage loans for manufactured homes, and chattel loans for manufactured homes. The report found, among other things: (i) about 42 percent of manufactured home purchase loans are “chattel” loans, which are secured by the home but not the land; (ii) about 70 percent of the time, homeowners seeking a loan on a site-built home are approved, but about 30 percent of manufactured home loan applications are approved; (iii) the top five lenders account for over 40 percent of manufactured housing purchase loans and nearly 75 percent of chattel lending; and (iv) Hispanic, Black and African American, American Indian and Alaska Native, and elderly borrowers “are more likely than other consumers to take out chattel loans, even after controlling for land ownership.” The report also pointed out that “compared to mortgages for site-built homes, manufactured homes mortgages tend to have smaller loan amounts, higher interest rates, fewer refinances, and less of a secondary market, patterns that are even more acute for chattel loans.”
On May 24, the CFPB filed its fifth status report in the U.S. District Court for the Northern District of California as required under a stipulated settlement reached in February with a group of plaintiffs, including the California Reinvestment Coalition. The settlement (covered by InfoBytes here) resolved a 2019 lawsuit that sought an order compelling the Bureau to issue a final rule implementing Section 1071 of the Dodd-Frank Act, which requires the Bureau to collect and disclose data on lending to women and minority-owned small businesses.
Among other things, the Bureau notes in the status report that it has satisfied the following required deadlines: (i) last September it released a Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) outline of proposals under consideration (InfoBytes coverage here); and (ii) it convened an SBREFA panel last October and released the panel’s final report last December (InfoBytes coverage here). The Bureau reports that its rulemaking staff continues to brief new Bureau leadership on significant legal and policy issues that must be resolved in order to prepare a notice of proposed rulemaking for the Section 1071 regulations, and states that the parties have met to discuss an appropriate deadline for issuing the NPRM. According to the status report, should the parties agree on a deadline they “will jointly stipulate to the agreed date and request that the court enter that deadline.”
Find continuing Section 1071 coverage here.