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CFPB releases annual report on servicemember complaint issues
On January 24, the CFPB’s Office of Servicemember Affairs (OSA) released an annual report, which highlights issues facing military consumers based on complaints submitted by servicemembers, veterans, and their families (collectively “servicemembers”). The OSA report covers the period between April 1, 2017 and August 31, 2018, during which the Bureau received approximately 48,800 military complaints. Some key takeaways from the OSA report are as follows:
- The largest category of servicemember complaints focused on credit reporting, with 37 percent of total servicemember complaints in this area. The report notes that the Department of Defense’s new security clearance process increases the likelihood that a servicemember’s poor credit score could result in losing a security clearance, and by extension being separated from the military.
- After credit reporting, debt collection was the next most complained about issue. Most servicemembers’ debt collection complaints alleged that the servicemember did not owe the debt or that the debt collector failed to respond to written requests for information. In particular, the report states that some debt collectors have inappropriately contacted servicemembers’ chains of command in an attempt to obtain payment.
- For mortgage debt, the largest category of complaints arose from challenges in the payment process—in particular issues related to loan modifications, collections, communicating with the servicemember’s “single point of contact,” escrow, and servicing transfers. These process-focused complaints were closely followed by overall difficulties in being able to afford mortgage payments.
- For credit cards, the greatest concentration of complaints were around problems with purchases on statements (i.e. fraudulent/unauthorized charges, billing frustrations, and difficulties in challenging charges directly with the credit card issuer). Notably, while the report acknowledges the October 2017 Military Lending Act compliance date for credit card issuers, it does not specifically break out MLA-related complaints; rather, the report notes that the Bureau has received “some complaints from servicemembers demonstrating confusion with respect to how and when creditors are applying the MLA’s protections to credit card accounts.”
- For auto lending, the leading category of complaints arose from managing the loan or lease, including application of payments and late fees. Unique to servicemembers, the report highlights that products like GAP can become void if a servicemember takes a car overseas (for example, to use while on deployment).
- For student lending, two-thirds of complaints arose from challenges in making payments and enrolling in payment plans, in particular issues with enrolling and recertifying eligibility for income-driven repayment.
- Finally, in the payday loan space, since 2016 servicemember complaints have decreased drastically and are now equal with non-servicemember complaints (as a percentage of total complaint volume); previously, servicemembers were almost twice as likely to complain about payday loan products.
CFPB issues five-year lookback for 2013 ATR/QM and Mortgage Servicing Rule
On January 10, the CFPB released the assessment reports required by Section 1022(d) of the Dodd-Frank Act for two of its 2013 mortgage rules: the TILA Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule and the RESPA Mortgage Servicing Rule. The assessment reports were conducted using the Bureau’s own research and external sources. The reports do not include a benefit-cost analysis of either rule, nor do they propose amendments to the rules or contain any other policy recommendations. However, the Bureau expects the reports to be used to “inform the Bureau’s future policy decisions.”
The ATR/QM Rule became effective in January 2014 and generally requires that lenders make a reasonable and good faith determination, based on documented information, that the borrower has the reasonable ability to repay the mortgage loan. Highlights of the report’s findings include:
- While it is difficult to distinguish the effects of the ATR/QM Rule and the marketwide tightening of underwriting standards following the housing crisis, the rule may have restricted the reintroduction of certain types of loans that were associated with high delinquency or foreclosure rates, such as loans based on limited or no documentation of income or assets, loans with low initial monthly payments that reset after a period of time, and loans with high debt-to-income ratios.
- The ATR/QM Rule was not generally associated with an improvement in loan performance, as measured by the percentage of loans becoming 60 or more days delinquent within two years of origination.
- The ATR/QM Rule did not impact access to credit for self-employed borrowers who were eligible for a GSE loan. For other self-employed borrowers, the Bureau acknowledged lenders may find it difficult to comply with the Appendix Q documentation and calculation requirements but found that approval rates for this population decreased only slightly.
- While the costs of originating a mortgage loan have increased substantially over time, the ATR/QM Rule does not appear to have materially increased the lenders’ costs or the prices the lenders charged to consumers, at an aggregate market level. However, based on data from nine lenders, the Bureau estimated the foregone profits from not originating certain types of non-QM loans at $20-$26 million per year.
- Contrary to the Bureau’s expectations when it issued the ATR/QM Rule, the GSEs have maintained a persistently high share of the market, and the market for non-QM loans remains relatively small.
The Mortgage Servicing Rule became effective in January 2014 and, among other things, imposes procedural requirements on servicers with respect to loss mitigation and foreclosure for delinquent borrowers. Highlights of the report’s findings include:
- Loans that became delinquent were less likely to proceed to a foreclosure during the months after the Mortgage Servicing Rule’s effective date compared to months prior to the effective date and were more likely to return to current status. For borrowers who became delinquent the year the rule took effect, the Bureau estimated that, absent the rule, at least 26,000 additional borrowers would have experienced foreclosure within three years, and at least 127,000 fewer borrowers would have recovered from delinquency within three years.
- The cost of servicing mortgage loans has increased substantially; the main increase in costs occurred before the Mortgage Servicing Rule took effect and is not attributable to the rule. However, some servicers reported significant ongoing costs of complying with the rule, which can be attributable with the need for “robust control functions” and higher personnel costs to support increased communication with delinquent borrowers.
- The time from borrower initiation of a loss mitigation application to short-sale offer increased in 2015 compared to 2012.
- A larger share of borrowers who completed loss mitigation applications in 2015 were able to avoid foreclosure than borrowers who completed loss mitigation applications in 2012.
- The rate of written error assertions per account fell by about one-half after the Mortgage Servicing Rule’s effective date compared to the prior three years.
- There was a moderate decrease in the share of borrowers receiving force-placed insurance and the Rule’s effective date, which can be attributable to the Rule but also to the changes in the insurance market.
District Court orders mortgage company to pay $260,000 in civil money penalties for deceiving veterans about refinance benefits
On December 21, the U.S. District Court for the District of Nevada ordered a non-bank mortgage company to pay $268,869 in redress to consumers and a civil penalty of $260,000 in an action brought by the CFPB for engaging in allegedly deceptive lending practices to veterans about the benefits of refinancing their mortgages. As previously covered by InfoBytes, the CFPB had alleged that, during in-home presentations, the company used flawed “apples to apples” comparisons between the consumers’ mortgages and a Department of Veterans Affairs’ Interest Rate Reduction Refinancing Loan. According to the Bureau, the presentations misrepresented the cost savings of the refinance by (i) inflating the future amount of principal owed under the existing mortgage; (ii) overestimating the future loan’s term, which underestimated the future monthly payments; and (iii) overestimating the total monthly benefit of the loan after the first month. In addition to the monetary penalties, the order prohibits the company from misrepresenting the terms or benefits of mortgage refinancing and requires the company to submit a compliance plan to the Bureau.
U.S. government watchdog studies fintech lending trends, recommends need for clarity on use of alternative data
In December, the Government Accountability Office (GAO) issued a report entitled “Financial Technology: Agencies Should Provide Clarification on Lenders’ Use of Alternative Data,” which addresses emerging issues in fintech lending due to rapid growth in loan volume and increasing partnerships between banks and fintech lenders. The report also addresses fintech lenders’ use of alternative data to supplement traditional data used in making credit decisions or to detect fraud. The report notes that many banks and fintech lenders would benefit from additional guidance to ease the regulatory uncertainty surrounding the use of alternative data, including compliance with fair lending and consumer protection laws. The report’s findings cover the following topics:
- Growth of fintech lending. GAO’s analysis discusses the growth of fintech lending and several possible driving factors, such as financial innovation; consumer and business demand; lower interest rates on outstanding debt; increased investor base; and competitive advantages resulting from differences in regulatory requirements when compared to traditional state- or federally chartered banks.
- Partnerships with federally regulated banks. The report addresses two broad categories of business models: bank partnership and direct lending. GAO reports that the most common structure is the bank partnership model, where fintech lenders evaluate loan applicants through technology-based credit models, which incorporate partner banks’ underwriting criteria and are originated using the bank’s charter as opposed to state lending licenses. The fintech lender may then purchase the loans from the banks and either hold the loan in portfolio, or sell in the secondary market.
- Regulatory concerns. GAO reports that the most significant regulatory challenges facing fintech lenders relate to (i) compliance with varying state regulations; (ii) litigation-related concerns including the “valid when made” doctrine and “true lender” issues; (iii) ability to obtain industrial loan company charters; and (iv) emerging federal initiatives such as the Office of the Comptroller of the Currency’s (OCC) special-purpose national bank charter, fragmented coordination among federal regulators, and the Consumer Financial Protection Bureau's (CFPB) “no-action letter” policy.
- Consumer protection issues. The report identifies several consumer protection concerns related to fintech lending, including issues related to transparency in small business lending; data accuracy and privacy, particularly with respect to the use of alternative data in underwriting; and the potential for high-cost loans due to lack of competitive pressure.
- Use of alternative data. The report discusses fintech lenders’ practice of using alternative data, such as on-time rent payments or a borrower’s alma mater and degree, to supplement traditional data when making credit decisions. GAO notes that while there are potential benefits to using alternative data—including expansion of credit access, improved pricing of products, faster credit decisions, and fraud prevention—there are also a number of identified risks, such as fair lending issues, transparency, data reliability, performance during economic downturns, and cybersecurity concerns.
The GAO concludes by recommending that U.S. federal financial regulators, including the CFPB, Federal Reserve Board of Governors, Federal Deposit Insurance Corporation, and the OCC communicate in writing with fintech lenders and their bank partners about the appropriate use of alternative data in the underwriting process. According to the report, all four agencies indicated their intent to take action to address the recommendations and outlined efforts to monitor the use of alternative data.
CFPB releases final policy on HMDA data disclosure
On December 21, the CFPB announced final policy guidance covering the loan-level HMDA data the Bureau intends to make publicly available in 2019. The proposed policy was issued in September 2017 (covered by InfoBytes here) and, after reviewing public comments, the Bureau agreed to modify certain data disclosures to address concerns regarding consumers’ privacy. The final policy now excludes from public disclosure (i) the loan identifier; (ii) application and action taken dates; (iii) the property address; (iv) the applicants’ credit scores; (v) the mortgage originator’s NMLS identifier; and (vi) the results generated by the automated underwriting system. The Bureau will also exclude free-form text fields which report data such as the applicant’s race or ethnicity. The Bureau further announced that it will publish data for (i) the applicants’ ages; (ii) the loan amount; and (iii) the number of units in the dwelling as ranges rather than specific values.
The announcement states that the Bureau intends to initiate in a separate notice-and-comment rulemaking in 2019 to incorporate any modifications of HMDA data into the text of Regulation C and will use the rulemaking to consider what HMDA data will be disclosed in future years. Additionally, the CFPB reiterated its intention to engage in a rulemaking to reconsider aspects of the 2015 HMDA rule, which was originally announced in December 2017 (covered by InfoBytes here).
CFPB releases annual adjustments to HMDA, TILA, and FCRA; agencies release CRA asset-size threshold adjustments
On December 31, the CFPB published final rules adjusting both the asset-size thresholds under HMDA (Regulation C) and TILA (Regulation Z), and the maximum amount consumer reporting agencies may charge consumers for providing the consumer the consumer’s credit file under FCRA. All rules take effect on January 1, 2019.
Under HMDA, institutions with assets below certain dollar thresholds are exempt from the collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $45 million to $46 million, thereby exempting institutions with assets of $46 million or less as of December 31, 2018, from collecting and reporting HMDA data in 2019.
TILA exempts certain entities from the requirement to establish escrow accounts when originating higher-priced mortgage loans (HPMLs), including entities with assets below the asset-size threshold established by the CFPB. The final rule increases this asset-size exemption threshold from $2.112 billion to $2.167 billion, thereby exempting creditors with assets of $2.167 billion or less as of December 31, 2018, from the requirement to establish escrow accounts for HPMLs in 2019.
Lastly, the FCRA permits consumer reporting agencies to impose a reasonable charge on a consumer when disclosing the consumer’s credit file in certain circumstances. Where the annual adjustment to this maximum charge had historically been announced via regulatory notice, the Bureau is now codifying the maximum charge in Regulation V. For 2019, the Bureau increased the maximum amount consumer reporting agencies may charge for making a file disclosure to a consumer from $12.00 to $12.50.
Separately, on December 20, the Federal Reserve Board, the OCC, and the FDIC (collectively, the “Agencies”) jointly announced the adjusted asset-size thresholds used to define “small” and “intermediate small” banks and savings associations under the Community Reinvestment Act (CRA). Effective January 1, 2019, a “small” bank or savings association will be defined as an institution that, as of December 31 of either of the past two calendar years, had assets of less than $1.284 billion. An “intermediate small” bank or savings association will be defined as an institution with assets of at least $321 million as of December 31 of both of the past two calendar years, but less than $1.284 billion in assets as of December 31 of either of the past two calendar years. The Agencies published the annual adjustments in the Federal Register on December 27.
District Court approves $480 million settlement between national bank and investors over incentive compensation sales program
On December 18, the U.S. District Court for the Northern District of California granted final approval following a fairness hearing to a $480 million settlement with a national bank to resolve a consolidated class action related to the bank’s previous incentive compensation sales program. As previously covered by InfoBytes, an agreement in principle was announced last May. The court’s order resolves class action allegations stemming from the September 2016 consent order between the bank and the CFPB, which resolved allegations related to the opening of deposit and credit card accounts for consumers without consent. (See previously InfoBytes coverage here.)
Illinois amends Residential Mortgage License Act
On December 19, the Illinois governor signed HB 5542, which amends the state’s Residential Mortgage License Act of 1987 (the Act) to make various changes to state licensing requirements. Among other things, the amended Act (i) clarifies the definition of a “bona fide nonprofit organization”; (ii) provides a list of prohibited acts and practices; (iii) stipulates that a licensee filing a Mortgage Call Report is not required to file an annual report with the Secretary of Financial and Professional Regulation (Secretary) disclosing applicable annual activities; (iv) repeals a provision requiring the Secretary to obtain loan delinquency data from HUD as part of an examination of each licensee; (v) clarifies that the notice of change in loan terms disclosure requirements do not apply to any licensee providing notices of changes in loan terms pursuant to the CFPB’s Know Before You Owe mortgage disclosure procedure under TILA and RESPA, while removing the provision that previously excluded licensees limited to soliciting residential mortgage loan applications as approved by the Secretary from the requirements to provide disclosure of changes in loan terms; (vi) removes certain criteria concerning the operability date for submitting licensing information to the Nationwide Multistate Licensing System; and (vii) makes other technical and conforming changes. The amendments are effective immediately.
Kraninger rejects CFPB name change
On December 19, new CFPB Director, Kathy Kraninger emailed staff stating she has decided to not move forward with changing the name of the agency to the Bureau of Consumer Financial Protection. Former acting Director Mick Mulvaney—to whom Kraninger previously reported at the Office of Management and Budget—had initiated the change and released an official agency seal referring to the Bureau of Consumer Financial Protection on the grounds that the Dodd-Frank Act generally used that name for the agency rather than Consumer Financial Protection Bureau. In an email to Bureau staff, Kraninger stated the seal and the “statutory name given in Dodd-Frank” will be used for “statutorily required reports, legal filings, and other items specific to the Office of the Director,” but “[t]he name ‘Consumer Financial Protection Bureau’ and the existing CFPB logo will continue to be used for all other materials.” The decision comes soon after an internal report allegedly calculated the name change to cost anywhere between $9 million and $19 million dollars and after a request by Senator Elizabeth Warren for the Bureau’s Inspector General to conduct an investigation into Mulvaney’s decision to change the name.
This appears to be one of the first significant decisions Kraninger has made since becoming the Bureau’s second confirmed Director. While her reversal of the course set by Mulvaney is noteworthy, her views on consumer financial protection issues are still largely unknown, and it remains to be seen whether she will continue with her predecessor’s initiatives on substantive matters.
House Democrats urge Kraninger to resume MLA examinations
On December 14, Maxine Waters (D-CA) and 22 other House Democrats issued a letter urging the new CFPB Director, Kathy Kraninger, to resume supervisory examinations of the Military Lending Act (MLA). As previously covered by InfoBytes, according to reports citing “internal agency documents,” the Bureau ceased supervisory examinations of the MLA, contending the law does not authorize the Bureau to examine financial institutions for compliance with the MLA. In response, a bipartisan coalition of 33 state Attorneys General sent a letter to then acting Director, Mick Mulvaney, expressing concern over the decision (covered by InfoBytes here).
The letter from Waters, who is expected to be the next chair of the House Financial Services Committee, and the other 22 Democratic members of the Committee, argues that “there is no question the [CFPB] has the authority and the responsibility to supervise its regulated entities for compliance with the MLA.” As support, the letter cites to the Bureau’s authority to oversee a “wide range of regulated entities,” the establishment of the Bureau’s Office of Servicemember Affairs, and the 2013 amendments to the MLA, which gave the Bureau the authority to enforce the act. The letter also points to the Bureau’s work obtaining $130 million in relief for servicemembers, veterans, and their families through enforcement actions, as well as the 109 complaints the Bureau has received from military consumers since 2011.