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CFPB Issues Request for Information on Small Business Lending; Prepares to Implement Section 1071 of Dodd Frank Act
On May 10, the CFPB announced the issuance of a Request for Information on various aspects of the market for small business loans as the Bureau prepares to implement Section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. The Request includes questions grouped in five categories: (i) defining what constitutes a small business; (ii) data points the Bureau will require to be submitted and collected; (iii) types of lenders involved in small business lending and the appropriate institutional coverage for the data collection requirements; (iv) types of financial products offered to small businesses generally, and those owned by women and minorities in particular; and (v) privacy concerns related to the data collection.
The CFPB also released Director Cordray’s prepared remarks in advance of a field hearing on small business lending where he introduced the Request for Information and issued a related press release. Comments are due 60 days after the Request for Information is published in the Federal Register. The Bureau also released a report, entitled “Key Dimensions of the Small Business Lending Landscape,” which presents the CFPB's perspective on the market for lending to small, minority-owned and woman-owned firms and gaps in its understanding.
A couple of industry groups have already weighed in regarding expected difficulties with the application of Section 1071. In a letter sent Tuesday in advance of the field hearing, the National Association of Federally-Insured Credit Unions (NAFCU) urged the CFPB to exempt its members from any rulemaking that compels disclosure of business loan information. NAFCU Regulatory Affairs Counsel Andrew Morris cites the unique characteristics of credit unions, and that such data collection “may yield confusing information about credit unions and further restrict lending activity as a result of increased compliance costs.” The letter notes that “[c]redit unions serve distinct fields of membership, and as a result, institution-level data related to women-owned, minority-owned and small business lending substantially differs in relation to other lenders.”
And, in a white paper provided to the Treasury Department, the American Bankers Association criticizes what amounts to Section 1071’s conflation of consumer and commercial lending, “recommend[ing] the elimination of any vestige of Bureau regulatory, supervisory, or enforcement authority over commercial credit or other commercial account and financial services.”
D.C. Circuit Holds CID Unenforceable Due to “Perfunctory” Notification of Purpose
On April 21, the U.S. Court of Appeals for the D.C. Circuit held that a civil investigative demand (“CID”) did not advise a non-profit organization that accredits for-profit colleges of “’the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.’ 12 U.S.C. § 5562(c)(2).” See CFPB v. Accrediting Council for Indep. Colls.& Schs., [Order] No. 16-5174 (D.C. Cir. Apr. 21, 2017). The CID described “the nature of the conduct” as simply “unlawful acts and practices in connection with accrediting for-profit colleges.” Because this “broad and non-specific” language did not describe the purpose of the CFPB’s investigation, the Court determined that it could not ascertain whether the information sought was reasonably relevant or “the link between the relevant conduct and the alleged violation.” The Court also found that the description of the laws applicable to the violation was inadequate. The CID identified 12 U.S.C. §§ 5531 and 5536 and “any other Federal consumer financial protection law,” but the Court concluded that the citations “tell … nothing about the statutory basis for the Bureau’s investigation” considering the CFPB’s failure to identify “the specific conduct under investigation.” Notably the Court explicitly limited its ruling to the particular CID at issue and declined to address the broader question of whether the CFPB may investigate accreditation of for-profit schools.
Oklahoma Governor Vetoes Legislation Expanding High-Cost Payday Lending
On May 5, Oklahoma Governor Mary Fallin vetoed legislation that would have expanded consumer payday lending in the state. Oklahoma House Bill 1913—known as the “Oklahoma Small Loan Act”—would have allowed lenders to offer installment loans with terms no longer than 12 months and interest rates up to 17 percent per month. Fallin’s veto message to the House expressed concerns about adding another high interest loan product without eliminating or restricting existing payday loan products: “House Bill 1913 adds yet another level of high interest borrowing (over 200% APR) without terminating or restricting access to existing payday loan products.” Fallin further asserted that “some of the loans created by this bill would be more expensive than the current loan options.” Four years prior, Fallin vetoed Senate Bill 817 “due to [her] concerns with the frequency [with which] low-income families in Oklahoma were using these lending options, and the resulting high cost of repayment to those families.” In the veto message, Fallin requested that the state legislature seek advice from her office as well as consumer advocates and mainstream financial institutions if it decides to revisit these issues. Under Section 11 of Article 6 of the Oklahoma Constitution, the legislation can still be enacted if two-thirds of the members of both legislative chambers vote to override the veto. In earlier votes, the legislation fell short of the two-thirds threshold, passing the Oklahoma House 59-31 and the Senate by a 28-16 margin.
Notably, last year, the CFPB published proposed rules in the Federal Register affecting payday, title, and certain other high-cost installment loans (see previously posted Special Alert).
American Bankers Association White Paper Addresses Concerns Over HMDA Expansion
On May 2, the American Bankers Association (ABA) issued a white paper to the Treasury Department on the implementation of the 2015 Home Mortgage Disclosure Act (HMDA) rule as part of its continuing response to President Trump’s executive order outlining “core principles” for financial regulation (see previously issued Special Alert here). The white paper, HMDA – More Really is Less: The Data Fog Frustrates HMDA, presents several views held by the ABA including that the CFPB should (i) rescind requirements to collect any data fields not expressly required by HMDA; (ii) suspend the effective date of the 2015 HMDA rule until privacy and security concerns are addressed (see previously issued Special Alert here); (iii) exclude commercial loans from HMDA coverage; and (iv) revoke the new HMDA data elements added by the Dodd-Frank Act. The ABA noted that the Dodd-Frank Act added more than 13 new categories to the statutory HMDA data fields lenders are required to collect, and in the implementing regulation, Regulation C, the CFPB added 25 new data fields to the existing 23 fields. The ABA noted that the CFPB estimates that, in addition to existing costs of HMDA compliance, the additional annual costs of operations will be approximately $120.6 million conservatively (more if reporting quarterly) and lenders will incur a one-time additional cost of between $177 million and $326.6 million. Furthermore, the ABA states there still remains a need to address the “significant” privacy issues presented by the “vast trove of data points added by Dodd-Frank,” and that “the collection and transfer and warehousing of greatly increased and more sensitive data will necessitate even more robust and costlier private sector and government systems.” However, the ABA noted the Bureau has not initiated rulemaking to address the privacy issues presented.
Notably, last month, the CFPB issued a proposal in the Federal Register to amend the 2015 HMDA rule (see previously issued Special Alert here). The changes are primarily for the purpose of clarifying data collection and reporting requirements, and most of the clarifications and revisions would take effect in January 2018. The deadline to submit comments on the CFPB’s proposal is May 25, 2017.
CFPB Seeks Public Comment on its Plans for Assessing RESPA Mortgage Servicing Rule
On May 4, the CFPB issued a request for comment on its plans for assessing the 2013 Real Estate Settlement Procedures Act (RESPA) servicing rule’s effectiveness in meeting the purposes and objectives outlined in the Dodd-Frank Act, which requires the CFPB to assess each significant rule or order it adopts under Federal consumer financial laws. According to the request for comment and a May 4 blog post on the CFPB’s website, the self-assessment will focus on objectives to ensure that: (i) “[c]onsumers are provided with timely and understandable information to make responsible decisions about financial transactions”; (ii) “[c]onsumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination”; (iii) “[o]utdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens”; (iv) “[f]ederal consumer financial law is enforced consistently”; and (v) “[m]arkets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”
In 2013, the Bureau adopted the 2013 RESPA Servicing Final Rule and further amended the rule several times to address questions raised by the industry, consumer advocacy groups, and other stakeholders. The CFPB deemed the 2013 RESPA Servicing Final Rule, effective January 10, 2014, a “significant rule” for purposes of the Dodd-Frank Act. Importantly, however, in Footnote 10 of its most-recent request for comment, the Bureau clarifies that it “is not seeking comment on the amendments to the mortgage servicing rules that became or will become effective after the January 10, 2014 effective date.” (emphasis added) Accordingly, it appears that the Bureau is not presently seeking comments on the Amendments to Regulation X and Regulation Z that the CFPB published as a Final Rule (12 CFR Parts 1024 and 1026) in the October 19, 2016 edition of the Federal Register – see earlier InfoBytes coverage here – and which are slated to take effect in part on October 19, 2017 and in full on April 19, 2018.
Financial CHOICE Act of 2017 Approved by House Financial Services Committee
On May 4, GOP efforts to overhaul existing financial regulations took a step forward as the House Financial Services Committee approved H.R. 10, a revised version of the “Financial CHOICE Act of 2017” in a party-line vote, 34-26. The vote concluded a two week period that included both a three-day markup, of the GOP-backed legislation—during which several Democrat committee members sought, unsuccessfully, to remove various provisions of the bill—and, a two-day hearing that included testimony from 18 different witnesses.
Originally introduced by Committee Chairman Jeb Hensarling (R-TX) in September 2016, the main focus of the CHOICE Act was to give financial institutions the option of avoiding many of the rules set up by the 2010 Dodd-Frank law if they maintain a high level of capital and are “well-managed” as defined in the bill. The legislation, if enacted, would also end the Dodd-Frank Act’s taxpayer-funded bailouts of large financial institutions and would impose greater penalties on those who commit fraud and insider trading, while also demanding greater accountability from banking regulators. A summary of changes incorporated in the latest iteration of the proposed legislation—recently referred to as “CHOICE Act 2.0”—was released by the Committee last week and included, among other things:
- the elimination of the CFPB supervisory and examination authority;
- a restructuring of the CFPB, FHFA, OCC, and FDIC into bipartisan commissions appointed by the President;
- an opt-out of many regulatory requirements for banks and other financial institutions if they maintain a 10% leverage ratio (among other conditions);
- subjecting the federal banking regulators to greater congressional oversight and tighter budgetary control;
- reforms in bank stress tests;
- materially reducing the authority of the Financial Stability Oversight Council (FSOC) and the establishment of a new process of identifying financial institutions as "systemically important";
- a repeal of the Orderly Liquidation Authority and the creation of a new bankruptcy process for banks;
- a repeal of the Volcker Rule; and
- facilitated capital raising by small companies, including through crowd-funding.
Looking ahead, the House could vote to pass the bill later this month. While a party-line vote would pass the House, the bill will likely need to pick up a minimum of 60 votes—including support from several Democrats—in order for it to pass in the Senate.
Advocacy Organization Argues Need for CFPB Prepaid Rule Communications Before CRA Vote
On April 28, an advocacy organization filed a reply to the CFPB’s opposition for expedited handling of two FOIA requests issued to the Bureau on April 12. The organization filed a lawsuit in the U.S. District Court for the District of Columbia on April 18 contending that the Bureau failed to comply with a statutory expedition processing request, and asserts that there is a “compelling need” for information that would enable the public to learn about efforts to influence the government's policymaking process before a proposed Congressional vote in mid-May to overturn the CFPB’s Prepaid Rule. The organization further argues—despite the Bureau’s assertions to the contrary—that in order to fulfill its mission it is “primarily engaged in disseminating information” with its public education efforts, and therefore, like others whose requests have been granted expedited processing, has “met the dissemination of information as a primary activity” requirement (citing Leadership Conference on Civil Rights v. Gonzales, 404 F. Supp. 2d 246, 260 (D.D.C. 2005)). Additionally, the organization claims that its FOIA requests pertain to issues for which there is an “urgency to inform the public” because of an imminent deadline under the Congressional Review Act (CRA), which “permits Congress to overrule a regulation within a certain amount of time after its promulgation.” Specifically, the FOIA requests seek access to communications about the Prepaid Rule between the CFPB and 12 Senators, and between the Bureau and two prepaid companies. The organization is asking the court to order the Bureau to take whatever steps are necessary to comply with the FOIA requests prior to the CRA vote on the Prepaid Rule.
CFPB Releases “Core Outcomes” for Financial Empowerment Programs
On April 27, the CFPB announced in a blog post its release of a core set of financial outcomes designed to help human services organizations integrate financial empowerment and capability initiatives into their programs. Strategies include implementing financial education tools and financial counseling or coaching. In its April report, Tracking Success in Financial Capability and Empowerment Programs, the Bureau identified the following five core outcomes to help consumers improve their financial capabilities: (i) planning and goals; (ii) savings; (iii) bill payment; (iv) credit profile; and (v) financial well-being. According to the report, which assists the financial empowerment field in encouraging commonality in outcomes, core outcomes are designed to:
- “help inform and guide service delivery organizations and those who design, fund, or evaluate service programs as they assess or document the value of integrating financial capability and empowerment strategies into the delivery of human services programs”;
- “provide a suggested core set of common outcomes to measure for the financial empowerment field”;
- “augment, not displace, current programmatic outcomes and accommodate a broad range of different program types”; and
- “help provide consistency across programs by creating a common framework and language for demonstrating success for the provision of financial empowerment services as an element of other human services programs.”
According to the Bureau’s Office of Financial Empowerment, it began identifying common core outcomes with input from multiple financial empowerment practitioners and researchers to “improve the financial well-being of “lower-income and economically vulnerable consumers.”
CFPB Releases Report on Diversity and Inclusion in the Mortgage Industry, Banking Agencies Attend Roundtable Meeting
On April 27, the Consumer Financial Protection Bureau published its report summarizing strategies intended to promote diversity and inclusion by mortgage industry participants. The report, Diversity and Inclusion in the Mortgage Industry: Readout from an Opening Roundtable, is the result of the Bureau’s collaboration with the financial services industry. The roundtable meeting—led by the Bureau’s Office of Minority and Women Inclusion (OMWI)—convened representatives from the mortgage industry, nonbank financial companies, and OMWI staff from the OCC, FDIC, Federal Reserve, and FHFA. OMWI was a created by Section 342 of the Dodd-Frank Act and charges directors with “increasing diversity in agency programs and contracts, and assessing diversity policies and practices of entities regulated by the agency.” The report highlights issues raised by roundtable participants and stresses the need to develop a “strong business case for diversity and inclusion.” The Bureau’s position on the strategies and practices discussed include the following:
- promoting diversity and inclusion strengthens organizations and improves overall performance;
- building in diversity and inclusion as “fundamental principles” and taking a “tone from the top” approach highlights the importance of leadership buy-in and accountability;
- boosting diversity and inclusion through the recruitment, hiring, retention, and advancement of personnel creates opportunities for more diverse viewpoints;
- promoting a more diverse workforce and tailoring products to the needs of different consumers fosters a greater understanding of the needs of a more diverse customer base; and
- understanding the importance of data collection and analysis supports the business case for diversity.
Following Hearing, House Financial Services Committee Chairman Formally Introduces Financial CHOICE Act of 2017
On April 26, the House Financial Services Committee held a hearing to discuss The Financial CHOICE Act – a GOP proposal to “reform the financial regulatory system” that was initially introduced and considered, though differing in a number of respects from the current version, but not adopted in the last Congress. The hearing debated the merits of a discussion draft, which was released on April 19 by Committee Chairman Jeb Hensarling (R-TX). Shortly after Wednesday’s hearing, Chairman Hensarling formally introduced H.R. 10, The Financial CHOICE Act of 2017. An Executive Summary of the proposed legislation has also been released.
The April 26 hearing – a video of which can be accessed here – included testimony from the following witnesses:
- Mr. Peter J. Wallison, a Senior Fellow and Arthur F. Burn Fellow, Financial Policy Studies with the American Enterprise Institute
- Dr. Norbert J. Michel, a Senior Research Fellow, Financial Regulations and Monetary Policy, with the Heritage Foundation
- The Honorable Michael S. Barr, a Professor of Law at University of Michigan Law School
- Mr. Alex J. Pollock, a Distinguished Senior Fellow with the R Street Institute
- Dr. Lisa D. Cook, an Associate Professor of Economics and International Relations at Michigan State University
- Ms. Hester Peirce, a Director in the Financial Markets Working Group and Senior Research Fellow at the Mercatus Center at George Mason University
- Mr. John Allison, Former President and Chief Executive Officer with the Cato Institute
On April 28, Democrats held a separate hearing pursuant to Clause (d)(5) of Rule 3 of the Committee rules, which entitles members of the minority party to call its own hearing on any matter that is the subject of a majority hearing. The second hearing day – a video of which can be accessed here – included testimony from the following witnesses:
- The Honorable Elizabeth Warren, United States Senator
- Rohit Chopra, Senior Fellow, Consumer Federation of America
- Corey Klemmer, Corporate Research Analyst, Office of Investment, AFL-CIO
- Rev. Willie Gable, Pastor, National Baptist Convention USA, Inc.
- John C. Coffee Jr., Adolf A. Berle Professor of Law, Columbia University
- Rob Randhava, Senior Counsel, Leadership Conference on Civil and Human Rights
- Melanie Lubin, Maryland Securities Commissioner, North American Securities Administrators Association
- Emily Liner, Senior Policy Advisor, Economic Program, Third Way
- Amanda Jackson, Organizing and Outreach Manager, Americans for Financial Reform
- Ken Bertsch, Executive Director, Council of Institutional Investors
- Sarah Edelman, Director, Housing Policy, Center for American Progress (CAP)
Ranking Minority Member Maxine Waters (D-CA) also used the hearing to express her strong disapproval of what she has dubbed the “Wrong Choice Act.” Among other things, the ranking member alleged that the proposed legislation would “destroy[] Wall Street reform, gut[] the Consumer Financial Protection Bureau, and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy.”