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CFPB Proposes Amendments to Mortgage Servicing Rules Under RESPA and TILA
On April 26, the CFPB published a proposed rule regarding potential amendments to certain mortgage servicing provisions in RESPA (Regulation X) and TILA (Regulation Z). The recently issued proposed rule reopens the comment period of a December 2014 CFPB proposal that would require mortgage servicers to “provide modified periodic statements under Regulation Z to consumers who have filed for bankruptcy, subject to certain exceptions.” Since the December 2014 proposal, the CFPB has conducted consumer testing of sample periodic statement forms for consumers in bankruptcy. The CFPB is reopening the comment period until May 26, 2016 to “seek comment specifically on the report summarizing consumer testing of sample periodic statement forms for consumers in bankruptcy.”
CFPB Publishes Final Rule Adopting December 2011 Interim Final Rules
On April 28, the CFPB published a final rule to adopt interim final rules issued in December 2011. Pursuant to the Dodd-Frank Act, the CFPB has rulemaking authority for various consumer financial protection laws, as transferred from seven other federal agencies. Effective immediately, the final rule adopts without change (subject to any intervening final rules published by the CFPB) the 2011 versions of various rules, including but not limited to ECOA, TILA, the SAFE Act, FCRA, FDCPA, RESPA, GLBA, and HMDA.
CFPB Issues Report on Payday and Installment Loans; Director Cordray Weighs in on Online Lending Industry
On April 20, the CFPB issued a report titled “Online Payday Loan Payments,” which covers an 18-month period in 2011 and 2012 and examines how online lenders’ attempts to recover debts are affecting consumers. Also on April 20, the CFPB held a press call during which Director Cordray delivered remarks regarding the small-dollar lending market, specifically focusing on findings included in the simultaneously released report. According to Director Cordray, online payday lenders have considerable power over consumers’ bank accounts because they use automated networks to deposit loans and collect payments, which often results in banks or credit unions charging consumers overdraft and non-sufficient funds fees. Director Cordray further summarized key findings from the report, including, but not limited to: (i) half of online consumers incurring an average of $185 in bank penalties – in addition to the penalties imposed by the lenders and the average annualized interest rate of 300% to 500% – as a result of reoccurring failed debits made by online payday lenders; (ii) one-third of online consumers losing their checking or savings accounts due to overdraft and non-sufficient funds fees; and (iii) consumers facing “hefty bank fee[s]” due to lenders’ repeated debit requests, despite the fact that second payment requests have a 70% failure rate, with third or subsequent payment attempts failing at an even higher rate. Director Cordray concluded by emphasizing that the CFPB’s “process of reforming the market for small-dollar loans” is ongoing, and that the CFPB will consider the data from the report as it prepares new regulations to address the industry.
U.S. Court of Appeals for the D.C. Circuit Hears Oral Arguments Regarding CFPB's Interpretation of RESPA
On April 12, the U.S. Court of Appeals for the D.C. Circuit held oral arguments in the case PHH Corporation v. CFPB. The primary issue in the case is whether the CFPB is constitutionally and statutorily authorized to assess a $109 million penalty against the petitioner, a nonbank mortgage lender (Lender), for allegedly violating Section 8 of the Real Estate Settlement Procedures Act (RESPA) by referring customers to certain mortgage insurance companies that purchased mortgage reinsurance at fair market value from an affiliate of the Lender. According to CFPB Director Richard Cordray, this practice was a violation of Section 8’s prohibition on kickbacks for referrals, because the mortgage insurers allegedly only purchased mortgage reinsurance in order to receive customer referrals from the Lender.
In appealing the CFPB’s action, counsel for the Lender argued that the CFPB is attempting to effectively rewrite Section 8 to prohibit activities expressly permitted by the statute’s implementing regulation, Regulation X, as well as prior agency guidance and the plain language of the statute itself. According to the Lender, its mortgage reinsurance practices had long been understood to be legal, were widespread throughout the country, and aligned with existing HUD guidance. The Lender further argued that Section 8(c)(2) permits entities to refer business so long as the referrals are not compensated, and any payments are equal to the market value cost of services actually provided. In the Lender’s case, counsel argued that the mortgage reinsurance premiums could not have been compensation for referrals, because mortgage reinsurance premiums received by the Lender’s affiliate were equal to the fair market value of mortgage reinsurance services actually rendered. The Lender further argued that the CFPB improperly ignored RESPA’s statutorily-prescribed statute of limitations (SOL) of three years when, under Section 15, RESPA clearly applies the SOL to “any action” – which, in the Lender’s view, would include an administrative action. Finally, the Lender argued that the CFPB’s structure and funding under the Dodd-Frank Act was unconstitutional in that it violated the requirement for separation of powers by, among other things, (i) restricting the President’s removal power to “for cause” removal; (ii) concentrating power in one individual; and (iii) funding the CFPB outside of the Congressional appropriations process.
Counsel for the CFPB responded that, during the period in question, mortgage insurance companies only purchased reinsurance from affiliates of lenders who referred them business. According to the CFPB, this type of quid pro quo arrangement is a violation of Section 8 even if the reinsurance premiums were equal to the fair market value of a service rendered. Counsel for the CFPB said that, notwithstanding the fact that the Lender’s conduct was common throughout the financial services industry, it had never expressly been blessed by prior agency guidance, and resulted in the type of market distortion that RESPA was designed to prevent. The CFPB also defended its position that its administrative actions are not subject to an SOL by noting that the Consumer Financial Protection Act, which authorizes the CFPB to take enforcement actions against regulated entities, does not include an SOL for such actions. In response to the challenge to the constitutionality of its structure, the CFPB pointed to the diversity of agency structures throughout the executive branch, including single-headed agencies and agencies that do not rely on Congress for appropriations funding.
The panel consisted of Judges Kavanaugh, Randolph, and Henderson; Judge Henderson was not present.
CFPB Announces Senior Staff Changes
On April 12, the CFPB announced several senior leadership changes and additions to its team. Elizabeth Ellis, who previously had served as the CFPB’s Deputy Assistant Director for the Office of Financial Institutions and Business Liaison and Senior Advisor to the CFPB’s Chief of Staff, was named the Deputy Associate Director for the External Affairs Division. Seth Frotman will serve as the new Student Loan Ombudsman and Assistant Director for the Office for Students and Young Consumers, positions he previously filled on an acting basis. Katherine Gillespie and Grady Hedgespeth will serve as the Deputy Associate Director for the Consumer Education and Engagement Division and the Assistant Director for the Office of Small Business Lending Markets, respectively. Chris Johnson will serve as the Assistant Director for the Office of Consumer Response, after having served in that role on an acting basis. Finally, John Schroeder was named the Midwest Regional Director for the Office of Supervision Examinations, a position he previously held on an acting basis.
CFPB's Jeffrey Langer Lends Perspective on Marketplace Lending
On April 12, CFPB Assistant Director for Installment Lending and Collections Markets Jeffrey Langer delivered remarks at the San Francisco LendIt USA Conference on the marketplace lending industry. Langer began his remarks by summarizing the CFPB’s Project Catalyst initiative, which was designed to support and encourage consumer-friendly innovation pertaining to financial products and services, such as marketplace lending. Langer, referencing the CFPB’s recently released consumer bulletin on online marketplace lending, commented that marketplace lending is a “young” industry with both potential benefits and potential risks. For example, Langer explained that marketplace lenders may be able to offer consumers faster and more convenient methods of obtaining credit, and may also have fewer overhead costs to pass along to consumers as compared to brick-and-mortar institutions. However, Langer also expressed concerns about the industry’s agility in changing markets, opining that, “[i]t is unclear whether marketplace lenders’ have adequate loan servicing infrastructure or the ability to scale infrastructure quickly and effectively in the event of [an economic] downturn.” According to Langer, “it is simply too soon to know whether marketplace lending will be able to realize its potential as a means of delivering credit at a lower cost to consumers (and small businesses) who have the ability to repay the loans they obtain or whether the marketplace lending business model will prove unable to sustain itself through a full business cycle.” Langer additionally noted that marketplace lenders could face fair lending risk as a result of introducing new types of data and/or analytics in making credit decisions.
House Financial Services Committee Advances Legislation that would Amend the Dodd-Frank Act
On April 13, the House Financial Services Committee voted by a 33-20 margin to advance H.R. 1486, the “Taking Account of Bureaucrats’ Spending Act.” The Act would amend the Dodd-Frank Act to strike provisions that allow for direct funding from Federal Reserve earnings to the CFPB. Supporters of the Act comment that it simply holds the CFPB accountable to Congressional oversight, subjecting it to the more conventional appropriations process, while those in opposition to the Act argue that it aims to defund, or dismantle, the CFPB.
GAO Report: Regulatory Oversight of Nonbank Servicers Could Be Stronger
On April 11, the Government Accountability Office (GAO) released a report titled, “Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened.” The report analyzes data on the mortgage servicing market from June 2006 through June 2015 from Fannie Mae and Freddie Mac (collectively, the Enterprises), the Federal Reserve, and Ginnie Mae, as well as academic studies and research conducted by industry organizations, federal agencies, and others since the financial crisis. The report focuses in particular on the role of nonbank servicers in servicing privately securitized nonprime loans. According to the report, the percentage of mortgage loans serviced by nonbank servicers – which, according to market participants, tend to service more delinquent loans than banks – increased significantly from the first quarter of 2012 through the second quarter of 2015, but still account for less than a quarter of the overall mortgage servicing market. Concerns regarding the regulatory oversight of nonbank servicers are highlighted in the report, which comments on (i) the CFPB’s direct role in overseeing nonbank servicers’ compliance with federal consumer financial laws; (ii) state regulators’ various prudential and operational requirements for nonbank servicers; and (iii) Ginnie Mae and the Enterprises’ monitoring of nonbank servicer activities to manage risk exposure. According to the report, issues related to nonbank servicers’ “aggressive growth and insufficient infrastructure have resulted in harm to consumers, have exposed counterparties to operational and reputational risks and ... complicated servicing transfers between institutions.” Based on the findings summarized in the report, the GAO recommends that (i) Congress consider giving FHFA the authority to examine third parties doing business with the Enterprises; and (ii) the CFPB collect additional data regarding the identity and number of nonbank servicers.
CFPB Monthly Complaint Snapshot Highlights Issues Related to Debt Collection
On March 29, the CFPB released its most recent complaint report focusing on complaints related to debt collection. According to the report, as of March 1, 2016, consumers have submitted approximately 834,400 complaints across all products, with debt collection complaints accounting for approximately 219,200 of the complaints. Debt collection complaints highlighted in the report include, but are not limited to: (i) first- and third-party debt collectors attempting to collect on debts that consumers claim they do not owe; (ii) consumers repeatedly receiving calls from debt collectors, sometimes early in their delinquency or during grace periods; (iii) consumers being contacted while at work, with some alleging that collectors made in-person visits to their workplace; (iv) debt collectors not honoring consumers’ requests to cease communications; and (v) debt collectors failing to provide sufficient information to verify debts. Similar to past CFPB-issued complaint snapshots, the report identifies the top 10 most-complained-about companies in regards to all financial products, as well as the top 20 most-complained-about companies for debt collection. Finally, the report identifies Florida as its geographical spotlight, noting that (i) Florida consumers have submitted more than 80,000 complaints as of March 1, 2016; (ii) mortgage-related complaints account for 30% of complaints received from Florida, exceeding the national average by 4%; and (iii) at 24%, debt collection-related complaints submitted by Florida consumers are 2% less than the national average.
CFPB Issues Consent Order against San Diego-Based Student Debt Loan Relief Company
On March 30, the CFPB filed a consent order against a San Diego-based student debt relief operation for alleged violations of the CFPA, the Telemarketing Sales Rule, and Regulation P. According to the CFPB, the company – marketing its services through outbound and inbound telemarketing and direct mail and falsely claiming to be affiliated with the Department of Education – charged consumers upfront fees up to $495 to enroll in federal student loan repayment programs, as well as a monthly maintenance fee of $39. The CFPB’s consent order requires the company to (i) cease all student debt relief operations; (ii) rescind all contracts entered into up to and including the date of the consent order and stop assessing fees pursuant such contracts; (iii) ensure that consumers enrolled in income-driven repayment or forgiveness plans with the Department of Education receive the paperwork necessary for annual recertification or renewal deadlines; and (iv) pay a civil money penalty of $50,000.
In light of the action, the CFPB reminded consumers of its December 2014 advisory notifying them to be mindful of companies “falsely claiming special expertise or a relationship with the Department of Education.”