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Federal Reserve Board Repeals Duplicative Regulations, Finalizes Red Flag Rule Amendments
On May 22, the Federal Reserve Board repealed its Regulation DD, which implements TISA, and Regulation P, which implements Section 504 of the GLBA because the Dodd-Frank Act transferred rulemaking authority for those laws to the CFPB, and the CFPB has already issued rules implementing them. The Board also finalized amendments to the definition of “creditor” in its Identity Theft Red Flags rule, which implements Section 615 of FCRA. Generally, the Red Flags rule requires each financial institution and creditor that holds any consumer account to develop and implement an identity theft prevention program. The revision excludes from the foregoing requirements businesses that do not regularly and in the ordinary course of business (i) obtain or use consumer reports in connection with a credit transaction; (ii) furnish information to consumer reporting agencies in connection with a credit transaction; or (iii) advance funds to or on behalf of a person. The repeals and Red Flags rule amendments take effect June 30, 2014.
CFPB Fines Realty Firm $500K Over RESPA Disclosures
On May 28, the CFPB ordered the largest real estate company in Alabama to pay a $500,000 civil penalty to settle claims that the company provided inadequate disclosures of its relationship with an affiliated title insurance company. The CFPB alleged that the realty company failed to comply with the disclosure-related provisions of RESPA in connection with affiliated business arrangements (AfBAs). Under RESPA, AfBAs do not violate the prohibition on the exchange of referral fees if, among other things, the party referring a consumer to its affiliate gives the consumer a disclosure clearly stating that the consumer may shop for other, lower-cost providers and that the consumer is not required to use the affiliate.
The CFPB alleged that, over a 14-month period in 2011 and 2012, the realty company provided consumers a document explicitly directing that title and closing services would be performed by the affiliate. Then, in 2012, the realty company changed its document to allow the consumer to choose the affiliate or another provider. During all of these periods, the realty company also provided an AfBA disclosure, but the CFPB alleged that the disclosure did not comply with RESPA’s Regulation X because it was not in the format required by Appendix D to Regulation X.
The CFPB charged that the realty company’s AfBA disclosure deviated from the format set forth in Regulation X and thus did not comply with RESPA. For instance, the CFPB claimed that the AfBA disclosure did not use capital letters or otherwise highlight the fact that consumers could obtain services from other providers and that the disclosure language was “hidden” among other statements. Further, the CFPB raised concerns that the AfBA disclosure “included marketing statements touting the benefit and value of the affiliated entities,” such as by saying that the affiliates are “in a unique position to provide you with exceptional value and service.”
The CFPB concluded that, based on these disclosures, the realty company and its affiliates violated RESPA’s prohibition on the exchange of referral fees by affirmatively referring consumers to the affiliates and then collecting profits from the affiliated entities, without satisfying the “safe harbor” under RESPA for AfBAs. The CFPB ordered the company to use AfBA disclosures that do not materially deviate from the model disclosure in Appendix D, to update its training and guidance documents on AfBAs, and to pay a civil money penalty of $500,000 to the CFPB. HUD, which previously had authority over RESPA, initially referred this matter to the CFPB.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB's supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
CFPB Opens Board And Council Meetings To Public
On May 20, the CFPB announced that it will allow the public to attend and participate in meetings of its Consumer Advisory Board (CAB), as well as its Academic Research, Community Bank, and Credit Union Advisory Councils. The public’s first opportunity to attend such an event will be on June 18, 2014, when the CAB meets in Reno, Nevada to discuss trends and themes in the mortgage market and consumer home-buying resources. The CFPB also provided a schedule of future Board and council meetings.
House Financial Services Committee Approves Several Mortgage Bills
On May 22, the House Financial Services Committee resumed activity on a series of bills—several of which are mortgage-related—that it considered earlier this month but for which it had postponed recorded votes. The committee approved all bills previously considered, including (i) H.R. 1779, which would amend TILA’s definition of a “mortgage originator” to exclude manufactured housing retailers unless they received compensation from a lender, mortgage broker, or loan originator, and definition of a “high cost mortgage” for loans under $75,000 to include a higher HOEPA APR trigger and a minimum HOEPA points and fees trigger of the greater of 5% of the transaction amount or $3,000; (ii) H.R. 2673, which would provide that loans retained on an institution’s balance sheet automatically qualify for qualified mortgage treatment under the Ability-to-Repay rule; and (iii) H.R. 4521, which would exempt from mandatory escrow requirements loans secured by a first lien on a consumer’s principal dwelling that are held in portfolio by creditors with assets of $10 billion or less, and would instruct the CFPB to provide regulatory relief for mortgage servicers that annually service 20,000 or fewer mortgage loans.
CFPB Report Highlights Nonbank Supervisory Findings
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending:
Consumer Reporting
Following its adoption of its larger participant rule for consumer reporting agencies (CRAs) in July 2012, CFPB examiners reviewed CRAs’ dispute handling processes and CMS, and found among other things that (i) some CRAs lacked a formal or adequate CMS, and/or their boards and senior managers exercised insufficient oversight of the CMS; (ii) some CRAs failed to establish sufficient FCRA compliance policies, including with regard to dispute-handling procedures, and (iii) some failed to adequately supervise vendors, including call center and ancillary product vendors. CFPB examiners also found that (i) at least one CRA did not monitor or track consumer complaints; (ii) at least one CRA failed to forward all relevant consumer dispute materials to the furnisher, as required by FCRA; and (iii) at least one refused to accept disputes from certain consumer submitted online or by phone.
Debt Collection
The CFPB finalized its debt collector larger participant rule in October 2012 and since that time its examiners have observed debt collectors engaged in the following allegedly illegal or unfair and deceptive practices: (i) intentionally misleading consumers about litigation; (ii) making excessive calls to consumers; and (iii) failing to investigate consumer credit report disputes.
Short-term, Small-dollar Lending
The Dodd-Frank Act grants the CFPB supervisory authority over payday lenders without having first to adopt a larger participant rule. The CFPB launched its payday lender supervision program in January 2012 and reports that its examiners have found, among other things, that in seeking to collect payday loan debt some lenders engaged in the following allegedly unfair or deceptive practices: (i) threatening to take legal actions they did not actually intend to pursue; (ii) threatening to impose additional fees or to debit borrowers’ accounts, regardless of contract terms; (iii) falsely claiming they were running non-existent promotions to induce borrowers to call back about their debt; and (iv) calling borrowers multiple times per day or visiting borrowers’ workplaces.
CFPB Extends Remittance Rule Amendments Comment Period
On May 14, the CFPB extended for 10 days the comment period on the latest proposed amendments to its international remittance rule. The comment period, originally set to expire on May 27, 2014, will close on June 6, 2014.
Senate Democrats Lobby CFPB On Forthcoming Payday Lending Proposal
On May 14, six Senate Democrats, including Senate Banking Committee Members Jeff Merkley (D-OR) and Elizabeth Warren (D-MA), sent a letter to CFPB Director Richard Cordray asking that the CFPB consider the proposals included in Senator Merkley’s SAFE Lending Act, S. 172, in developing the forthcoming payday lending proposed regulations. That legislation primarily attempts to address perceived gaps in the regulation of Internet and offshore small dollar lenders—including those lenders affiliated with Native American tribes—and lead generators. The letter also petitions the CFPB to adopt “strong” reforms—such as minimum loan terms, fee and renewal limitations, and a waiting period between loans—that cover all types of small dollar lending. The CFPB highlighted many of these potential reforms in a March 2014 report and field hearing.
Special Alert: VA Adopts Its QM Rule
On May 9, 2014, the Department of Veterans Affairs (VA) issued an interim final rule defining what constitutes a “qualified mortgage” (QM) for purposes of the loans it guarantees, insures, or originates. The VA stated that, to quell persistent uncertainty among lenders regarding the treatment of VA loans under the temporary QM definition established by the Consumer Financial Protection Bureau, it was adopting a rule designating all VA loans as QMs and all VA loans other than a subset of VA streamlined refinancings as safe harbor QMs.
Click here to view our special alert.
Questions regarding the matters discussed in the Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.- Jeffrey P. Naimon, (202) 349-8030
- John P. Kromer, (202) 349-8040
- Clinton R. Rockwell, (310) 424-3901
- Joseph M. Kolar, (202) 349-8020
- Jeremiah S. Buckley, (202) 349-8010
House Passes Financial Services Bills
On May 6, the U.S. House of Representatives passed by voice vote three financial services bills: (i) H.R. 2672, which would require the CFPB to allow individuals and businesses to apply to have an area designated as “rural” for purposes of exemptions to the CFPB mortgage rules; (ii) H.R. 3329, which would require the Federal Reserve Board to allow bank holding companies and savings and loan holding companies with assets of less than $1 billion to incur higher amounts of debt when acquiring other banks than are allowed for larger holding companies—the current asset ceiling for that special allowance is $500 million and applies only to bank holding companies; and (iii) H.R. 4386, which would permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs that provide international remittance transfer services and other non-bank financial institutions such as gaming establishments and jewel merchants.