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CFPB Announces First Steps In HMDA Rulemaking Process, Launches Additional HMDA Data Tools
On February 7, the CFPB announced the first public phase of its rulemaking to expand the scope of HMDA data reporting, as required by the Dodd-Frank Act. The CFPB is asking small businesses to provide feedback on its initial proposal to collect new mortgage origination data from financial institutions and potential changes to the data collection and reporting process.
Proposed Data Requirements
Section 1094 of the Dodd-Frank Act transferred responsibility for HMDA and its implementing regulation to the CFPB and directed the CFPB to conduct a rulemaking to expand the collection of mortgage origination data to include, among other things: (i) the length of the loan; (ii) total points and fees; (iii) the length of any teaser or introductory interest rates; (iv) the applicant or borrower’s age and credit score; and (v) the channel through which the application was made. The Dodd-Frank Act granted the CFPB discretion to collect additional information as it sees fit.
As detailed in its outline for small businesses, in addition to the statutorily required fields, the CFPB also is considering requiring financial institutions to report more underwriting and pricing information, such as the interest rate, the total origination charges, and the total discount points of the loan, which the CFPB believes will help regulators investigate “true trouble spots” in the mortgage market. The Bureau also states that it is considering new requirements that would “more accurately capture access to credit in the mortgage market.” Specifically, the CFPB is considering requiring institutions to (i) provide an explanation of rejected loan applications; (ii) explain whether the institution considers a loan to be a Qualified Mortgage; and (iii) report the borrower’s debt-to-income ratio. The CFPB states that debt-to-income data would allow the Bureau to determine whether financial institutions are making loans that are unsuitable for borrowers.
Potential Reporting Changes
In addition to the planned expansion in the types of data to be collected, the CFPB is seeking small business feedback on how financial institutions report HMDA data. The CFPB is considering streamlining the collection process to mitigate the burden on lenders, including by possibly aligning the HMDA data requirements with “well-established data standards already in use by a significant portion of the mortgage market.” The CFPB also is proposing to standardize the reporting threshold. It explains that currently, all banks, savings associations, and credit unions that meet certain conditions must submit annual reports if they make even a single loan, while nonbank mortgage lenders typically only report if they make 100 loans and meet other conditions. The Bureau is considering requiring all banks and nonbanks that meet certain conditions to report HMDA data if they make 25 or more loans in a year. Finally, the CFPB states it is seeking to improve data entry, including by potentially streamlining the data submission and editing processes for lenders by creating an interface that will allow lenders to connect their software to a CFPB intake system. The CFPB is consulting with other federal agencies on potential data entry streamlining options.
Enhanced Access To Existing HMDA Data
The CFPB also re-launched and expanded the capabilities of its new HMDA data tool, which it originally announced in September 2013. The tool now includes additional features, which allow users to (i) filter records by, among other things, geography (state, metropolitan area, county, and census tract), borrower characteristics, loan characteristics, and property type; (ii) create summary tables (e.g. to compare refinances, home purchases, and home improvement loans over a given time period); (iii) download data and summary tables to allow researchers and software developers to incorporate the CFPB-provided HMDA data into other applications and visualizations; and (iv) save and share results, including through social media platforms.
Next Steps
This initial framework for enhancing HMDA data collection and reporting was released as part of the small business review process required when a potential CFPB rule could have a significant economic impact on a substantial number of small entities. In such cases, including with this HMDA proposal, the CFPB must convene a panel of representatives from the Bureau, the Chief Counsel for Advocacy of the Small Business Administration, and OMB’s Office of Information and Regulatory Affairs (the Review Panel) to meet with small business representatives. The CFPB released a fact sheet explaining the process, and a list of issues the Review Panel will discuss with small businesses. Within 60 days of convening the Review Panel, it must issue a report on the feedback received from small business, which then must be considered as the CFPB prepares a proposed rule. The small business review process is the first public step in a lengthy rulemaking process. Along the way, financial institutions of all sizes will have opportunities to weigh-in on the proposal, which could evolve over the coming months.
CFPB Reports Results Of Student Loan Payment Allocation Practices Inquiry
On February 3, the CFPB’s student loan ombudsman, Rohit Chopra, released a summary of student loan servicers’ responses to questions the CFPB posed last November about the application of borrower payments. In that November request, the CFPB asked a group of unidentified servicers to provide information about (i) the allocation of lump sum payments by the Department of Defense and other third parties on behalf of servicemembers or others seeking to direct lump-sum payments to specific loans; (ii) the percentage of borrower payments made through online bill pay systems and direct debit, and servicer practices related to borrower instructions provided with such payments; (iii) servicers’ ability to accommodate standing instructions for future excess payments; and (iv) the methods by which servicers communicate with borrowers about directing prepayments.
The CFPB’s summary of the responses explains that the request was sent to “a number of private student loan servicers” and that the respondents “represented many different forms” including “third-parties servicing notes held by banks or in a securitized pool, large depository institutions servicing loans in-house, and small depository institutions.” However, a chart included in the summary reports the results of only six respondents.
The report presents a short list of “key findings”:
- Many servicers responded that they cannot honor specific payment allocation instructions communicated through online, third-party bill pay services.
- Many servicer online payment platforms allow borrowers to direct payments to a specific loan, but others do not. Some that do not provide a workaround, requiring the borrower to contact their servicer following a payment and request a reallocation.
- Many servicers indicated that they are making other changes to improve communications to borrowers about payment processing policies.
- Many servicers have limited ability to accept payment instructions in advance of a payment made by a third party (e.g. payments made by the Department of the Defense on behalf of servicemembers receiving loan repayment assistance).
- Some servicers have recently changed their payment allocation policies and now allocate payments from borrowers in excess of the scheduled payment amount or statement balance due to balances with the highest interest rate.
In addition, in response to servicer inquiries regarding an appropriate standard allocation policy when borrowers have both fixed and variable rate loans, the Ombudsman states, based on the CFPB’s preliminary analysis, that applying excess funds toward the loan with the highest current interest rate will save the borrower interest in the short run and over the life of the loan.
CFPB Joins With DOD, VA, And Others To Launch Servicemember Education Complaint System
On January 30 the CFPB, the Department of Defense (DOD), the Department of Veterans Affairs (VA), the FTC, and other federal agencies announced the launch of a new online system designed to collect information from veterans, current servicemembers, and their families regarding negative experiences at education institutions and training programs administering the Post-9/11 GI Bill, DOD Military Tuition Assistance, and other military-related education benefit programs. The new system is modeled after the CFPB’s complaint system and is intended to help the government identify and address unfair, deceptive, and misleading practices. The complaint system, which is comprised of the DOD’s Postsecondary Education Complaint System and to the VA GI Bill Feedback System, was developed in accordance with the April 2012 Executive Order 13607, Establishing Principles of Excellence for Educational Institutions Serving Service Members, Veterans, Spouses, and Other Family Members. That order required, among other things, the Secretaries of Defense and Veterans Affairs to “create a centralized complaint system for students receiving Federal military and veterans educational benefits to register complaints that can be tracked and responded to by the Departments of Defense, Veterans Affairs, Justice, and Education, the CFPB” and other relevant agencies.
NADA Proposes Fair Credit Compliance Policy And Program For Its Member Dealers
On January 24, the National Automobile Dealers Association (NADA) distributed a proposed compliance program to its members aimed at reducing the risk of discrimination allegations stemming from CFPB Bulletin 2013-02, which places limits on how sources of indirect auto financing may compensate dealers. The bulletin and proposed program address the practice by which auto dealers “markup” an indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The NADA program recommends that dealerships adopt fixed markup limits and only exceed those limits if a legitimate business reason completely unrelated to a customer’s background is present. The proposal identifies seven “good faith” reasons for deviation—including a more competitive offer and generally-applicable promotional offers—which mirror those set forth in consent orders entered into between the DOJ and two automobile dealers accused of disparate impact discrimination in 2007. The CFPB has not commented on whether the program as proposed will satisfy regulatory scrutiny but plans to do so.
CFPB Publicly Announces Changes to Exam Reports, Identifies Mortgage Servicing Exam Findings
On January 30, the CFPB issued a new Supervisory Highlights report. The report publicly announces changes to the CFPB’s examination reports and supervisory letters. Beginning in January 2014 the CFPB is changing the format of the Examination Reports and Supervisory Letters (collectively referred to as reports) that it sends to supervised entities after conducting compliance reviews. The changes to the report templates aim to: (i) facilitate drafting by examiners; (ii) simplify reports and reduce repetition; and (iii) facilitate follow-up reporting by supervised entities about actions they take to address compliance management weaknesses or legal violations found at CFPB reviews.
The primary template changes include:
- Elimination of Recommendations. Any recommendations for improving currently satisfactory processes will be provided orally when examiners are on-site.
- Elimination of the list of CFPB team members participating in a review. Reports will continue to be signed by the Examiner in Charge and provide regional management contact information.
- Creation of a single section in the report that includes all of the items that the CFPB expects the entity to address when the review identifies violations of law or weaknesses in compliance management. This entire section will be referred to as “Matters Requiring Attention,” regardless of whether the CFPB is requiring specific attention by an entity’s Board of Directors. The CFPB will no longer include additional “Required Corrective Actions.” The entity receiving the report will be expected to furnish periodic progress reports to the CFPB about all Matters Requiring Attention. The frequency of reporting will be tailored to the specific matters in a report.
The report also provides “supervisory observations,” which are limited to mortgage servicing. In a section on non-public supervisory actions the report states recent supervisory activities have resulted in at least $2.6 million in remediation to consumers, and that these non-public supervisory actions generally have been the product of CFPB examinations, either through examiner findings or self-reported violations during an exam.
CFPB Director Defends Mortgage Rules, Discusses Plans In Other Markets
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members.
Several committee members, including Reps. Sherman (D-CA), and Huizenga (R-MI) raised the issue of the requirement that title insurance from affiliated companies must be counted in the QM three percent cap. Mr. Cordray repeated that the CFPB believes Congress made a determination to include affiliate title protections in numerous places in the Dodd-Frank Act. That said, the CFPB is looking at the data on the impacts and meeting with stakeholders. Rep. Huizenga was most forceful, stating that while the CFPB has sought to limit the impact of the three percent cap, it is not enough. He raised again his bill, HR 1077, Rep. Meeks’ HR 3211, and ongoing work with Senators Vitter (R-LA) and Manchin (D-WV). He cited a survey conducted by the Real Estate Settlement Providers Council that found the inclusion of title charges causes 60 percent of loans under $60,000 to fail as qualified mortgages, and such loans actually become high-cost HOEPA loans. The survey also found that 45 percent of affiliated loans between $60,000 and $125,000 failed to qualify as qualified mortgages, and that 97 percent of the loans that failed as QMs were under $200,000 simply due to the inclusion of title insurance. Director Cordray did not have time to respond in full, but indicated the CFPB is waiting to see data on the actual impact.
Rep. Capito focused on the QM rule impact on Habitat for Humanity and other 501(c)(3) entities. Director Cordray stated that he spoke with the Habitat CEO prior to the hearing and believes the CFPB can address all of that organization’s concerns through rule amendments. He added that the CFPB already amended the rule to address Habitat’s first set of concerns, and that its latest concerns are new.
HMDA Rule Amendments & Small Business Fair Lending Rule
As she has done several times in the past, Rep. Velazquez (D-NY) raised the status of rulemaking required by Dodd-Frank Act section 1071 regarding small and minority/women-owned business lending. As he has in the past, Director Cordray explained that the CFPB is having difficulty addressing this rule given it is the only area in which the CFPB is required to address business lending. He added that the CFPB has determined that as it moves forward with the rule to amend HMDA data collection, which is underway now, the Bureau will attempt to fold the small business lending element into that process. He stated that the CFPB is working with the Federal Reserve Board on “overhauling that whole [HMDA] database” and “it feels to me that the right spot for this, and we've talked to a number of folks both from industry and consumer side on this, is to make [the small business lending requirements] part of the later stages of that, so it's coming, but not immediate.”
Auto Finance
Rep. Bachus (R-AL) asked Director Cordray to specify appropriate dealer compensation alternatives. Mr. Cordray responded that the CFPB does not know all the mechanisms yet that would be satisfactory. It is “open to auto lenders and others bringing those to [the CFPB’s] attention, but [the CFPB] did say flat fees are one possibility. A flat percentage of the loan might be a possibility. Some combination of that with different durations of the loan, different levels, and potentially other things that [the CFPB has not] thought of but others in the industry may think of and bring to [its] attention. So [the CFPB is] open-minded on that.”
Reps. Scott (D-GA) and Barr (R-KY) also were critical of the CFPB’s auto finance guidance and suggested the CFPB should have met with industry stakeholders in advance or should have conducted a rulemaking. Mr. Scott asserted that auto credit is tighter and more expensive now. Mr. Cordray defended the guidance, as he has in the past, as a restatement of existing law. He does not believe the guidance has impacted or will impact the health of the auto market.
Rep. Beatty (D-OH) raised a recent proposal from the National Association of Auto Dealers on alternative dealer compensation models. Mr. Cordray acknowledged having seen it, and said that as long as all parties agree that the CFPB is respecting its jurisdictional lines in the auto context, the Bureau is willing to sit down with dealers and others to work on a “broader solution.”
Credit Reporting
Rep. Velazquez (D-NY) asked for an update on the CFPB’s efforts to regulate consumer credit reporting agencies. Director Cordray described the CFPB’s efforts to, for the first time, provide federal supervision of the major credit reporting agencies. He stated that those agencies are not used to such supervision and that, in his view, it has been an adjustment for them. The CFPB has had examination teams into each of the three largest credit reporting agencies and is discussing “various issues” with them and areas of concern. He informed the committee that as a result of the CFPB’s efforts the credit reporting agencies, for the first time, are forwarding the documentation that consumers send them about problems and potential errors in their credit reports to the furnishers to be evaluated. The CFPB still is concerned about errors and error resolution.
Prepaid & Overdraft
In response to an inquiry from Rep. Maloney (D-NY), Mr. Cordray stated that the CFPB is continuing to work on the prepaid card proposed rule to address “a hole in the fabric” of consumer protection. He said the rule likely will address disclosures and add new protections. On overdraft, he acknowledged the CFPB is not as far along—the agency is still studying the market.
Payday & Internet Lending
Rep. Luetkemeyer (R-MO) stated the FDIC and DOJ have admitted to working to shut down online lending. He confirmed that the Oversight Committee is considering investigating DOJ on Operation Choke Point (its payment processor investigations). He asked Director Cordray to support, perhaps with a letter of some sort, legitimate online lending businesses and processors. Mr. Cordray agreed that there is plenty of appropriate online lending, but declined to offer specific help absent further context.
Rep. Murphy (D-FL) later suggested that the CFPB look at the “good regulation and great enforcement” in Florida. Director Cordray responded that the CFPB is looking at “a number of states that have developed different provisions on short-term, small-dollar payday lending” including Florida, Colorado, and Washington.
Rep. Heck (D-WA) inquired as to the status of proposed Military Lending Act regulations. Director Cordray explained that the CFPB has been “actively engaged” on writing new rules with the Department of Defense, the Federal Reserve, the FDIC, the OCC, Treasury Department, and the FTC. It stated that it has been difficult to get multiple agencies to work together, and asked Congress to “keep our feet to the fire and make it clear that you want to see that quickly.”
Mobile Payments & Emerging Products/Providers
Rep. Ellison (D-MN) asked about the CFPB’s views on emerging financial service providers, citing recent reports about T-Mobile’s efforts. Mr. Cordray stated that the CFPB is watching very closely and trying to keep up with the rapidly changing products and markets. He stated that it will present challenges to the current regulatory structure, particularly when phone companies are involved, and that the CFPB will need to coordinate with other regulators and probably will need legislation from Congress. Rep. Heck asked the CFPB to conduct a front-end in-depth analysis of consumer protection issues across various emerging mobile payments platforms. Mr. Cordray did not commit.
Student Lending
Rep. Peters (D-MI) raised his FAIR Student Credit Act bill, HR 2561. The bill, which is co-sponsored by Reps. Bachus (R-AL), Capito (R-WV), and seven other Republicans and 11 Democrats, would amend FCRA with respect to the responsibilities of furnishers of information to consumer reporting agencies. It would provide for the removal of a previously reported default regarding a qualified education loan from a consumer report if the consumer of the loan meets the requirements of a loan rehabilitation program, where the number of consecutive on-time monthly payments are equal to the number of payments specified in a default reduction program under the Higher Education Act of 1965. The bill would limit such rehabilitation benefits to once per loan. Rep. Peters indicated the Committee will consider the legislation, and that he has met with lenders who stated they could start offering rehabilitation immediately after the bill is enacted. Director Cordray stated that without having read the bill, it sounded promising, and that he would ask Rohit Chopra to work with the Congressman.
CFPB Issues Advisory Regarding Recent Retailer Data Breaches; Congressional Activity Increases
On January 28, the CFPB issued a consumer advisory in response to recent reports of data breaches at several large retailers. In addition to providing tips for consumers in the wake of a retail breach, the advisory encourages card holders to submit complaints about debit and credit card issuers’ inadequate responses to consumer charge disputes related to data breaches.
The advisory is the first public response from the CFPB on data breach issues. It follows a request last month from Senator Chuck Schumer (D-NY), a member of the Senate Banking Committee, that the CFPB conduct an investigation of the data breach and issue a “full report on the findings of its investigation -- informing the public of how this breach occurred, how consumers can protect themselves from similar attacks, and any further recommendations the CFPB may have for retailers to minimize the occurrence of similar breaches.” Schumer also asked Director Cordray to “take a closer look at whether retailers systems should be required to transfer credit and debit card information as encrypted data. . . . The CFPB must ensure that necessary rules and standards for retailers are in place to validate consumers’ trust in the transaction process.”
Numerous congressional committees share jurisdiction over data breach issues. The Senate Banking Committee will be among the first to act with a hearing scheduled for February 3, 2014 that will feature governmental witnesses, as well as the views of the retailer and banking industries.
Report Criticizes Auto Dealer Compensation, Add-On Product Practices
On January 23, the Center for Responsible Lending (CRL) released a report titled “Non-Negotiable: Negotiation Doesn’t Help African-Americans and Latinos on Dealer-Financed Car Loans.” The report provides the results of CRL’s investigation of whether racial disparities occur in auto financing, “considering the consumer’s attempt to negotiate their interest rates and comparison-shop at other institutions.” The CRL also examined “other aspects of car buying by race and ethnicity, including the purchase of ancillary ‘add-on’ products and the accuracy of information provided by the dealer to the customer during the buying experience.” CRL states that its research “supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.” Specifically, the CRL states its investigation revealed (i) African-American and Latino consumers attempt to negotiate pricing on car dealer loans just as much as white consumers, if not more, and their levels of comparison shopping are similar to those of white buyers; (ii) more borrowers of color reported receiving misleading information about their loans from car dealers, which served to negate the impact of negotiations or comparison shopping; and (iii) African Americans and Latinos are nearly twice as likely to be sold multiple add-on products as white consumers. The CRL recommends that policymakers (i) prohibit dealer compensation that varies based on the interest rate or other material, other than the loan’s principal balance; (ii) require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products; and (iii) prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.
CFPB Proposes To Supervise Larger Nonbank International Money Transmitters
On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.
The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.
Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.
A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.
CFPB Seeks New Members for Advisory Boards, Councils
On January 15, the CFPB published a notice seeking applications for appointment to its Consumer Advisory Board, Community Bank Advisory Council, and Credit Union Advisory Council. Membership of the Community Advisory Board and Advisory Councils includes representatives of consumers, communities, the financial services industry, and academics. Membership on the two Advisory Councils is open only to current community bank and credit union employees, respectively. Applications must be submitted by February 28, 2014. Additional information about the application process is available here.