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Bipartisan Student Loan Certainty Act Passes; Industry Trade Groups Request TILA Compliance Grace Period
The Bipartisan Student Loan Certainty Act passed Congress last week and is awaiting the President’s signature. When signed, it will lower the interest rates for federal student loans made on or after July 1, 2013, but also will create some immediate compliance burdens for lenders and servicers. On August 5, four industry trade groups submitted a letter asking the CFPB to (i) implement a 30-day grace period (from enactment) for lenders and servicers to make necessary system changes and update TILA disclosures, and (ii) clarify that lenders and servicers will not be required to modify TILA disclosures provided prior to or during the grace period. Noting that this “will be the second time in less than 45 days that the interest rate for subsidized Stafford loans has changed,” and that the law mandates “an immediate and broad shift in the entire interest rate structure for all Federal Direct Loans,” the letter identifies the significant challenges in complying with the new structure, including the challenges to lenders and servicers in accurately disclosing interest rates as required by TILA. As precedent for the requested transition period, the trade groups refer to the Federal Reserve Board’s allowance for a transition period when it wrote the private student loan regulations in 2009.
Fannie Mae, Freddie Mac Announce Uniform Dataset to Support CFPB Closing Disclosures
On July 30, Fannie Mae and Freddie Mac announced that they are developing a standardized dataset to support the consolidated closing disclosure forms expected to be finalized by the CFPB in the coming months. The new Uniform Closing Dataset (UCD) is a component of the broader Uniform Mortgage Data Program currently being implemented by Fannie Mae and Freddie Mac, which is designed to standardize the way loan data is defined, captured, and delivered. The enterprises are currently obtaining input from select industry participants and will release the UCD after the CFPB finalizes its rule.
Federal District Court Dismisses Challenge to Dodd-Frank Act, CFPB
On August 1, the U.S. District Court for the District of Columbia dismissed in its entirety a lawsuit that challenged Titles I, II, and X of the Dodd-Frank Act as unconstitutional. The lawsuit was brought originally by three private parties and later joined by several state attorneys general. The court determined that that the plaintiffs lacked standing and had not demonstrated injury sufficient to permit a challenge of the law on any of their claims.
The private plaintiffs' challenge to Title X, which created the CFPB, was based on “financial injuries directly caused by the unconstitutional formation and operation of the [CFPB,]” including substantial compliance costs, increased costs of doing business, and forced discontinuance of profitable and legitimate business practices in order to avoid risk of prosecution. The court concluded that such “self-inflicted” harm could not confer standing to challenge Title X. With respect to the private plaintiffs’ challenge to the Financial Stability Oversight Council (FSOC) created by Title I, the court concluded that while an unregulated party is not precluded from establishing standing to challenge the creation and operation of FSOC, standing is “substantially more difficult to establish” under such circumstances and the theories asserted by the plaintiffs were too remote to confer standing.
Both the private plaintiffs and the state attorneys general challenged Title II, claiming that the “orderly liquidation authority” (OLA) provisions violate the separation of powers, deny due process to creditors of a liquidated firm, and violate the requirement for uniformity in bankruptcy. The court again concluded that none of the plaintiffs established either present or future injury sufficient to confer standing to challenge the OLA.
According to media reports, an appeal of the ruling by at least one of the private plaintiffs is anticipated.
CFPB Publishes Update on Student Loan Complaints
This afternoon, the CFPB published a “mid-year snapshot” of private student loan (PSL) complaints it received from October 2012 through March 2013. The report updates the Bureau’s initial student loan complaint report published in October 2012.
This latest report characterizes the volume of student loan complaints as “relatively steady” over the reporting period, with complaints about loan repayment issues, including an inability to modify loans, outpacing all others. In addition to repayment-related complaints, the CFPB highlights a number of other PSL servicing complaints, including those related to (i) payment processing, (ii) conflicting information provided by lender or servicer, (iii) lack of written notices from lender or servicer, and (iv) co-signer issues.
For example, with regard to payment processing, the CFPB states that many complaints relate to the situation in which the consumer sends one payment to cover several loans handled by the same servicer. The CFPB has found that servicers generally apply those funds to satisfy outstanding fees, interest and principal, and then allocate any remaining overpayment to the outstanding principal across all loans on a pro rata basis. In some cases, depending on the size of overpayment, the servicer may also advance the due date for future payments. The CFPB believes these practices, and the way servicers have communicated them, have caused “significant borrower confusion” while limiting consumers’ ability to control the application of their overpayments. The report notes that certain online servicing platforms do not provide a simple way for consumers to allocate excess payments.
Finally, the CFPB states, in both the report and a related blog post, that, despite improvements by PSL servicers, some servicemembers continue to have difficulties obtaining rate relief under the SCRA and that the Bureau will continue to work with the DOJ on potential SCRA violations.
Importantly, the report is a “snapshot,” and the CFPB cautions in its introduction that the report is not intended to communicate the frequency to which certain practices exist in the market and that readers should recognize that there are inherent limitations with the underlying data. This is perhaps most evident in the CFPB’s listing of complaints by company, without providing any context as to each company’s market share, and without connecting the types of resolution – which themselves have limited utility – with the various companies named.
CFPB Plans Study of Bundled Financial Products
Today, the CFPB published a notice indicating that it will review bundled financial products and services. The CFPB is seeking comments on its plans to survey “low-income, underserved consumers” about their savings, credit score, and size of their debt to income ratio for the purpose of understanding whether such bundled products and services have an impact on asset building and financial capability. The CFPB is accepting comments on the planned survey through September 30, 2013.
Senate Committee on Aging Scrutinizes Short-Term, Small Dollar Loans
On July 24, the Senate Special Committee on Aging held a hearing titled “Payday Loans: Short-term Solution or Long-term Problem?” that included discussion of several short-term, small-dollar credit products. Although the Committee’s jurisdiction is intended to cover policy issues related to older Americans, the hearing reviewed small dollar products more generally. Numerous Senators, including committee Chairman Sen. Bill Nelson (D-FL) and Sen. Elizabeth Warren (D-MA) scrutinized bank deposit advance products and, building off the CFPB’s testimony and earlier white paper, characterized them as payday loans that trap consumers in a cycle of debt. Sen. Nelson suggested that banks have an obligation to provide customers with alternatives and a range of options to meet their needs, while Sen. Donnelly (D-IN) and others repeatedly raised the concept of a 36% national usury cap. Committee members, with the help of a representative from Maine’s financial regulator, tried to build a record in support of federal legislation to address alleged practices of online lenders, including charges that such lenders often avoid state licensing requirements to circumvent state usury caps. Committee members and witnesses also discussed the role of banks in assuring debits from customer accounts are compliant with state law.
CFPB Publishes ECOA Baseline Review Modules
Yesterday afternoon, the CFPB released its ECOA baseline review modules, which supplement the recently updated ECOA examination procedures. Completed baseline modules will be included in an institution’s examination work papers and may be considered in conjunction with any fair lending statistical analysis to assess an institution’s fair lending compliance and risks.
The baseline review procedures provide examiners with a series of questions in six modules to assess the following:
- Fair lending supervisory history;
- Fair lending compliance management system – management participation, policies and procedures, training, and internal controls and monitoring;
- Mortgage lending - policies and procedures for mortgage underwriting and pricing, including frequency of deviations, compensation structures, third-party involvement, and marketing practices;
- Mortgage servicing - policies and procedures as they relate to fair lending;
- Auto lending – policies and procedures for direct and indirect auto lending, including information related to pricing, underwriting, referrals, origination, and third-party compensation; and
- Other products – policies and procedures with respect to any additional products selected for review, e.g. secured and unsecured consumer lending, credit cards, add-on products, private student lending, payday lending, and small business lending.
The CFPB baseline review differs from the CFPB’s targeted review process, during which a supervised institution can be subject to an in-depth look at a specific area of fair lending risk, and is separate from the CFPB’s HMDA review, which includes transactional testing for HMDA data accuracy.
Service Provider Challenges CFPB Authority
On July 22, a Connecticut bankruptcy attorney and a firm with whom the attorney contracts for legal support services filed a lawsuit charging the CFPB with “grossly overreaching its authority” in requesting “sensitive and privileged information” about thousands of consumers and challenging the constitutionality of the Bureau itself. The suit was filed in response to a CFPB investigation into the service provider’s relationships with law firms that provide debt settlement assistance to consumers facing bankruptcy. The complaint asserts that the CFPB lacks authority to regulate the law firms supported by the service provider and that the information demanded by the CFPB – disclosed to lawyers by clients seeking advice regarding bankruptcy – is protected by the attorney-client privilege.
CFPB Sues Mortgage Company Over Alleged Loan Officer Compensation Practices
This afternoon, the CFPB released a complaint it filed today against a Utah-based mortgage company and two of its officers for giving bonuses to loan officers who allegedly steered consumers into mortgages with higher interest rates. The complaint alleges that the company, and its president and senior vice-president of capital markets, violated the Federal Reserve Board’s Loan Originator Compensation Rule by instituting a quarterly bonus program that paid more than 150 loan officers greater bonus compensation based on the terms and conditions of the loans they closed. The CFPB claims the program incentivized loan officers to steer consumers into loans with higher rates.
According to the complaint, when the Loan Originator Compensation Rule took effect in April 2011, the company amended its program to eliminate any written reference to compensation based upon terms or conditions, making it appear on its face to be a compliant compensation program. The CFPB alleges that although the company’s regular compensation was no longer tied to terms or conditions under the new program, the managers actually continued to adjust the quarterly bonuses based upon the terms and conditions established under the compensation program.
The complaint further alleges violations of Regulation Z’s requirement that a creditor retain records of compensation paid to loan originators for two years. According to the complaint, the company violated this requirement by failing to record what portion of quarterly bonuses paid to loan originators were attributable to a given loan and by failing to maintain accurate and complete compensation agreements.
The case highlights a number of points:
- The CFPB will look beyond a company’s written compensation and compliance plans to include analysis of a company’s actual compensation payments to its loan originators;
- The CFPB is pursuing individuals in senior management;
- $1 billion companies are within range for CFPB actions;
- The CFPB is seeking an injunction, restitution, civil money penalties for each bonus paid, and costs; and
- The case was referred to the CFPB by the Utah Department of Commerce.
CFPB Outlines Financial Literacy Strategy in Report to Congress
On July 17, the CFPB published its first annual Financial Literacy Report to Congress. The report, required by the Dodd-Frank Act, outlines the CFPB’s broad consumer education and outreach efforts. The report reviews the various resources the CFPB has developed on its website, including its complaint database and tools aimed at helping consumers understand college costs and payment options. The CFPB also highlights ongoing research to (i) determine how to measure financial well-being and identify the knowledge, skills, and habits associated with financially capable consumers; (ii) evaluate the effectiveness of existing approaches to improving financial decision-making and outcomes; and (iii) develop new approaches to financial education and evaluate their potential to improve financial well-being.