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CFPB Publishes 2014 List of Rural Counties
On July 2, the CFPB published a final list of rural and underserved counties for use in 2014. Several of the CFPB’s new mortgage rules include provisions and exceptions related to creditors who operate in predominantly rural or underserved counties, including the ability-to-repay/qualified mortgage rule and the TILA escrows rule. The CFPB notes that the list has changed based on 2010 census data such that some small creditors will lose eligibility for certain mortgage rule exemptions. Based on those changes and extensive feedback the CFPB has received about the definition of rural and underserved counties, the CFPB reminded institutions that it (i) recently revised its ability-to-repay rule to extend the ability to originate balloon QMs to certain small creditors that do not operate predominantly in rural or underserved areas during the period from January 10, 2014, to January 10, 2016, (ii) recently proposed to extend the same treatment to these small creditors for purposes of the high-cost mortgage balloon exemption, and (iii) proposed to extend eligibility for the rural or underserved exemption from the escrow requirement to creditors that operated predominantly in rural or underserved counties in any of the previous three years.
CFPB Releases Spring Rulemaking Agenda
On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.
Special Alert: CFPB Finalizes Additional Amendments to ATR/QM Rule; Agencies Propose Appraisal Rule Amendments
On July 10, the Consumer Financial Protection Bureau ("Bureau") finalized important amendments (the "Amendments") to its ability-to-repay / qualified mortgage rule (the "QM / ATR Rule") that are intended to ease certain compliance challenges with making qualified mortgages ("QMs"). In response to industry concerns on the extensive underwriting requirements in Regulation Z's new Appendix Q, the Bureau acknowledged that certain of its provisions were "not well-suited to function as regulatory requirements" and, as a result, finalized major revisions to the methodology for determining a consumer's monthly debt and income for purposes of making a QM under the 43% debt-to-income ("DTI") underwriting alternative.
The Amendments, which had been proposed in April of this year (the "April Proposal"), also finalize clarifications to its mortgage servicing and escrows rules that were issued this January. Like the mortgage rules themselves, the Amendments will take effect on January 10, 2014.
Separately, on the same date, the Bureau, together with the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Federal Housing Finance Agency, National Credit Union Administration, and Office of the Comptroller of the Currency (the "Agencies") issued proposed amendments to their January 2013 final rule governing appraisal practices.
Click here to read the special alert.
Questions regarding the matters discussed in this 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, jnaimon@buckleyfirm.com
- Clinton R. Rockwell, (310) 424-3901, crockwell@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
- Joseph M. Kolar, (202) 349-8020, jkolar@buckleyfirm.com
- Jon Langlois (202) 349-8045, jlanglois@buckleyfirm.com
CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices
On July 10, the CFPB issued new debt collection guidance that, among other things, seeks to hold CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts, in much the same way debt collectors are held accountable for violations of the FDCPA. Bulletin 2013-07 reviews the Dodd-Frank Act UDAAP standards, provides a non-exhaustive list of debt collection acts or practices that could constitute UDAAPs, and states that even though creditors generally are not considered debt collectors under the FDCPA, the CFPB intends to supervise their debt collection activities under its UDAAP authority.
Separately, in Bulletin 2013-08, the CFPB provided guidance to creditors, debt buyers, and third-party collectors about compliance with the FDCPA and sections 1031 and 1036 of Dodd-Frank when making representations about the impact that payments on debts in collection may have on credit reports and credit scores. The Bulletin states that potentially deceptive debt collection claims are a matter of “significant concern” to the CFPB and describes the CFPB’s planned supervisory activities and other actions the CFPB may take to ensure that the debt collection market “functions in a fair, transparent, and competitive manner.”
In addition, the CFPB announced that it will begin accepting consumer complaints related to debt collection, and published five “action letters” that consumers can use to correspond with debt collectors. The letters address the situations when the consumer: (i) needs more information on the debt; (ii) wants to dispute the debt and for the debt collector to prove responsibility or stop communication; (iii) wants to restrict how and when a debt collector can contact them; (iv) has hired a lawyer; (v) wants the debt collector to stop any and all contact.
Spotlight on Student Lending (Part 2 of 2): Lessons Learned from CFPB Reports
In 2012 and 2013, the Consumer Financial Protection Bureau released several major reports and held field hearings focused on private student lending and servicing. In addition to recent CFPB activity, on June 25, 2013, the Senate Banking Committee held a hearing regarding private student loans at which, among other witnesses, the CFPB’s Student Loan Ombudsman Rohit Chopra testified.
The largest CFPB report, and the one most sweeping in scope, was the Bureau’s study of the private student loan market and characteristics of private student loans that was mandated by Dodd-Frank and issued in July 2012 (Private Student Loans Report). In addition, in October 2012, the Student Loan Ombudsman issued his Annual Report in which, among other things, he characterized the nature of the student loan complaints received through the CFPB’s student loan complaint portal up to that point (Annual Report of the Student Loan Ombudsman). Further, on May 8, 2013, the CFPB issued another report and held a field hearing focused on what it described as the “potential domino effect” of student loan debt on the broader economy and proposing several options to assist private student loan borrowers. Finally, testimony at the above-referenced Senate Banking Committee hearing focused largely on how to increase the low refinancing and modification activity in the private student loan (PSL) market.
Taken together the Bureau’s reports, field hearings, and Congressional testimony put student lenders and servicers on notice that the Bureau will be looking closely at servicing issues, including loan modification and debt collection practices, as well as fair lending and likely fair servicing issues going forward, i.e., consistency in loan modifications and work outs.
With respect to the Private Student Loans Report, the report made clear that, in the fair lending space, the Bureau intends to scrutinize the use of cohort default rate (a statistic calculated by the Department of Education and used to determine which schools will be eligible to participate in federal student aid programs) as an eligibility metric. Likewise, the report recommends that lenders obtain school certification of the student’s education costs to prevent over borrowing.
As for the Annual Report of the Student Loan Ombudsman, from the Bureau’s perspective, the report likely validates the agency’s growing concern over student loan servicing insofar as the three main areas of consumer complaints described in the report are all focused in that area: general servicing concerns, concerns about payment processing, and concerns about inability to obtain loan modifications. The report draws parallels between problems in student loan servicing and those in mortgage loan servicing. For example, the report describes consumer complaints focused on the misapplication of payments, untimely error resolution and consumer difficulty in contacting appropriate personnel (all areas that have been a focus in the mortgage servicing space). So evident were the similarities in the eyes of the CFPB that its student loan ombudsman, Rohit Chopra, urged the Treasury secretary, the CFPB and secretary of education to consider whether mortgage servicing program “fixes” can be applied in the student loan context.
To this end, the Bureau has been sharpening its focus on repayment options in the private student loan market, with signals pointing perhaps to possible new rules setting student loan servicing standards. However, in the meantime, the Bureau has taken some notable steps. First, on February 21, it issued a notice and request for information on policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans. Over 30,000 comments have been received. In addition, on May 8, as mentioned earlier, the Bureau proposed several policy “solutions” to assist student loan borrowers, such as providing “refi relief” for borrowers who have made timely payments, providing a “road to recovery” for borrowers by allowing their loans to be restructured, and providing a “credit clean slate” for borrowers who satisfy the terms of a workout plan. Importantly, though, the Bureau conceded that there are still significant accounting and operational impediments to implementing these “solutions” that require further consideration.
In light of the Bureau’s reports, field hearings, and other public statements, we advise private student lenders focus now on tightening internal controls with respect to fair and responsible lending issues as well as servicing and debt collection practices as those will areas of primary focus by the Bureau in examinations and otherwise going forward.
Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Andrew R. Louis, (202) 349-8061, alouis@buckleyfirm.com
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- Aaron C. Mahler, (202) 349-8024, amahler@buckleyfirm.com
- Sasha Leonhardt, (202) 349-7971, sleonhardt@buckleyfirm.com
CFPB Announces Debt Collection Field Hearing
On June 26, the CFPB announced that its next field hearing will focus on debt collection and will be held in Portland, Maine on July 10, 2013. The event, which is open to members of the public who RSVP, will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups and industry representatives. In the past, the CFPB has made policy announcements in connection with field hearings, and this time may announce, among other things, that it will begin accepting debt collection complaints through its public complaint database.
CFPB Finalizes Rule to Supervise Nonbanks That Pose Risks to Consumers
On June 26, the CFPB issued a final rule outlining new procedures for establishing supervisory authority over nonbanks that it has “reasonable cause” to believe pose “risks to consumers” with regard to consumer financial products or services. The rule outlines the procedures by which the CFPB will notify nonbanks that they are being considered for supervision and how they can respond to the CFPB’s notice. The CFPB’s determination regarding whether and when to issue a “Notice of Reasonable Cause” will be based on complaints collected by the Bureau or on information from other sources, including judicial opinions and administrative decisions. Once supervised, a nonbank is subject to the CFPB’s authority to require reports and conduct examinations, but can petition to end the supervision after two years and annually thereafter. The final rule takes effect 30 days after its publication in the Federal Register.
DOD Seeks Input on Military Lending Act Regulations; State AGs Seek Expansion of Covered Loans
Last week, the Department of Defense (DOD) issued an advanced notice of proposed rulemaking to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the Military Lending Act (MLA). Currently, the MLA regulations cover certain payday, car title, and refund anticipation loans to servicemembers and their dependents. The DOD notice seeks (i) comment on whether the definition of “consumer credit” should be revised to cover other small dollar loans and (ii) examples of alternative programs designed to assist servicemembers who need small dollar loans. Responses to the DOD notice are due by August 1, 2013. On June 24, a bipartisan group of 13 state attorneys general submitted a comment letter urging the DOD to amend the MLA regulations to close loopholes in the definitions of covered loans and to cover any other type of consumer credit loan presenting similar dangers, such as overdraft loans.
Virginia Federal District Court Dismisses Shareholder Derivative Action Related to Credit Card Issuer's Settlements with OCC, CFPB
On June 21, the U.S. District Court for the Eastern District of Virginia dismissed a shareholder derivative action against a national bank’s officers and directors that was based on the bank’s settlements with the CFPB and OCC over allegedly deceptive marketing of ancillary products. In re Capital One Derivative S’holder Litig., No. 1:12-cv-1100 (E.D. Va. June 21, 2013). The shareholders, relying on Delaware law, alleged that the officers and directors breached their fiduciary duty of loyalty, committed corporate waste, and were unjustly enriched by failing to prevent the allegedly deceptive sales practices at the bank’s third-party call centers which led to the consent orders. The court held that the shareholders did not adequately allege corporate waste because the bank’s settlement payments were not “transfers of assets with no corporate purpose” but instead achieved final resolution of the investigations. The unjust enrichment claim failed because the shareholders did not allege any facts indicating a relationship between the officers and directors’ compensation and the settlements with the agencies. With respect to the duty of loyalty claim, the shareholders alleged two theories: (i) that the officers and directors failed to implement controls that would have prevented the alleged misconduct, and (ii) that defendants ignored numerous “red flags” that should have alerted them to the alleged misconduct. First, the controls theory failed because the shareholders could not satisfy the demanding Caremark standard, which requires an utter failure to implement any controls. Second, most of the alleged red flags were either not actually red flags at all or there were no allegations that the individual officers and directors were aware of them. However, as to a small number of the alleged red flags, the court found the claims sufficiently plausible to allow the shareholders an opportunity to amend their complaint to add additional facts.
Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers
This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues.
Scope of Alleged Violations
The CFPB charges that the bank violated Regulation Z (TILA) by failing to accurately disclose the finance charge, annual percentage rate, payment schedule and total of payments for the subject loans, and also violated the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices by (i) failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for the subject loans; and (ii) deceptively marketing the prices and coverage of add-on service contracts. Specifically, the bank allegedly failed to inform servicemembers that they would be charged a monthly processing fee for automatic payroll allotments; (ii) failed to disclose that the allotments would be deducted from servicemember paychecks twice per month, but only credited once a month; and (iii) failed to regularly review and validate its vendor’s marketing related to the cost and coverage of add-on service contracts. As with the CFPB’s actions last year related to certain add-on products marketed by credit card issuer vendors, the CFPB focused on the marketing of the products and did not directly address their value. This action also applies the CFPB’s guidance on vendor management, which outlines the CFPB’s expectations for oversight and management of third-party vendors involved in the offering of ancillary products.
The service provider is alleged to have violated the CFPA’s prohibition on unfair, deceptive, or abusive practices by (i) deceptively marketing the prices of an add-on vehicle service contract and an add-on GAP insurance product; and (ii) deceptively marketing the scope of the coverage of a vehicle service contract. The CFPB asserts that the company understated the costs of the vehicle service contract and insurance product and overstated the reach of their coverage.
Resolution
The orders require the companies to cease the alleged practices, improve disclosures, and pay combined restitution of approximately $6.5 million - $3.2 million by the bank, $3.3 million by the vendor. Neither order includes a civil money penalty.
In addition, the bank must (i) develop a comprehensive compliance plan within 60 days; (ii) submit compliance progress reports within 90 days and after one year, as well as within 14 days of receiving a request from the CFPB after the one-year report; and (iii) implement certain recordkeeping requirements. The service provider has 15 days to retain an independent consultant to develop a compliance plan. Within 90 days of when the CFPB approves the consultant, the service provider must submit a compliance management system and written compliance plan. It also is subject to similar reporting and recordkeeping requirements.
Application of “Responsible Conduct” Guidance
Earlier this week, as detailed in our prior Special Alert, the CFPB issued guidance setting forth its expectations for companies subject to enforcement activity. Among other things, the CFPB stated that “responsible conduct” may be rewarded by the exercise of its discretion to resolve an investigation with no public enforcement action or to reduce any sanction or penalty imposed. According to the CFPB, in the actions announced today, the companies proactively addressed aspects of the loan program at issue and worked cooperatively with the Bureau to provide refunds to servicemembers. While the matters nonetheless resulted in public enforcement actions, the Bureau states expressly that this “responsible conduct” was one of several factors it considered in electing not to impose civil money penalties.
CFPB’s Focus on Auto Finance & Servicemember Protection
In addition to marketing of loans and add-on products, the CFPB has continued to focus on the fair lending implications of certain practices of indirect auto lenders. Just last week, the CFPB sought to explain to members of Congress its rationale for pursuing auto fair lending claims, largely reiterating the information set forth in the guidance issued in CFPB Bulletin 2013-02, and the CFPB reportedly has several ongoing auto finance investigations. We expect to see additional auto finance actions from the Bureau addressing the marketing and pricing of auto loans and add-on products.
Today’s CFPB announcement notes that the DOD and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. Concurrent with the announcement, the CFPB published information for servicemembers related to military allotments, announced that the DOD has established a working group that will consult with the CFPB and other federal regulators to look at the use of military discretionary allotments, and reiterated the Bureau’s general commitment to working with the DOD on protecting servicemembers in the consumer financial marketplace.”