InfoBytes Blog

Special Alert: CFPB Proposes Additional Changes to Mortgage Rules

On June 24, 2013, the Consumer Financial Protection Bureau ("CFPB") issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.

Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.

Comments on the proposed amendments are due July 22, 2013.

Key Proposed Amendments

Mortgage Servicing

Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of "first notice or filing required by applicable law" and prohibit servicers from filing any document that "would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law" during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.

This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the "first notice or filing required by applicable law."  Similarly, servicers in California and other states with pending or effective "Homeowners Bill of Rights" statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes' requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB's minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.

Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower's loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.

The proposed amendments would:

• Allow servicers who initially describe an application as complete based on the five-day review to request additional information in some circumstances;
• Allow servicers to select a "reasonable date" by which an incomplete application should be completed; and
• Allow servicers to offer a borrower the option of a short-term forbearance program (i.e., forbearance of payments for up to two months) even if the application is not complete, subject to certain requirements.

Notice of Denial. The proposed amendments would clarify that, when notifying a borrower that he or she has been denied for a loss mitigation option, the servicer need only disclose the actual reasons for the denial and not other potential reasons.

Loan Originator Compensation

Effective Date. The CFPB proposed to modify the effective date for portions of this rule. Specifically, the proposed rule would: (1) move the effective date for most provisions forward from January 10, 2014 to January 1, 2014; and (2) generally apply the revised restrictions on compensation to transactions consummated and for which the employer paid compensation on or after January 1, 2014.  These revisions are intended to permit employers of loan originators to make changes to their compensation, registration, licensing, and training practices at the start of the calendar year.

Definition of Loan Originator. The proposed amendments would provide a number of clarifications about who is and is not covered by the rule. In particular, the CFPB would clarify that employees of a creditor or loan originator in certain administrative or clerical roles (such as tellers or greeters) do not become loan originators solely by providing an application form or discussing general credit terms with consumers (e.g., "We offer rates as low as 3% to qualified consumers."). Instead, to be a loan originator, the employee would need to discuss particular credit terms that are or may be available from the creditor to that consumer selected based on the consumer's financial characteristics.

Other Rules

Points and Fees for Qualified Mortgages and High-Cost Mortgages. The proposed amendments would clarify the treatment of: (1) charges paid by parties other than the consumer - in particular, the amendments make clear that seller's points and charges paid by the creditor are excluded from the finance charge component of points and fees; and (2) loan originator compensation to retailers of manufactured homes and their employees.

Rural and Underserved Areas. The proposed amendments would revise the exceptions available to small creditors (creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year) operating in predominantly "rural" or "underserved" areas while, as announced in May, the CFPB re-examines the underlying definitions of "rural" or "underserved" over the next two years. Specifically, the CFPB would allow all small creditors, regardless of whether they operate predominantly in "rural" or "underserved" areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for balloon qualified mortgages. In addition, the CFPB would allow more small creditors to take advantage of the exemption from the requirement to establish escrow accounts for higher-priced mortgage loans.

Prohibition on Financing Credit Insurance. For purposes of the prohibition on financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, the proposed amendments would clarify what constitutes financing of premiums by a creditor and, for purposes of the statutory exclusion for certain credit insurance premium calculation and payment arrangements, when credit insurance premiums are considered to be calculated and paid on a monthly basis.

CFPB Mortgage Origination Mortgage Servicing Loss Mitigation

Congress, CFPB Trade Letters on Fair Auto Lending Guidance

On June 20, 35 Republican Members of the U.S. House of Representatives sent a letter to CFPB Assistant Director of the Office of Fair Lending and Equal Opportunity, Patrice Ficklin, questioning the manner in which recent CFPB guidance regarding lending practices in the auto lending industry was rendered and requesting details concerning the process of analyzing potential fair lending violations. The letter comes on the heels of a similar inquiry made by 13 Democratic Members of the House Financial Services Committee to CFPB Director Richard Cordray on May 28, 2013. The CFPB guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.

The Republican letter takes issue with the CFPB “initiating [a] process without a public hearing, without public comment, and without releasing the data, methodology, or analysis it relied upon to support such an important change in policy.”  The letter notes that “allegations of disparate impact do not involve intentional conduct, but instead consist solely of statistical analysis of past transactions” and that any model assessing such impact must be reliable and accurate. Because the guidance fails to disclose the model for assessing fair lending violations, Congress requested the CFPB provide all pertinent details regarding its methodology to evaluate whether the statistical model supports its supervision and examination of financial institutions.

In addition to taking issue with the CFPB’s statistical analysis, the Republican letter also characterized the ECOA compliance controls suggested in the CFPB bulletin as “onerous and unrealistic,” noting that “restricting consumer choice is highly problematic.”  To support the controls prescribed by the guidance, the Republican letter requested that the CFPB provide “all studies, analysis, and information it relied upon in developing its guidance document.”  Specifically, the two congressional letters requested the analysis conducted by the CFPB on the impact of these prescribed controls on the auto lending industry and any coordination activities undertaken with other agencies in developing the guidance. The House members, like many in the auto industry, are concerned the guidance will have an adverse impact on competition, result in increased overall costs for consumers, and potentially exclude lower-income customers from the credit market entirely.

Amid these growing concerns regarding the CFPB’s guidance and inquiry into auto finance practices, on June 20, Director Cordray provided a response to the May 28 Democrat letter. Mr. Cordray’s response essentially reiterates both the CFPB’s authority to supervise and investigate financial institutions engaged in auto finance and the CFPB’s concerns that pricing discretion may create a significant risk of discrimination. In responding to the issues of the Democrat letter, Director Cordray indicated that the CFPB uses a proxy methodology to analyze disparate impact in the auto lending industry, though it is short on the specifics behind the methodology used. The CFPB response acknowledged that ECOA fair lending analysis is more complex than mortgage lending analysis given the absence of data similar to that collected in the mortgage context under the Home Mortgage Disclosure Act. Director Cordray also posited that the use of proxies for unavailable data is a widely accepted mathematical and systematic approach in various arenas, including for marketing in the auto industry itself. According to Director Cordray, the CFPB uses both surnames and geographic location as proxies for unavailable characteristics. The proxy analysis is then conducted through publicly available data from the Social Security Administration and Census Bureau.

Notwithstanding the information provided regarding the CFPB’s methodology for analyzing potential discrimination within the auto finance industry, it appears that both Members of Congress and industry participants remain skeptical of the accuracy of such an approach and continue to call for increased transparency from the CFPB regarding its due diligence in creating this proxy methodology and disclosure of the methodology itself. Opponents also question the manner in which the guidance was released and absence of public hearings or public comment periods. The most recent Republican letter raised these precise issues and requested a response from the CFPB within 30 days.

CFPB Fair Lending ECOA U.S. House

Special Alert: CFPB Issues Guidance on "Responsible Conduct"

This afternoon, the CFPB issued CFPB Bulletin 2013-6, which identifies four pillars of “responsible conduct” on the part of potential targets of enforcement action by the Bureau.  The CFPB expressly states that such conduct may be rewarded with (i) resolution of an investigation with no public enforcement action; (ii) treatment of subject conduct as a less severe type of violation; (iii) reduction in the number of violations pursued; or (iv) reduction in sanctions or penalties.  The Bulletin, titled “Responsible Business Conduct: Self-Policing, Self-Reporting, Remediation, and Cooperation,” states that such conduct has “concrete and substantial benefits for consumers and significantly contributes to the success of the Bureau’s mission” because it speeds detection and increases investigative and enforcement efficiency, thereby enabling the Bureau to pursue a larger number of investigations.

The Bulletin has interesting parallels to the SEC Seaboard Report and the DOJ’s Thompson and McNulty Memoranda.  The four factors to be considered by the CFPB—self-policing, self-reporting, remediation, and cooperation—are discussed in further detail below.

• Self-Policing.  In deciding whether to provide favorable consideration for self-policing, the Bureau will evaluate the nature of the violation (duration, pervasiveness, and significance); how it was detected (effectiveness of internal mechanisms); prior or relative performance of compliance management and audit functions; and the institution’s “culture of compliance.”
• Self-Reporting.  The Bureau notes that it views self-reporting to be “special” among the four factors, and will evaluate for favorable consideration the completeness, effectiveness, and timeliness of the disclosure, as well as the degree to which the disclosure was purely proactive or a violation otherwise was likely to be discovered.
• Remediation.  Remediation activity will be credited based on a review of how timely potential misconduct was addressed and how quickly it was remediated; whether responsible individuals were disciplined; whether information and extent of harm were documented and preserved promptly; and the Bureau’s confidence that misconduct is unlikely to recur.
• Cooperation.  In evaluating cooperation with enforcement efforts, the Bureau will look for “substantial and material steps above and beyond what the law requires,” including cooperation from start to finish and the identification of any additional misconduct; proper steps taken to complete an objective internal investigation and share findings with the Bureau; encouragement of employee cooperation; and facilitation of enforcement actions against other potential targets.

The Bulletin should be considered carefully by any entity facing enforcement action by the CFPB because, among other things, the way in which these factors will be applied remains an open question.  Despite the encouragement of self-policing, self-reporting, remediation, and cooperation, the Bulletin notes that there is no consistent formula that can be applied to the crediting of responsible conduct, and satisfaction of some or all of the factors will not bar the Bureau from bringing any enforcement action or pursuing any remedy.  The Bulletin also states that there may be misconduct so egregious or harm so great that enforcement actions or penalties cannot be mitigated.

CFPB Enforcement Agency Rule-Making & Guidance

Spotlight on Student Lending (Part 1 of 2): Facing Increased Regulatory Scrutiny, Student Loan Lenders Prepare for CFPB Examinations

Currently, total outstanding student debt (both federal loans and private loans) has risen to roughly $1.1 trillion dollars. That figure represents an over 50% increase since 2008 and makes student loans the largest source of unsecured consumer debt – surpassing credit cards. At the same time, at least with respect to federal student loans, delinquencies have risen sharply during the same time period and, with unemployment rates for recent graduates still high by historic standards, the risk of continued high delinquency rates remains significant. Complicating matters is that student loan servicers, and servicers of private student loans in particular, have limited ability vis-à-vis a mortgage lender to modify those loans for borrowers in default.

Not surprisingly, given this backdrop, borrowers have lodged complaints with the Consumer Financial Protection Bureau (CFPB or Bureau) focused on their inability to obtain loan modifications, concerns about improper payment processing, and concerns about servicers’ debt collection practices. All of these factors have prompted the Bureau to draw comparisons to the recent mortgage servicing crisis and to increase focus and attention on the student lending and servicing industry in an effort to stave off a problem of those proportions.

In addition, the Bureau has focused its attention within student lending and servicing on other, more traditional areas of regulatory concern.  For example, the Bureau in the past year indicated it intends to closely scrutinize student lenders on fair lending issues – especially the use of non-credit bureau attributes such as cohort default rate – as well as unfair, deceptive, or abusive trade practices.

For non-bank private student lenders, regulation by the CFPB represents a significant increase in the type of regulatory scrutiny to which lenders have traditionally been subject.  Even for large bank student lenders, which have long been subject to examinations by their prudential regulators, CFPB regulatory oversight will present new challenges insofar as the Bureau’s focus is solely on consumer protection and compliance and it has made clear that understanding and regulating private student lending is one of its high priorities.

Here are several steps that student lenders and servicers can take now to proactively mitigate risk in the current environment, including:

1. Developing, implementing and, as applicable, updating fair and responsible lending programs (including training of key employees in this area)
2. Conducting periodic fair lending and UDAAP risk assessments
3. Conducting gap analyses of collections and servicing practices to ensure compliance and CFPB readiness

It bears emphasizing that the future likely holds increased regulatory scrutiny, especially from the Bureau and especially in the area of student loan servicing and debt collection. Private student lenders will also see increased scrutiny with respect to fair and responsible lending compliance, including their use of non-credit bureau attributes in underwriting and pricing and their marketing practices, e.g., how borrowers are solicited and whether a lender uses different marketing efforts based on loan products, such as those specific to a particular major, school, or geography.

In December 2012, the Consumer Financial Protection Bureau released their student loan examination procedures, and since doing so, has commenced several examinations of bank and non-bank private student lenders. Lenders will have to show compliance with a variety of federal laws applicable at various stages (called modules) of the lending process and will be examined for potentially unfair, deceptive or abusive acts and practices.

The procedures indicate that exams will be composed of several modules:

1. Advertising, marketing and lead generation
2. Application, qualification, loan origination, and disbursement
3. Repayment and account maintenance
4. Customer complaints
5. Collections and credit reporting
6. Information sharing and privacy

The CFPB’s examination personnel will review the lender’s organizational documents and process flowcharts, board minutes, annual reports, management reports, policies and procedures, rate and fee sheets, loan applications, account documentation, notes and disclosures, file contents, operating checklists and worksheets, computer system details, due diligence and monitoring procedures, lending procedures, underwriting guidelines, compensation policies, audit reports and responses, training materials, service provider contracts, advertisements, and complaints. Examiners may also interview the lender’s personnel and observe customer interactions.

Examiners will review potential legal and regulatory violations in modules roughly corresponding to the processes by which education loans are developed, marketed, originated and serviced, and the processes for handling consumer complaints, delinquencies and defaults, credit reporting and privacy protection. The examination process is intended to help the CFPB determine whether consumer financial protection laws have been violated and, if so, whether supervisory or enforcement actions are warranted.

BuckleySandler advises student lenders to prepare for a CFPB exam by carefully reviewing the Bureau’s examination procedures, reports, and other public statements concerning student lending and servicing. We also recommend conducting a gap analyses between those materials and existing policies and procedures, and as appropriate, filling any identified gaps.

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 UDAAP Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

SCOTUS To Hear Recess Appointment Case, Potential Implications for CFPB Director

This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.

CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia.  Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure.

In its review, the Supreme Court will address two questions presented by the government, as well as a third the Court added. The government’s petition asked the court to determine (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. The Court also signaled its intent to address the issue of Senate pro forma sessions with a question it added - whether the President's recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions. The Court is likely to hear the case in the fall and issue its opinion next year.

CFPB U.S. Supreme Court U.S. Senate

CFPB Teams With Boston to Field Consumer Complaints

On June 18, the CFPB announced a partnership with the City of Boston to provide local residents access to the CFPB’s consumer complaint hotline through the city’s existing constituent service hotline. Boston residents who call the city hotline with a question or complaint about consumer financial products or services will be transferred directly to the CFPB for assistance.

CFPB Consumer Complaints

CFPB Director Affirms Mortgage Rule Effective Dates, Acknowledges Potential Secondary Market Impacts

On Wednesday, CFPB Director Richard Cordray delivered remarks at an Exchequer Club luncheon in Washington, DC. During a brief question and answer segment, Mr. Cordray confirmed that the Bureau does not intend to delay the effective date of the mortgage rules and fully expects institutions to be in compliance when the rules take effect in January 2014. Financial institutions and their trade associations have expressed concern about implementing certain aspects of the myriad rules in the short time allowed by the CFPB and the potential impact on credit markets. Most recently industry representatives highlighted specific challenges at a House Financial Services Committee hearing that focused on the potential effects of the ability-to-repay/qualified mortgage (ATR/QM) rule.

Mr. Cordray generally downplayed the potential market impact and cost of compliance with the CFPB’s mortgage rules, with a particular focus on the ATR/QM rule.  Mr. Cordray explained the CFPB expects that the spread between QM and non-QM loans, if passed to the consumer, should be only 10 basis points, and that, as a result, concerns over the significant cost of compliance with the ATR/QM rule’s requirements are overblown. Some market participants believe this estimate may be overly optimistic and not in line with the factors they are considering in making pricing decisions on non-QM loans. These observers believe that the underlying CFPB economic analysis for the estimate includes a series of critical assumptions based on limited data, such as the probability that a borrower will allege a rule violation and estimated repurchase and litigation costs.

Mr. Cordray reiterated the agency’s promise to provide further guidance on the interplay of fair lending compliance and QM lending although, given his expectations that QM and non-QM loans will not vary significantly from a pricing perspective, he expressed the view that the issue is not a major concern.  He also downplayed concerns that changes to FHA premium requirements will cause more QM loans to exceed the APR threshold required for QM safe harbor status, an issue recently addressed by FHA Commissioner Galante.

In response to an observation from BuckleySandler Partner Jerry Buckley that the assignee liability provisions of the ATR/QM rule may act as an impediment to private capital re-entering the secondary market -- an issue that could become more critical since the Federal Reserve Board has signaled it may soon begin to taper its quantitative easing activities, which have buoyed secondary market liquidity -- Mr. Cordray acknowledged that the provision could possibly serve as a brake on secondary market liquidity. He also noted the CFPB’s ongoing work with the FHFA to develop a national mortgage database, which is intended to allow the agencies to monitor, among other things, the health of the secondary market.

CFPB Mortgage Origination RMBS Fair Lending Compliance Qualified Mortgage

CFPB Publishes Additional Mortgage Rule Compliance Guides, Launches Mortgage Rule Implementation Web Page

On June 7, the CFPB published a loan originator rule compliance guide and a mortgage servicing rules compliance guide. As with other prior guides it has released, the CFPB cautioned that the guides are not substitutes for the rules and the Official Interpretations, and that the guides do not consider other federal or state laws that may apply to the origination or servicing of mortgage loans. On June 13, the CFPB announced a new web page that provides, in one location, the various compliance guides and other mortgage rule implementation materials prepared by the CFPB.

CFPB Mortgage Origination Mortgage Servicing

CFPB Report Questions Overdraft Practices

On June 11, the CFPB released a white paper with initial findings from its study of bank and credit union overdraft practices. The paper reports that (i) customers who opt-in to overdraft programs pay higher fees and are more likely to have their accounts involuntarily closed, (ii) overdraft practices and costs / closures related to overdraft programs vary widely by institution, and (iii) some policies and practices are not disclosed or are disclosed in a technical manner. The CFPB highlights bank revenue generated by overdraft fees, stating that such fees represent approximately 60 percent of the fee revenue generated by consumer checking accounts, and identifies specific practices the CFPB believes raise questions about whether customers can anticipate or compare the cost of overdrafting, including funds availability and order posting practices. The report is based on a review of institution-level data, and the CFPB plans to review account-level data in order to better understand how differences in bank practices affect customers.

CFPB Overdraft

CFPB Plans Credit Card Arbitration Survey

On June 6, the CFPB released a notice and request for comment on its plan to conduct a new survey related to its ongoing study of arbitration agreements. A supporting document submitted with the notice includes the initial survey questions proposed by the CFPB. The CFPB plans to contact 1,000 credit card holders to evaluate their awareness of card agreement dispute resolution provisions, and their “assessments of such provisions.” The CFPB stated that the survey will seek information regarding card holders’ perceptions and valuations of arbitration and litigation, but will not gather data regarding respondents’ post-fact satisfaction with arbitration or litigation proceedings. Comments on the proposed survey are due by August 6, 2013.

Credit Cards CFPB Arbitration