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Financial Services Law Insights and Observations


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  • CFPB Outlines Potential Mortgage Loan Originator Compensation and Qualification Rules


    On May 9, the Consumer Financial Protection Bureau (CFPB) outlined in its outreach materials to small business representatives its proposals to implement the loan originator compensation provisions of the Truth in Lending Act (TILA). These proposals will amend the rules applicable to compensation in mortgage loan transactions, and they would also "help level the playing field" in connection with regulation of mortgage loan originators under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The CFPB intends to finalize rules on these topics by January 21, 2013.

    Under the Dodd-Frank Act, restrictions were placed on the ability of creditors and consumers to compensate mortgage loan originators (which includes employee loan officers, mortgage brokerages, and employees of mortgage brokerages). This restriction is similar to the restrictions implemented by the Federal Reserve Board (Board), effective April 2011, that prohibit a creditor from compensating a loan originator based on the terms and conditions of the transaction.

    The Dodd-Frank Act generally provides that loan originators may be compensated only by consumers, unless two conditions are met: (i) the loan originator must not receive any compensation directly from a consumer; and (ii) the consumer must not make an upfront payment of discount points, origination points, or fees, other than bona fide third-party fees that are not retained by the creditor, the loan originator, or either company's affiliates.

    The CFPB has the authority to create exemptions to the second "points and fees" provision if it finds that an exemption is "in the interest of consumers and in the public interest." In its proposal, the CFPB states that it is considering using this exemption authority to permit consumer payment of upfront points and fees under certain circumstances, and the CFPB is further considering whether to propose particular conditions for payments to affiliates. The CFPB is considering a number of proposals that would carry out this restriction:

    • No-Discount-Point Loan Option: Under the CFPB's proposal, the loan originator would be required to offer a no-discount-point transaction. Offering this option, according to the CFPB, would enable the homebuyer to better compare competing offers from different lenders.

    • Interest-Rate Reductions When Consumers Pay Discount Points: The CFPB's proposal would mandate that any "discount point" be a "bona fide" discount point that actually reduces the interest rate by at least a minimum amount.

    • Origination Charges Must Not Vary with the Size of the Loan: The CFPB proposes that mortgage brokerage firms and creditors would be allowed to charge only flat origination fees instead of fees that vary with the size of the loan. The CFPB proposes that upfront fees may be paid to affiliates, provided that these fees are likewise flat and so do not vary with the size of the loan (except for title insurance payments).

    In connection with these proposals, the CFPB indicates that it may allow (i) certain payments and bonuses to loan originator based on profitability, (i) certain payments to mortgage brokerage employees when the consumer pays the brokerage, and (iii) certain types of pricing concessions to be covered by the loan originator's compensation. The CFPB's proposal also considers whether to permit certain types of "point banks," and whether to impose record-retention requirements on loan originators directly. Further, the CFPB is considering whether to "sunset" any potential partial exemption from the statute that it implements.

    Significantly, the CFPB's proposal would restrict the ability of a lender to charge its own up-front origination fees, except for a fixed fee that does not vary based on loan size. Under the Board's rules, compensation to loan originators is restricted, but lenders may charge origination fees and discount points without restriction. This proposal, if implemented, would require lenders to make significant adjustments to their fee schedules. Further, the CFPB interprets the Dodd-Frank Act's amendments as imposing a ban on loan originator compensation that varies based on loan terms (except principal balance) even in transactions in which the consumer pays compensation directly.

    Although the Dodd-Frank Act requires the CFPB to draft rules related to the anti-steering provisions of the loan originator compensation rules, the CFPB indicates that it will address those provisions at a later date.

    In a second major aspect of the outline, the CFPB indicates its intention to carry out its authority under TILA to ensure that loan originators be "qualified." Currently, the SAFE Act imposes registration or licensing requirements on loan originators, but these requirements vary widely based on whether the loan originator is an employee of a depository institution or of a non-bank institution.

    Under the CFPB's proposal, loan originators-regardless of employer-would be subject to certain qualifications:

    • All loan originators would be subject to the same standards for character, fitness,

      and financial responsibility;

    • Loan originators would be subject to a criminal background check; and

    • Loan originators would be required to undertake training commensurate with the size and mortgage lending activities of the employer. This training would be analogous to the continuing education requirement that applies to individuals who are subject to SAFE Act licensing.

    As a result of these proposals, registered mortgage loan originators would be subject to some of the same requirements as licensed loan originators.

    The CFPB proposal was created in connection with the CFPB's compliance with the Small Business Regulatory Enforcement Fairness Act (SBREFA), which mandates that the CFPB convene a Small Business Review Panel anytime a proposed rule may have a significant impact on a substantial number of small entities. This panel meets with selected representatives of small businesses, and these representatives provide feedback to the panel on the potential economic impact of the proposal. In addition to the outline, the CFPB also issued a press release, a fact sheet, and a set of discussion questions for the panel.

    CFPB TILA Dodd-Frank Mortgage Origination

  • FTC, CFPB, DOJ File Brief in Suit Challenging FCRA Constitutionality

    Consumer Finance

    On May 8, the FTC announced that it had joined the CFPB and the DOJ to file a brief supporting the constitutionality of the Fair Credit Reporting Act (FCRA). The brief was filed in a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania in which a consumer alleged that a consumer reporting agency (CRA) violated FCRA by reporting on arrest records that were more than seven years’ old. Responding to these allegations, the CRA argued that the Supreme Court’s decision in Sorell v. IMS Health, Inc., 131 S. Ct. 2653 (2011), rendered FCRA’s seven-year limitation unconstitutional under the First Amendment. The federal entities’ brief counters that Sorell does not alter the test for commercial speech restrictions established in Central Hudson Gas and Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). It goes on to argue that, under this test, the government has a substantial interest in protecting individuals’ privacy and that FCRA protects this interest while accommodating businesses’ competing interest in obtaining complete information about potential borrowers.

    CFPB FTC FCRA Consumer Reporting Privacy/Cyber Risk & Data Security

  • Fourth Circuit Reverses Dismissal of TILA Claim


    On May 9, Fannie Mae announced new requirements for document custodians with respect to compliance audits and certification practices. In Servicing Guide Announcement SVC-2012-08, Fannie Mae states that document custodians must engage third-party auditors to conduct an annual assessment of eligibility and operational compliance. Custodians that had a Fannie Mae on-site review prior to August 1, 2011 must engage an independent third-party auditor and complete the first annual audit by July 31, 2013, while custodians that had or will have a Fannie Mae audit between August 1, 2011 and July 31, 2012 will have until December 31, 2013. All custodians must also develop and implement a monthly quality control review by September 30, 2012.

    CFPB TILA Mortgage Servicing

  • Spotlight on Auto Finance (Part One of Three): A New Road for Auto Finance Companies

    Consumer Finance

    Auto Finance Attorney John Redding

    Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.

    “The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”

    Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices.  The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.

    “This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.

    The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.

    Redding suggests the following steps auto finance companies can take to prepare for the CFPB:

    • Evaluate the institution’s risk profile and prepare an operations and compliance strategy
    • Update policies and procedures (review CFPB exam guidelines)
    • Monitor, address, and retain records regarding consumer complaints
    • Monitor third-party sources of complaints
    • Appoint an ombudsman
    • Conduct internal audits
    • Consider patterns and practices that emerge regarding operations
    • Focus on areas that may lead to consumer harm, as well as technical violations
    • Include the compliance team to monitor, analyze and advise on specific proposals

    CFPB Auto Finance John Redding

  • Buckley Sandler Files Amicus Brief on Behalf of Industry Groups in Tenth Circuit TILA Case


    On May 3, BuckleySandler filed an amicus brief on behalf of three industry trade groups in a Tenth Circuit case addressing the right to rescind a mortgage under the Truth in Lending Act. The CFPB previously filed an amicus brief in Rosenfield v. HSBC Bank, No. 10-1442 (10th Cir.), in which it argued that borrowers who do not receive certain TILA-required disclosures should be permitted to rescind so long as they notify their lenders within three years—even if they did not file suit within TILA’s three-year repose period. The industry amicus brief, filed on behalf of the American Bankers Association, Consumer Bankers Association, and Consumer Mortgage Coalition, urges the Tenth Circuit to hold that TILA’s statute of repose requires that any right of rescission expire three years after origination even if the consumer previously notified the lender. The industry amicus brief argues that holding otherwise contravenes the purpose of TILA's statute of repose and creates unnecessary uncertainty that will negatively affect the industry and consumers alike.


  • Lawmakers Request CFPB Budget Details

    Consumer Finance

    On May 2, Republican members of the House Financial Services Committee sent a letter to CPFB Director Cordray following up on their initial request and the CFPB’s response, seeking additional details regarding the CFPB’s budget and plans. Although Congress does not appropriate funds to the CFPB, the members argue that the CFPB still must provide the committee with detailed budget information.  The CFPB, according to the letter, cannot act as other non-appropriated federal banking regulators because the CFPB budget impacts the national debt while the others do not. In an attempt to exercise some oversight over CFPB spending, the members seek (i) a financial operating plan for the agency; (ii) a detailed fiscal year 2013 budget justification, (iii) performance measures, (iv) a commitment to notify Congress prior to seeking funds from the Federal Reserve Board, (v) information about the CFPB headquarters design and renovation, and (vi) the process for determining employment needs.


  • CFPB Announces Director of Diversity Office, Outlines Planned Activities

    Consumer Finance

    On April 30, the CFPB announced that Stuart Ishimaru will lead its Office of Minority and Women Inclusion. A former Equal Employment Opportunity Commissioner, Mr. Ishimaru will lead an office that plans to (i) develop standards for assessing the diversity policies and practices of CFPB-regulated entities, (ii) provide advice on the impact of CFPB policies and regulations on minority and women-owned businesses, (iii) coordinate with the Director to create and implement solutions to civil rights violations, and (iv) develop and implement standards of equal employment for the CFPB. In announcing Mr. Ishimaru’s hiring, Director Cordray stated that the financial industry “has not traditionally reflected all of its customers” and the new office will work with banks and nonbanks to develop systems that encourage diversity.

    CFPB Dodd-Frank

  • FDIC Issues Statement Regarding Applicability of CFPB Mortgage Compensation Rules


    On April 17, the FDIC issued Financial Institution Letter 2012-02 to apply the recent CFPB guidance on compensation for mortgage originators to FDIC-regulated institutions.  The statement directs covered institutions to ensure that their policies and practices are consistent with the compensation rules as interpreted by the CFPB.

    FDIC CFPB Mortgage Origination

  • CFPB Begins Study of Arbitration Clauses, Extends Comment Period for Overdraft Inquiry

    Consumer Finance

    On April 24, the CFPB released a request for information to inform its study of the use and impact of arbitration clauses in consumer financial services agreements. Through June 23, 2012, the CFPB is seeking information from the public regarding (i) the prevalence of use of these arbitration clauses, (ii) what claims consumers bring in arbitration against financial services companies, (iii) whether claims are brought by financial services companies against consumers in arbitration, and (iv) how consumers and companies are affected by actual arbitrations and outside of actual arbitrations. The study is required by the Dodd-Frank Act and must be completed before the CFPB can begin exercising its Dodd-Frank authority to conduct rulemakings regarding arbitration agreements. Therefore, at this time the CFPB is not seeking comments on whether and how the use of such agreements should be regulated.

    The CFPB also this week extended through June 29, 2012, the comment period for its inquiry into overdraft programs and their costs, benefits, and risks to consumers.

    CFPB Dodd-Frank Arbitration

  • CFPB Clarifies Transitional Licensing for Mortgage Loan Originators


    On April 19, the CFPB issued Bulletin 2012-05 to clarify issues related to the transitional licensing of mortgage loan originators under the SAFE Act and Regulation H. According to the Bulletin, (i) states are allowed to provide a transitional license to an individual with a valid license from another state, but (ii) states are prohibited from providing a transitional license for a registered loan originator who leaves a federally regulated financial institution to act as a loan originator while pursuing a state license.

    CFPB Mortgage Licensing Mortgage Origination