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CFPB Explains Use of Civil Penalty Fund
On April 26, the CFPB issued a final rule that (i) establishes the governance structure of the Civil Penalty Fund, including the position of Civil Penalty Fund Administrator, (ii) identifies categories of victims who may receive funds and the amounts they may receive, (iii) establishes procedures for allocating funds for payments to victims and for consumer education and financial literacy programs, and for distributing allocated funds to individual victims, (iv) describes the circumstances in which payments to certain victims or classes of victims will be deemed impracticable, and (v) requires the Administrator to issue regular reports. While the CFPB issued the rule without a notice and comment period because the rule is exempt from the Administrative Procedures Act and other rulemaking requirements, it also issued a related proposal in which the CFPB seeks comment on, among other things, (i) whether it should make payments to victims of any type of “activities” for which it has imposed civil penalties, even if no enforcement action imposed a civil penalty for the particular “activities” that harmed the victim, (ii) whether it should limit payments to a share of the civil penalties collected for the particular violations that harmed a consumer, as opposed to using general Civil Penalty Fund dollars, and (iii) alternatives to the allocation procedures to be used when sufficient funds are not available to compensate fully the uncompensated harm of all victims to whom it is practicable to make payments. Comments on the proposal are due within 60 days of its publication in the Federal Register.
Federal Regulators Target Payday Loans, Deposit Advance Products
On April 24, the CFPB published a white paper on payday loan and deposit advance products that claims to show those products lead to a “cycle of high-cost borrowing.” On April 25, the FDIC and the OCC proposed guidance relating to deposit advance products based on similar concerns. The CFPB paper reflects the results of what the CFPB characterizes as a year-long, in-depth review of short-term, small-dollar loans, which began with a January 2012 field hearing. Although it acknowledges that demand exists for small dollar credit products, that such products can be helpful for consumers, and that alternatives may not be available, the CFPB concludes that such products are only appropriate in limited circumstances and faults lenders for not determining whether the products are suitable for each customer. The CFPB paper does not propose any rule or guidance, but is instead intended to present a clear statement of CFPB concerns. The paper notes that a related CFPB study of online payday loans is ongoing. The FDIC and OCC proposed guidance outlines the agencies’ safety and soundness, compliance, and consumer protection concerns about deposit advance products, and sets forth numerous expectations, including with regard to consumer eligibility, capital adequacy, fees, compliance, management oversight, and third-party relationships. For example, under the guidance the agencies would expect banks to offer a deposit advance product only to customers who (i) have at least a six month relationship with the bank, (ii) do not have any delinquent or adversely classified credits, and (iii) meet specific financial capacity standards. The guidance also would require, among other things, that (i) each deposit advance loan be repaid in full before the extension of a subsequent loan, (ii) banks refrain from offering more than one loan per monthly statement cycle and provide a cooling-off period of at least one monthly statement cycle after the repayment of a loan before another advance is extended, and (iii) banks reevaluate customer eligibility every six months.
CFPB Proposes Changes to Qualified Mortgage and Mortgage Servicing Rules
On April 19, the CFPB proposed a rule to amend and clarify certain provisions of its final qualified mortgage rule and final mortgage servicing rule. The proposal addresses (i) preemption issues with regard to Regulation X’s servicing provisions, (ii) the small servicer exemption from certain of the new servicing standards, (iii) the use of government-sponsored enterprise and federal agency purchase, guarantee, or insurance eligibility for determining qualified mortgage status, and (iv) the determination of debt and income for purposes of originating qualified mortgages. With regard to small servicers, the proposal would clarify which mortgage loans to consider in determining small servicer status and the application of the small servicer exemption to servicer/affiliate and master servicer/subservicer relationships. It would exclude from consideration mortgage loans voluntarily serviced for an unaffiliated entity without remuneration, reverse mortgages, and mortgage loans secured by a consumer’s interest in timeshare plans. With regard to debt-to-income ratio assessments for purposes of offering qualified mortgages, the rule would amend language related to employment record and income, obtaining business credit reports and other issues related to self-employed borrowers, and the treatment of Social Security and rental income.
CFPB Announces Organization, Senior Personnel Changes
On April 22, the CFPB announced the creation of the Office of Financial Institutions and Business Liaison, which will interface with bank and nonbank trade associations, financial institutions, and other businesses. The new office will be led by Dan Smith, who previously served as the Director for Industry and State Relations at Freddie Mac. The CFPB also announced that Catherine Galicia will serve as Assistant Director for Legislative Affairs. Ms. Galicia most recently served as Senior Counsel for the Senate Committee on Banking, Housing and Urban Affairs, where she helped draft the consumer protection provisions of the Dodd-Frank Act. She replaces Lisa Konwinski, who will become Deputy Associate Director for External Affairs. In addition, Hubert “Skip” Humphrey will transition from his role as Assistant Director in the Office of Older Americans to Senior Liaison Officer, focusing on expanding the Office’s efforts to build strong working relationships with state, local, public and private organizations.
CFPB Issues Final Preemption Determination for Maine, Tennessee Unclaimed Gift Card Laws
On April 19, the CFPB issued a final preemption determination regarding whether the Electronic Fund Transfer Act (EFTA) and Regulation E preempt certain unclaimed gift card laws in Maine and Tennessee. The EFTA, as implemented by Regulation E, generally prohibits any person from issuing a gift certificate, store gift card, or general-use prepaid card with an expiration date, though under certain conditions, the card may have an expiration date so long as it is at least five years after the date of issuance (or five years after the date that funds were last loaded). The CFPB determined that the Maine law does not interfere with a consumer’s ability to use a gift cards at point-of-sale for at least as long as guaranteed by the EFTA and Regulation E because it requires the issuer to honor the gift card on presentation indefinitely even if the unused value has been transferred to the state. For Tennessee, the CFPB reached the opposite conclusion because the Tennessee provision permits issuers to decline to honor gift cards as soon as two years after issuance. According to the CFPB, the Tennessee law is inconsistent with federal law because, in effect, the provision allows funds to expire sooner than is permitted under EFTA and Regulation E.
Senators Raise Concerns about CFPB's Data Collection
On April 23, the Senate Banking Committee held a hearing during which CFPB Director Richard Cordray testified on the CFPB’s semiannual report to Congress. A substantial portion of the hearing focused on the CFPB’s collection and use of data. Republican committee members led by Ranking Member Mike Crapo (R-ID) criticized the CFPB’s data collection efforts and its developing ability to “watch” consumers, and questioned the CFPB’s legal authority to collect data that could be reverse engineered to connect with specific consumers. Mr. Cordray explained that “big data” is the cutting edge of research in every field and that the CFPB needs to keep pace with financial institutions. According to Mr. Cordray (i) the CFPB’s data are not connected to individuals (aside from complaint data) and are “anonymized”, (ii) much of the data come commercial resources already accessible to firms, (iii) the CFPB obtains certain data from the same sources other regulators have in the past, and (iv) all of the data are essential to the CFPB’s ability to carry out its congressionally mandated work, including rulewriting, reporting to Congress, and undertaking other studies. The hearing also covered numerous other topics including (i) the impact of CFPB’s mortgage rules on small institutions, (ii) the CFPB’s collection and assessment of consumer complaints, (iii) coordination of examinations and information requests among federal and state regulators, and (iv) the status of the CFPB’s arbitration study, portions of which the CFPB may release this year.
House Committee Refuses to Allow CFPB Director to Appear
On April 22, House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent letters to CFPB Director Richard Cordray and CFPB General Counsel Meredith Fuchs stating that the House Financial Services Committee cannot allow Director Cordray to testify on the CFPB’s semiannual report, as the Committee has in the past, because no nominee for CFPB Director has been confirmed. Citing the D.C. Circuit’s January 2013 decision in Noel Canning v. NLRB, which invalidated three presidential appointments to the NLRB, Mr. Hensarling asserted that “[a]bsent contrary guidance form the United States Supreme Court, Mr. Cordray does not meet the statutory requirements of a validly-serving Director” and the committee cannot legally accept testimony from him. Mr. Hensarling further indicated that the committee is not relinquishing its oversight role and expects the CFPB to make other employees and information available upon request. Committee Ranking Member Maxine Waters (D-CA) sent a letter one day later to the Chairman, stating that she will use the rules of the committee to allow Director Cordray to testify if the Chairman does not reverse his position.
Obama Administration Seeks Supreme Court Review of Recess Appointment Decision
On April 25, the DOJ and the National Labor Relations Board (NLRB) filed a petition seeking U.S. Supreme Court review of the D.C. Circuit Court’s January 25, 2013 decision invalidating the appointment of three NLRB members. Nat’l Labor Rel. Bd. v. Noel Canning, No. 12-1281 (cert. pet. filed, Apr. 25, 2013). The D.C. Circuit held that appointments to the NLRB made by President Obama in January 2012 during a purported Senate recess were unconstitutional. 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. The petition asks the Court to resolve two questions: (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. If the Court accepts review of the case, it likely would be heard during the Court’s next session, which begins in October 2013.
CFPB Proposes Escrow Rule Amendments, Publishes Escrow Rule Compliance Guide
On April 12, the CFPB proposed a rule to amend aspects of its January 10, 2013 final rule on escrow account requirements for first-lien higher-priced mortgage loans (HPMLs). That rule expands existing escrow requirements for such loans and creates a new exemption for small creditors that operate predominantly in rural or underserved areas. The proposal explains that the CFPB did not intend for the escrow rule to state that the CFPB will designate or determine which counties are rural or underserved. Instead, the CFPB intended to require determinations of rural or underserved status to be made by creditors, but also intended for the CFPB to apply both tests to each U.S. county and publish an annual list of counties that satisfy either test for a given calendar year, which creditors may rely upon as a safe harbor. Further, the CFPB proposes clarifications to how rural or underserved status may be determined. The proposal notes that the amended factors also will apply to three other CFPB mortgage rules that provide rural and underserved exemptions. Finally, the proposal (i) notes that the final escrow rule inadvertently removed existing language that provided certain protections related to a consumer’s ability to repay and prepayment penalties for HPMLs, and (ii) seeks to establish a temporary provision to ensure the removed protections remain in effect until the expanded HPML protections take effect on January 10, 2014. The CFPB is accepting comments on the proposed amendments for 15 days following publication in the Federal Register. On April 18, the CFPB published a guide to help small entities comply with the escrow rule. More broadly, the CFPB believes the guide provides an “easy-to-use” summary of the rule for all creditors, as well as servicing market participants, software providers, and other creditor business partners. As with another compliance guide released last week, the CFPB notes that the guide is not a substitute for the rule and the Official Interpretations and does not consider other laws that may apply to the maintenance and administration of escrow accounts.
CFPB Announces Field Hearing on Student Loan Issues
On April 18, the CFPB announced a field hearing about student loan issues, to be held in Miami-Dade County on May 8, 2013. The CFPB has not yet announced witnesses but has stated the event will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives, and members of the public. In the past, the CFPB has made policy announcements in connection with field hearings. On April 8, the comment period closed on a CFPB notice and request for information regarding policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.” The CFPB also recently proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The comment period for that proposal does not close until May 28, 2013.