InfoBytes Blog

CFPB Proposes To Supervise Larger Nonbank International Money Transmitters

On January 23, the CFPB proposed a rule that would allow the agency to supervise nonbank “larger participants” in the international money transfer market. The proposed rule defines “larger participant” to include any entity that provides one million or more international money transfers annually, which the CFPB estimates will extend oversight to roughly 25 of the largest providers in the market. Providers that do not meet the million-transfer threshold may still be subject to the CFPB’s supervisory authority if the Bureau has reasonable cause to determine they pose risk to consumers. Although the CFPB proposes to use aggregate annual international money transfers as the criterion for establishing which entities are “larger participants” of the international money transfer market, the CFPB also considered and has requested comment on use of annual receipts from international money transfers and annual transmitted dollar volume as potential alternatives.

The CFPB suggests that examinations of such providers will focus on compliance with the Remittance Rule—particularly with respect to new requirements addressing disclosures, cancellation options, and error corrections—and that the agency will “coordinate [examinations] with appropriate State regulatory authorities.” The CFPB released examination procedures for use in assessing compliance with the remittance transfer requirements last year.

Dodd-Frank granted the CFPB authority to supervise “larger participants” in the consumer financial space, as defined by rule. The agency has already finalized similar rules covering “larger participants” in student loan servicing, debt collection, and consumer reporting markets. The proposal, if finalized, would be the fourth larger-participant rule adopted by the CFPB.

A CFPB factsheet on the proposal is available here. The CFPB will accept comments for 60 days from publication of the proposed rule in the Federal Register.

CFPB Examination Nonbank Supervision Electronic Fund Transfer Money Service / Money Transmitters Agency Rule-Making & Guidance

CFPB Finalizes "Larger Participant" Rule For Student Loan Servicing, Updates Exam Procedures

On December 3, the CFPB issued a final rule that will allow the Bureau to supervise certain nonbank student loan servicers for the first time. The CFPB already oversees student loan servicing at the largest banks. The new rule will allow the Bureau to also oversee “larger participants” in federal and private loan servicing, defined as any nonbank student loan servicer that handles more than one million borrower accounts. The Bureau estimates that its final rule will allow supervision of the seven largest student loan servicers, responsible for servicing the loans of more than 49 million borrower accounts. The final rule takes effect on March 1, 2014.

Several commenters to the Bureau’s initial proposal requested further clarification of what constitutes an “account.” The final rule, like the proposed rule issued on March 28, 2013, considers each separate stream of fees to which a servicer is entitled for servicing post-secondary education loans with respect to a given student or prior student to be an account. Commenters also requested further clarification of the inclusions and exclusions implicit in this definition. The Bureau declined to make any substantive changes and instead adopted its proposed definitions with only technical changes.

The final rule does adopt several adjustments to the proposed definition of “student loan servicing.” The Bureau changed the proposed definition to address comments related to the use of a lockbox and similar services, agreeing that the function of merely receiving and remitting payments without handling borrowers’ accounts should not itself be considered “student loan servicing” for purposes of the final rule. The final rule also further clarifies that the purpose of an interaction with a borrower is important for determining whether it is “student loan servicing” and that activities to prevent default arising from post-secondary education loans are only included if conducted to facilitate the core servicing activities identified in the definition of “student loan servicing.” In addition, the Bureau adjusted the clause of the definition that addresses periods when payments are not required on the loan to make clear that it intends the clause to apply during all periods when no payment is required on a loan, including, for example, periods of forbearance.

The Bureau did not receive any objections to the proposed method of aggregating accounts of affiliated companies for the purpose of calculating volume and therefore adopts the aggregation method as proposed. The final rule also adopts the proposed threshold of one million accounts for the student loan servicing market, despite numerous comments requesting an alternate threshold for qualifying entities as “larger participants.”

On the same date, the CFPB released updated student loan examination procedures, which the Bureau revised to account for examination of nonbank servicers under the larger participant rule. In addition, the revised procedures prepare examiners to identify potential violations outside of consumer financial service laws applicable to servicers and administered by the CFPB, including potential violations of certain Servicemember Civil Relief Act (SCRA) requirements. The procedures also were revised to emphasize student loan servicing transfer and repayment issues, two issues the CFPB has highlighted as areas of concern over the past year.

CFPB Nonbank Supervision Student Lending

Second Annual CFPB Ombudsman Report Recommends Exam Changes

On December 3, the CFPB Ombudsman’s Office submitted its second annual report to the Director of the CFPB. The report contains an update on the systemic recommendations made last year and new recommendations stemming from the Ombudsman’s review of (i) how the CFPB shares information, (ii) caller experience with the CFPB contact center, and (iii) the supervisory examination process. The Ombudsman’s recommendations relate primarily to further standardizing and clarifying what a financial entity may expect throughout the examination lifecycle and to ensuring industry and consumer access to CFPB information in a consistent and timely manner. According to the Ombudsman, the Bureau was receptive to all suggestions and feedback.

Specifically, the Ombudsman recommended that the CFPB cite to the examination manual in written communications to examinees; describe at the onset what the financial entity can expect to receive at the end of the examination process; provide updates on examination status at regular intervals after the onsite portion of examinations; and better inform financial entities about the methods available for elevating examination concerns. The Ombudsman also recommended that the CFPB add a digest to all updates to consumerfinance.gov, along with more user-friendly subscription “sign up” options; maintain a public events calendar and announce events with consistent minimal lead time; make basic information about the CFPB speaker request process more accessible; and explain to consumers contacting the CFPB contact center that providing an email address will result in consumer complaint notifications solely via email.

In addition, the report summarizes and identifies trends in the individual inquiries submitted to the Ombudsman during the review period. The majority of inquiries related to the consumer-complaint process, and more than half of the consumer complaints received concerned mortgages. The report also addresses growth within the Ombudsman’s Office since last year and the Ombudsman’s external outreach efforts and internal dialogue with CFPB leaders across divisions and offices.

CFPB Examination Nonbank Supervision Bank Supervision

CFPB Announces First Enforcement Action Against Payday Lender

On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.

Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.

Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.

In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau.  First, robo-signing practices are illegal wherever they occur, and they need to stop – period.  Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed.   Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”

CFPB Payday Lending Nonbank Supervision Debt Collection Enforcement Military Lending Act Online Lending

Report On CFPB's Auto Finance Forum

This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.

Some of the highlights include:

• Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
• Much of the discussion focused on potential alternatives to the current dealer markup system.  The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
• There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences.  Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups.  When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
• Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines.  The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same.  The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
• Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.

Additional detail from each panel follows. Please note that these details are based on notes taken during the event and could differ from actual statements made during the event. The entire report is subject to alteration or clarification, particularly if a transcript or archived video are made available.

Opening Remarks

Director Cordray opened the forum. He stressed the importance of vehicles to individual consumers and to the broader economy. He stated that some consumers may be subject to discrimination that may result in millions of dollars in consumer harm each year.

As he did in a Senate hearing earlier this week, Mr. Cordray emphasized that neither the 2012 fair lending bulletin nor the March 2013 auto finance bulletin were new; they simply served as a reminder to finance companies of liability under ECOA, particularly with regard to indirect auto finance.

He stated that the CFPB uses proven statistical methods and publicly available data to assess the probability that a particular customer belongs to a particular racial group or is of a particular national origin.

The March bulletin provided guidance about steps auto finance companies might consider taking to ensure they are ECOA-compliant. One approach described by the Director is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. The bulletin also stated that finance companies could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup. Director Cordray stated that such mechanisms include: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns.

He acknowledged that dealers are entitled to fair compensation, but stressed that the CFPB wants to make sure the process is transparent. He stated it is worth considering further how the disclosure of markup practices actually works.

Panel 1

Patrice Ficklin (CFPB): Ms. Ficklin described and defended the March bulletin, asserting that the CFPB did not provide any new legal interpretations, but rather reminded finance companies about existing law. She noted and defended the CFPB’s proxy methodology, as described recently in letters to Congress, but did not provide additional detail. She stated that the CFPB’s supervisory and enforcement work in this area is more substantial than it was in March, and continues to indicate fair lending risk—the CFPB has found “substantial and statistically significant” disparities between African Americans, Hispanics, and Asians and similarly situated white borrowers.  The CFPB has identified numerous institutions with disparities over 10 basis points, and several over 20 or 30 basis points.

Going forward, the CFPB is committed to continuing a constructive dialogue with industry, a dialogue in which alternative compensation structures has been the key theme to date.

Melissa Yap (FRB): Ms. Yap described the Fed’s ECOA authority post-Dodd-Frank. She stated that pricing remains the greatest area of risk. The Fed employs the 2009 interagency fair lending procedures and looks at (i) financial incentives, (ii) the amount of discretion, and (iii) disparities in note rate and markup over buy rate. She described the Fed’s proxy methodology, which differs slightly from the CFPB’s, but which the Fed believes is appropriate for the size and complexity of the institutions it supervises. For race, the Fed geocodes and defines majority-minority census tracts as those over 50%. She defended name proxies for gender and ethnicity, stating they are as likely to over count as under count. She also referenced two webinars the Fed and other hosted this year, which included discussion of these issues, see e.g., August webinar.

Steven Rosenbaum (DOJ): Mr. Rosenbaum described the DOJ’s broad authority to enforce ECOA and noted that it has a number of investigations ongoing, including joint investigations with the CFPB. He stated that Congress created the issue that requires the use of proxies, given that ECOA protects classes in consumer lending but does not require data collection similar to HMDA. The DOJ is using the CFPB’s method on joint investigations, but it continues to “kick the tires” on its methods and analyses and invites finance companies to do the same.

He stated, twice, that ECOA does not require nor prohibit discretion in pricing; risk from discretion can be managed, for example by setting caps or requiring justifications and documentation.

Mr. Rosenbaum added that the DOJ also enforces SCRA, and stated that if finance companies have not thought about SCRA compliance in their auto finance programs, they ought to do so.  He also acknowledged the DOJ’s ongoing investigation of buy-here, pay-here dealers, though the issues differ in that those dealers may be offering predatory products in minority neighborhoods.

Keith Ernst (FDIC): Mr. Ernst similarly described the FDIC’s jurisdiction and addressed in broad terms its approach to indirect auto financing. He stated that all examination and statistical results that are consistent with a violation are subject to independent review and all statistical analyses are reviewed by a team. The FDIC provides institutions with the results, data, and methods and provides an opportunity for questions and other feedback. Mr. Ernst also noted that this dialogue includes providing institutions with the opportunity to provide non-discriminatory explanations for statistical disparities. According to Mr. Ernst, the FDIC has amended analyses as part of these processes. The FDIC believes the vast majority of its banks are effectively managing fair lending risk in auto finance, but that examinations can reveal compliance management systems concerns that fall short of a fair lending violation.

Tonya Sweat (NCUA): Ms. Sweat stated that the practices identified in the CFPB bulletin are not prevalent in the credit union industry, but NCUA still examines for fair lending risk and safety and soundness. The NCUA advises credit unions that sound practices include sampling and testing of loans, particularly to ensure third-party compliance. Credit unions should implement written policies that require written approval of any changes to underwriting criteria.

Donna Murphy (OCC): Ms. Murphy provided only brief comments, and generally referenced and incorporated what others had said on proxies. The OCC is revising and updating its methods for fair lending risk assessments and scoping based on changes in markets, the legal environment, and technology. These changes are intended to result in more consistency in examinations and the ability of the OCC to conduct more analysis across banks.  For auto finance, the OCC is looking at how it gathers factors regarding use of third-parties. Ms. Murphy also noted the OCC’s attention to SCRA, stating that last year it revised examination procedures and enhanced examiner training for SCRA, including in auto finance, and that those enhancements are reflected in this year’s examination cycle.

Panel 2

The second panel was moderated by the CFPB’s Rohit Chopra and featured remarks from the National Association of Minority Automobile Dealers (NAMAD), the National Consumer Law Center (NCLC), the Consumer for Auto Reliability and Safety (CARS), and the NAACP.

Stuart Rossman from the NCLC described his part in a series of class actions against auto finance companies in the 2000s. Those actions, as he described, resulted in markup caps, the last of which sunsetted last year. He asserted that the market forces that led to those actions persist, as do fundamental problems in discretionary pricing policies.  Citing more restrictive class action requirements and less access to critical data, he called on the CFPB to take the lead in enforcement.

NAMAD acknowledged the possibility that bad actors exist in the market, but argued against eliminating discretion. NAMAD called for approval and documentation requirements for discretionary programs. NAMAD supports uniform data collection, enhanced proxies, training and education for dealers and consumers.

CARS noted California’s markup cap statute and reported that a proposal for a ballot proposition outlawing dealer discretion has been filed with the state attorney general. CARS also encouraged the CFPB to look at the impact of percentage rate markups in the motor home market.

Panel 3

Bill Himpler, American Financial Services Association (AFSA): Mr. Himpler stressed that the current indirect auto finance model is efficient and proven. He noted that auto finance complaints are at record lows, and pointed out that even the CFPB’s database shows a small number of complaints compared to other markets.  Since the CFPB has refused to assess the impact of a broad market shift towards flat fee compensation structures or other alternatives, AFSA is commissioning an independent study to assess the present model and evaluate costs and benefits of alternative models.

Chris Kukla, Center for Responsible Lending (CRL): Mr. Kukla countered that the current compensation model gives rise to potential discrimination and should be ended. Consumers have no ability to know what part of their rate is based on risk and what is due to compensation. He defended the CRL’s 2011 study on indirect auto finance from attacks, including those that followed Senator Warren’s reference to the study during a Senate hearing earlier this week.  That study concluded that consumers pay $26 billion each year in markups. Mr. Kukla explained that CRL never said consumers would not otherwise be charged a portion of those fees, and only sought to define the size of the market. He referenced other research that indicates a market-wide adoption of flat fee arrangements would have little impact on dealers.

Paul Metrey, National Automobile Dealers Association (NADA): Mr. Metrey outlined a preferred approach by federal regulators to unintentional disparate impact discrimination: (i) understand the market, (ii) develop appropriate methods, and (iii) if present, address in a manner that assists consumers. He called for the CFPB to pursue more open processes on this issue, including by identifying its complete statistical methodology and fully accounting for neutral legitimate factors. He presented NADA’s case against flat fee arrangements, in part on the basis that dealers still will have discretion to select among finance sources that may offer different flat fee arrangements.

Rich Riese, American Bankers Association (ABA): Mr. Riese challenged the CFPB’s post hoc approach to obtaining input on its auto finance program, stating that the forum does not substitute for the kind of engagement the issue requires. He argued that the guidance should have been proposed and subject to notice and comment.  The ABA believes proxies should be viewed with skepticism; they can be useful to identify risks and can be useful in compliance programs, but they should not be used to prove violations. Citing the 1999 interagency exam procedures, he argued that discretion is not an appropriate area to apply disparate impact, and, before straying too much from prior policy, regulators should recognize that Reg. B applies to creditors determination of creditworthiness and the discretion being applied in auto finance is for compensation and is not part of a creditor’s determination of creditworthiness.

The panelists also discussed the comparison of indirect auto finance to the mortgage market, particularly the use of broker yield spread premiums. Mr. Riese pointed out that in the mortgage context, brokers were alleged to have steered borrowers into “bad” loans without considering suitability; that is not the case in the auto market where there are no option arms, teaser rates, etc. Mr. Himpler and Mr. Metrey agreed. Mr. Metrey added that the comparison is apples to oranges—the markets have performed differently; there is nothing going on in auto ABS like there was in MBS. He added that Congress directed an end to yield spread premiums and there has been no similar action in auto, and the Fed tested to see if a fix was necessary but there has been no similar testing in auto.

Mr. Kukla responded that the mechanics may be different, but the impact and incentives are the same.  A broader view of “steering” covers any instance in which a consumer is provided a loan with less advantageous terms than the consumer otherwise would have received.

FDIC CFPB Nonbank Supervision Federal Reserve OCC NCUA Auto Finance Fair Lending ECOA DOJ Enforcement Bank Supervision

CFPB Issues Report on Examination Findings, Other Supervisory Activities

This afternoon, the CFPB released its summer 2013 Supervisory Highlights report, which covers supervisory activity from November 2012-June 2013.  This is the second such report the CFPB has released; the first report came out in October 2012 and covered activity from July 2011 through September 2012.

The report provides a brief review of the CFPB’s public enforcement actions and non-public supervisory actions and developments in the supervision program, including the issuance of bulletins, the issuance of new fair lending examination procedures, and the reorganization of supervision staff. The report also reviews the CFPB’s risk-based approach to examinations, including the “Institution Product Lines” approach, and outlines the factors that influence examination priorities.  The report does not identify any planned supervisory activities.

The bulk of the report, however, summarizes the CFPB’s examination findings. Key findings are discussed below.

Compliance Management Systems (CMS)

• CMS Elements
  • Although the report states no specific CMS structure is required, it also states that, based on the CFPB’s supervisory experience, an effective CMS commonly has the following components:  (i) board and management oversight; (ii) compliance program; (iii) consumer complaint management program; and (iv) independent compliance audit.  The report provides additional discussion on each component.
• Nonbanks
  • The report states that nonbanks are more likely than banks to lack a robust CMS. The CFPB found one or more instances of nonbanks that lack formal policies and procedures, have not developed a consumer compliance program, or do not conduct independent consumer compliance audits. According to the CFPB, the lack of an effective CMS has, in a number of instances, resulted in violations of Federal consumer financial laws. In these instances, the CFPB has required appropriate corrective action.
  • The report notes that CMS deficiencies in nonbanks are generally related to the supervised entity’s lacking a CMS structure altogether. CFPB examinations have found instances where nonbanks do not have a separate compliance function; rather, compliance is embedded in the business line, which can lead to deficiencies.
• Banks
  • The CFPB found that banks generally had an adequate CMS structure; however, several institutions lacked one or more of the components of an effective CMS.
  • The most common weakness the CFPB identified in banks is a deficient system of periodic monitoring and independent compliance audits. An entity that lacks periodic monitoring and instead relies on an annual independent compliance audit to identify regulatory violations and CMS deficiencies increases its risk that violations and weaknesses will go undetected for long periods of time, potentially leading to multiple regulatory violations and increased consumer harm.

   

Mortgage Servicing

• Servicing Transfers
  • Examiners found noncompliance with RESPA’s requirement to provide disclosures to consumers about transfers of the servicing of their loans.
  • Examiners also noted lack of controls relating to the review and handling of key documents – such as loan modification applications, trial modification agreements, and other loss mitigation agreements – necessary to ensure the proper transfer of servicing responsibilities for a loan.
  • Examiners noted that one servicer did not review any individual documents that the prior servicer had transferred, such as trial loan modification agreements.
  • At another servicer, examiners determined that documentation the servicer received in the transfer was not organized or labeled, and as a result, the servicer did not utilize loss mitigation information provided to the prior servicer in its loss mitigation efforts.
• Payment Processing
  • A servicer provided inadequate notice to borrowers of a change in the address to which they should send payments, which constituted a potentially unfair practice impacting thousands of borrowers. The entity acted promptly to ensure that it did not impose late fees or other delinquency fees, or any other negative consequences.
  • A servicer decided – without notice to borrowers – to delay property tax payments from December of one year to January of the next, resulting in the borrowers’ inability to claim a tax deduction for the prior year, which the CFPB cited as an unfair practice.
  • A servicer paid certain property taxes late, in violation of RESPA. The CFPB directed the servicer to pay any fees associated with the late payment and to investigate whether consumers experienced any additional harm as a result of the late payments. Further, at the CFPB’s direction, the servicer will notify consumers of the late payment and solicit information about any additional harm. If any such harm is identified, the servicer will remediate it.
  • Examiners have found violations of the Homeowners Protection Act (HPA) at several servicers. In one examination, examiners found excessive delays in processing borrower requests for private mortgage insurance (PMI) cancellation. Additionally, in cases where PMI was canceled, the servicer improperly handled unearned PMI premiums in violation of the HPA. The CFPB required the servicer to amend its policies and procedures relating to PMI cancellation. The servicer also must conduct a review to determine whether borrowers were subject to additional harm caused by delays in processing PMI cancellations.
  • Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees. Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements. Servicers have refunded these fees to borrowers.
• Loss Mitigation
  • Examiners have found issues related to: (i) inconsistent borrower solicitation and communication; (ii) inconsistent loss mitigation underwriting; (iii) inconsistent waivers of certain fees or interest charges; (iii) long application review periods; (iv) missing denial notices; (v) incomplete and disorganized servicing files; (vi) incomplete written policies and procedures; and (v) lack of quality assurance on underwriting decisions.
  • The CFPB states that weak compliance management surrounding loss mitigation processes creates fair lending risk and that it expects that entities servicing mortgage loans will implement fair lending policies, procedures, and controls to ensure that they are ECOA compliant. The CFPB states that servicers should conduct fair lending training for loss mitigation staff and engage in effective and timely fair lending risk assessments, compliance monitoring, and testing.

Fair Lending

• ECOA
  • The report states that some lenders are not complying with various aspects of the adverse action notification requirements under ECOA and Regulation B. The CFPB has found instances where supervised entities violated ECOA and Regulation B by failing to comply with either the provision, content, or timing requirements for adverse action notices and has directed the entities to develop and implement plans to ensure that the appropriate monitoring and internal controls are in place to detect and prevent future violations.
  • The report specifically notes that loan servicers should have systems in place to determine whether borrowers who apply for a change in the terms of credit are entitled to adverse action notices. The CFPB notes that some institutions may find it helpful to arrange for independent, internal reviews of loan files to ensure that the documentation supports the action taken and that all timing requirements are met. In addition, the report states that institutions should provide comprehensive periodic training to management and staff regarding compliance with ECOA and Regulation B, including compliance with provisions on adverse action notices.

CFPB Nonbank Supervision Mortgage Servicing Fair Lending Compliance Bank Supervision Loss Mitigation

August Beach Read Series: CFPB's Supervision of Student Lending and Servicing Takes Shape

Over the past year, the CFPB has started to publicly outline its supervisory approach to student lending and servicing. In doing so, it repeatedly has identified similarities between the lending practices that led to the subprime mortgage crisis and the escalating default rate in the burgeoning level of student loan debt. Rather than wait for a student loan crisis, the CFPB is attempting to put in place a program it hopes can help prevent one.

As part of that program, at the end of 2012, the CFPB released its student loan examination procedures. Also in 2012 the CFPB released two reports (July 2012 and October 2012) aimed at curbing purported violations of law, and it has continued to highlight student loan issues this year, including in a recent update on student loan complaints. In addition, in March of 2013, partly to address the complaints of student loan debtors, the CFPB announced its intention to supervise and examine the larger non-bank education loan servicers. That rule should be finalized next month.

Student lenders and servicers also should take note of the CFPB’s recently issued debt collection guidance, which, among other things, holds 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.  Many of the guideposts set forth in the guidance reflect the standards to which third-party debt collectors are held accountable under the FDCPA.

For more information about the CFPB’s debt collection guidance, please see a recent article by BuckleySandler Partner Valerie Hletko. Over the coming months, look for additional articles from BuckleySandler attorneys about the CFPB’s activities in the area of student loans and other non-mortgage consumer financial products and services.

CFPB Examination Nonbank Supervision Student Lending Debt Collection Bank Supervision

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 Nonbank Supervision Single-Director Structure

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.

CFPB Nonbank Supervision

FTC Chairwoman Announces Senior Personnel Changes

On June 17, FTC Chairwoman Edith Ramirez named several senior staff members, including Jessica Rich as Director of the Bureau of Consumer Protection. Ms. Rich has been with the FTC for more than 20 years and most recently served as Associate Director of the Division of Financial Practices. Prior to that, Ms. Rich was a Deputy Director of the Bureau and has served as the Acting Associate Director and Assistant Director of the Bureau’s Division of Privacy and Identity Protection, among numerous other positions. Ms. Ramirez also named Jonathan E. Nuechterlein as General Counsel. He joins the agency from a large law firm, where he was a partner and chair of the firm’s communications, privacy, and Internet law practice group. He previously was Deputy General Counsel for the FCC and an Assistant to the Solicitor General at the U.S. Department of Justice.

FTC Nonbank Supervision Privacy/Cyber Risk & Data Security