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CFPB Publishes White Paper on Largest Consumer Reporting Agencies
On December 13, the CFPB issued a white paper on its review of 2011 data to determine how the three largest consumer reporting agencies (CRAs) manage consumer data and complaints. According to the CFPB press release, its review of the data revealed that more than half of the trade lines (the accounts in a consumer’s name reported by creditors) in the CRAs databases are supplied by the credit card industry, with 40 percent related to bank cards, such as general credit cards, and 18 percent from retail credit cards. Only seven percent comes from mortgage lenders or servicers, and only four percent comes from auto lenders. The CFPB also reported that (i) almost 40 percent of disputes have to do with collections, and debt in collection is five times more likely to be disputed than mortgage information, (ii) fewer than one in five people obtain copies of their credit report each year, (iii) most information contained in credit reports comes from a few large companies, and (iv) most complaints are forwarded to the furnishers that provided the original information, while the CRAs resolve an average of 15 percent of consumer disputed items internally. The report adds that certain documentation provided by consumers to support their cases may not be getting passed on to the data furnishers for them to properly investigate and report back to the CRA, but the report does not offer any policy prescriptions.
Special Alert: Congress Passes Bill Extending Privilege Waiver Protections to CFPB
Yesterday, the Senate passed H.R. 4014, an important bill that clarifies that privileged materials produced to the Consumer Financial Protection Bureau (CFPB) retain their privileged character as to third parties. Because the House passed the same bill in March, the measure will now go to President Obama, who is expected to sign it.
The bill amends 12 U.S.C. § 1828(x) to place the Bureau on equal footing with the banking agencies—a so-called “legislative fix” that many observers have called for to address concerns that the Dodd-Frank Act did not provide clear guidance with respect to the status of privileged material provided to the CFPB. The amended statutory provision would read:
The submission by any person of any information to the Bureau of Consumer Financial Protection, any Federal banking agency, State bank supervisor, or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such Bureau, agency, supervisor, or authority shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such Bureau, agency, supervisor, or authority.
The language “any person” makes clear that the bill applies to submissions by banks, non-banks, and individuals. The bill also amends 12 U.S.C. § 1821(t)(2)(A) to allow the Bureau to share information with other federal agencies without waiving “any privilege applicable” to that information.
Once it receives the President’s signature, the bill will partly resolve some long-standing debates over the effect of producing privileged information to the CFPB. In a January 2012 bulletin, the Bureau first argued that the production of privileged information to the agency would not waive any applicable privileges. Many supervised entities were skeptical, given the absence of any non-waiver statute or regulation applicable to the CFPB. Just a few months later, the agency finalized a regulation that also purported to preserve such privileges. But again, several groups remained concerned that the CFPB’s assurances were not enough to avoid waiver.
H.R. 4014 now offers some measure of comfort to CFPB-supervised entities, but a number of questions remain. For instance:
- Although the amendment to Section 1821(t) explains how privileges are affected when the CFPB shares information with federal agencies, it does not say how privileges will be affected if the CFPB shares such information with state and local authorities—as it has said it intends to do and it has agreed to do in various compacts with state regulatory agencies and enforcement officials.
- The bill does not speak at all to the question of whether, as the CFPB has maintained, it is entitled to obtain privileged material in the first place. The bill only provides that the transmitter may still assert privilege as to third parties if such material is transmitted to the CFPB. The CFPB to date has aggressively sought privileged and attorney work product material relating to institutions’ fair lending compliance efforts. Where institutions turn that material over, the bill would provide no protection against the CFPB’s use of the material to prosecute the institution.
- It is not clear whether the newly-amended Section 1828(x) will apply retroactively to protect confidential information that has already been submitted to the CFPB.
BuckleySandler will continue to monitor these issues. In the meantime, questions regarding the matters discussed in this alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
CFPB Ombudsman Issues First Annual Report, Makes Recommendation Regarding CFPB Supervisory Examination Process
On November 30, the CFPB Ombudsman’s Office submitted its first annual report to the Director of the CFPB. It describes the establishment of the office and highlights the office’s activities from July 2011 through September 30, 2012. The report also identifies two “systemic issues” that the Ombudsman reviewed: (i) consumer understanding of the CFPB complaint process and (ii) the presence of enforcement attorneys at supervisory examinations. Almost 40 percent of the questions the Ombudsman received from consumers related to the CFPB complaint process, so the Ombudsman recommended that the CFPB provide more information to the public about the complaint process using multiple methods to communicate that information. The Ombudsman also heard concerns regarding the CFPB’s policy that enforcement attorneys participate in supervisory examinations. After conducting her own review, the Ombudsman recommended that the CFPB review its implementation of the policy, and until that review is complete, establish ways to clarify the enforcement attorney role at the supervisory examination.
CFPB Reports Examination Findings, Updates Examination Manual, and Details Supervisory Appeals Process
The CFPB today released its first periodic Supervisory Highlights publication, along with an updated examination manual and a bulletin about the Bureau’s examination appeals process.
The Supervisory Highlights report describes the CFPB’s supervisory activity from July 2011 through September 2012, including with regard to credit cards, credit reporting, and mortgages, and “signal[s] to all institutions the kinds of activities that should be carefully scrutinized.” During its first year of conducting exams, the CFPB states that it has found compliance management system deficiencies, including with regard to fair lending compliance programs and oversight of affiliate and third-party service providers. The report also reviews nonpublic actions taken to enforce compliance with the CARD Act and FCRA, and identifies several areas of concern for mortgage originators.
Bulletin 2012-07 details the CFPB supervisory appeals process, and addresses confidentiality and the role of the CFPB Ombudsman. Finally, the updated Supervision and Examination Manual incorporates the various procedures issued since the manual first was published in October 2011, e.g. the payday lending and consumer reporting exam procedures. The updated manual also includes new references to the Code of Federal Regulations to reflect the republishing of federal consumer finance law regulations under the CFPB’s authority.
CFPB Finalizes Debt Collector "Larger Participant" Rule
On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.
Federal Regulators Finalize Bank Stress Test Rules
On October 9, the OCC and the FDIC each finalized a rule to implement the company-run stress test requirements of the Dodd-Frank Act. The stress tests are exercises designed to gauge the losses that covered institutions might experience under hypothetical scenarios established by the regulators. The OCC and FDIC rules apply to covered institutions with average total consolidated assets greater than $10 billion. Covered institutions with assets over $50 billion are subject to the stress test requirements immediately. They will be required to submit results in January 2013 of stress tests based on data as of September 30, 2012 and scenarios that the FDIC and the OCC plan to publish next month. Implementation of the stress test requirements for institutions with assets of $10 billion to $50 billion will not begin until October 2013. Also on October 9, the Federal Reserve Board (FRB) finalized two stress test-related rules. The first rule establishes the stress test requirements for bank holding companies, state member banks, and savings and loan companies with more than $10 billion in total consolidated assets. As with the OCC and FDIC rules, the FRB rule delays implementation of stress test requirements for covered institutions with $50 billion or less in assets until the fall of 2013. Additionally, the results of that first test will not have to be publicly disclosed. The second FRB rule establishes the company-run stress test requirements for bank holding companies with $50 billion or more in total consolidated assets, and nonbank financial companies designated as systemically important by the Financial Stability Oversight Council. These institutions are required to conduct two internal stress tests each year, in addition to a stress test performed by the FRB. Like the OCC and the FDIC, the FRB expects to release its stress test scenarios in November.
Special Alert: CFPB Announces First Determination Of A Petition to Modify Or Set Aside A Civil Investigative Demand
On September 20, the Consumer Financial Protection Bureau issued its first Decision and Order on a petition to modify or set aside a civil investigative demand (CID). The petition challenged a CID issued to a non-bank mortgage servicer (the Company) seeking responses to 21 interrogatories and 33 document requests. CFPB Director Richard Cordray denied the petition in its entirety and ordered the Company to comply with the CID within 21 days. In addition to ruling on the substantive issues relevant to the petition, the Decision and Order demonstrates the importance of including detailed and specific objections in any petition to modify or set aside a CID and the crucial role of the meet-and-confer sessions.
The CID, served on May 22, was issued in connection with the Bureau’s investigation regarding whether ceding premiums from private mortgage insurance companies to captive reinsurance subsidiaries of certain mortgage lenders violates section 8 of the Real Estate Settlement Procedures Act (RESPA). In the petition filed on June 12, the Company argued among other things that the CID (i) did not state the nature of the conduct under the investigation; (ii) was overly broad, unduly burdensome, and irrelevant; and (iii) requested materials going back more than 11 years when RESPA’s statute of limitations was 3 years and the CFPB’s enforcement power cannot be predicated on acts prior to July 21, 2010.
In denying the petition, the Bureau began by explaining that CIDs play a “crucial role” in the Bureau’s ability to carry out its duty to enforce consumer financial laws. It stated that the purpose of CIDs are to “close the [information] gap” between the Bureau and the subject company and/or individual in order for the Bureau to determine whether the investigation is worth pursuing, and if so, to what extent.
The CFPB then set forth the standard it will use to consider and resolve petitions to modify or set aside CIDs, adopting the deferential standard of review relied upon by Circuit Courts of Appeals in proceedings to enforce administrative subpoenas. That standard provides that a CID will be enforced if it satisfies the following requirements: (i) the investigation is for a lawfully authorized purpose; (ii) the information requested is relevant to the investigation; and (iii) procedural requirements are followed. If the Bureau establishes these factors, the CID will be enforced unless the petitioner demonstrates the CID imposes an “undue burden” or constitutes an abuse of process.
With respect to the Company’s first issue, that the CID failed to state the nature of the conduct at issue, the Company argued that the CID’s description of the purpose of the investigation was so broad as to encompass every aspect of mortgage lending, and thus did not satisfy the notice requirement established by the Dodd-Frank Act. The Bureau rejected this contention and found that “notice was provided from the outset and repeatedly thereafter” beginning as early as January 3 and through to May 22 in the CID’s “Notification of Purpose.” In support of this finding, the CFPB cited cases standing for the proposition that the subject matter of investigations can be provided generally.
With respect to the Company’s assertion that the CID was an overly broad and unduly burdensome fishing expedition, the Bureau noted that the petition “offered little or no detail to make the kind of showing required to substantiate these claims.” It explained that in order to meet its legal burden, the petitioner needed to show the specific nature and the magnitude of the hardship and state specifically how compliance will harm its business. The Bureau further noted that it already had made substantial modifications to the CID through the meet-and-confer process, and the Bureau’s enforcement team had stated that it was willing to consider other potential limitations.
Finally, with respect to the Company’s objection that the CID sought documents, items, and information exceeding the applicable limitations period, the CFPB maintained that the relevant issue was not whether the information itself was actionable but rather whether that information was relevant to conduct that was actionable. It cited other authority which allowed discovery beyond the statute of limitations and noted the importance of collecting relevant information in order to accurately and completely investigate a matter.
Petitioning a newly-founded government agency in unchartered territories always is a difficult exercise. With the increasing number of CFPB investigations and enforcement actions, that exercise will become even more challenging. In light of the Bureau’s first determination of a petition to modify or set aside a CID, potential CID recipients will be left to wonder: how is the CFPB likely to respond to future petitions of this type? Given its precedential value for potential petitioners, it is important to determine what, if anything, can be gleaned from the CFPB’s determination.
First, the Bureau makes clear that it is incumbent on petitioners to be specific in their objections to a CID. Petitioners must specifically describe the burdens that supplying requested information imposes on the company and how the information sought is irrelevant to the investigation. In fact, the Bureau criticized the petition’s use of “general objections” and summarily dismissed the arguments associated with those objections.
Second, given the deferential standard of review which will be applied to such petitions, the meet-and-confer sessions take on increased importance. The meet-and-confer session is intended as an opportunity to narrow the scope of the requests and close the information gap between the CFPB and the subject of the investigation. As a prerequisite to filing a petition, CID recipients are obligated to confer with the Bureau in a good-faith effort to resolve issues and concerns. In fact, the CFPB’s Rules of Investigations provide that “[t]he Bureau will not consider petitions to set aside or modify civil investigative demands unless the recipient has meaningfully engaged in the meet and confer process described in this subsection and will consider only issues raised during the meet and confer process.” 12 C.F.R. part 1080.6(c)(3) (emphasis added). While the CFPB did not decide whether the Company met this obligation, the Bureau did express its concern to future parties about the importance of approaching this obligation affirmatively and engaging in “a productive discussion that can resolve issues or concerns more effectively.”
CSBS Proposes Uniform Reporting of Authorized Delegates for Money Service Businesses
On September 28, the Conference of State Bank Supervisors (CSBS) proposed a system for state-licensed money service businesses (MSBs) to report information concerning authorized delegates through NMLS. Licensed MSBs are permitted to contract with third-parties-authorized delegates-to perform the function of receiving and dispensing funds on behalf of the MSB. Most state regulators require that MSBs report information regarding their authorized delegates. NMLS currently is expanding to allow state agencies to manage filings by non-mortgage companies, including MSBs. To date, nine states have started to manage or have announced their intent to manage MSB licenses through NMLS. An NMLS working group has determined that the reporting of authorized delegate information is not supported by NMLS' existing platform. The instant proposal (i) identifies new NMLS functionality to facilitate reporting of authorized delegate information, (ii) outlines policies to implement such reporting, and (iii) describes the process by which an MSB would report such information through NMLS. The CSBS has requested comment from licensees and regulatory agencies by November 1, 2012.
CFPB Releases Examination Procedures for Consumer Reporting Agencies
On September 5, the CFPB released procedures to guide its staff in examining “larger participant” consumer reporting agencies (CRAs). In July, the CFPB adopted a rule that will allow it to supervise CRAs with more than $7 million in annual receipts from consumer reporting activities starting September 30, 2012. The procedures outline how examiners should assess a CRA’s compliance with federal requirements, primarily under the Fair Credit Reporting Act, relating to (i) using and providing accurate consumer information, (ii) handling consumer disputes, (iii) providing disclosures to consumers, and (iv) preventing fraud and identity theft. While the procedures focus on issues specific to consumer reporting, they include a module that directs examiners to consider whether a CRA offers any other consumer financial product or service that creates other risks to consumers, particularly with regard to Gramm-Leach-Bliley privacy requirements and potential unfair, deceptive, or abusive acts or practices (UDAAP violations).
Special Feature: Report on the AARMR 23rd Annual Regulatory Conference
The American Association of Residential Mortgage Regulators (AARMR) held its 23rd Annual Regulatory Conference in Boston, Massachusetts from August 14-17, 2012. AARMR is the trade association of state mortgage regulators that coordinates state-level regulation of the mortgage industry and, in partnership with the Conference of State Bank Supervisors (CSBS), created the National Mortgage Licensing System & Registry (NMLS).
The Conference brought together state and federal mortgage regulators, industry professionals, compliance companies, legal professionals, and education providers to discuss the latest developments in mortgage supervision and pressing issues confronting the industry, most notably developments regarding: (i) the SAFE Act and entity level licensing through the NMLS and (ii) the examination, enforcement and rulemaking initiatives of the Consumer Financial Protection Bureau (CFPB).
On August 14, recently appointed NMLS Ombudsman Timothy Siwy, Deputy Secretary for Non-Depository Institutions, Pennsylvania Department of Banking, presided over his first bi-annual NMLS Ombudsman Meeting, which allows NMLS users an opportunity to raise concerns and questions regarding the NMLS. Specifically, the session addressed the following topics, among others:
- Continued discussion of the states potentially issuing (1) “reciprocal licenses” for mortgage loan originators (MLOs) based on similar state education and testing standards, or (2) a 90- to 120-day “transitional license” for MLOs needing additional time to complete a state’s specific MLO requirements;
- “Inactive licenses” for federally registered MLOs, which would allow MLOs not currently employed by a state-licensed entity to obtain and maintain an “Approved-Inactive” status in the NMLS if the MLO otherwise satisfies the state’s MLO licensing requirements;
- The Uniform State Test for MLOs, which is expected to launch in Spring 2013;
- Alleviating “home state” licensure for MLOs, which is where a state requires the MLO to secure a license not because the MLO makes loans to borrowers in the state or secured by property in the state, but rather because the MLOs office is located in the home state;
- Issues facing exempt companies, such as insurance companies, that may be required to obtain entity level approval via NMLS because of certain non-lending activities performed by its employees, e.g., underwriting activities;
- States compelling submission of information from depository institutions to authorize state exemptions via the NMLS when such depository institutions may otherwise be exempt from a state’s mortgage lending law;
- The April 2012 NMLS amendments, including a request for uniformity among states regarding recently-implemented requirements to upload documentation to the NMLS; and
- Suggestions on how to improve the user interface of the NMLS.
Subsequent panel discussions provided more detailed information on several of these topics, and also examined related NMLS issues.
Details regarding the specific issues submitted for comment, as well as accompanying exhibits and an audio recording, will be made available on the NMLS Ombudsman website.
The Conference included several CFPB focused panels, which included presentations from high ranking CFPB officials.
First, on August 15, Edwin Chow, Regional Director, CFPB, West Region, discussed the CFPB’s supervision process for both banks and non-bank lenders with a focus on the recently launched non-bank exams. Mr. Chow stated that the general intention of a CFPB examination is to evaluate a company’s ability to manage its compliance. An entity’s ability to manage its compliance is assessed through the CFPB’s examination approach, which at a macro level includes:
- The CFPB initiating the first point of contact through a preliminary meeting by phone or in-person with the entity;
- Prior to an examination, issuing a letter to the entity requesting information to facilitate fast and efficient review of the entity;
- Throughout the process, coordinating with state regulators of the entity; and
- Following the examination, performing an “exit interview” prior to any finalized action to discuss tentative findings and conclusions and to address how issues may be corrected.
Regardless of the region in which the examination is being conducted, Mr. Chow indicated that the CFPB will strive for uniformity and consistency in its examination approach.
Also, on August 16, Steven Antonakes, Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, and David Bleicken, Acting Deputy Associate Director for Supervision, Enforcement, and Fair Lending, CFPB, provided an update on the CFPB’s Supervision, Enforcement, and Fair Lending division and provided an overview of the CFPB’s enforcement approach. Specifically, the officials indicated that during examinations the CFPB will:
- Focus on harm to consumers, as it weighs heavily into whether the CFPB takes a “punitive” or “instructive” approach in a particular examination, (e.g., the CFPB may consider on a case-by-case basis whether consumer reimbursements are appropriate when there was no actual harm to a particular consumer);
- Continue its efforts to maintain any relevant attorney-client privilege for information disclosed by entities. Following the issuance of its January bulletin and June 28 final rule, the CFPB has asserted that a party may submit information to the CFPB in the supervisory or regulatory process without waiving any applicable privileges;
- Utilize a product-based, rather than institution-based, focus; and
- Utilize real-time information sharing.
While the CFPB touched on the process for making decisions about what constitutes an “abusive” practice under the CFPB’s unfair, deceptive, or abusive acts or practices (UDAAP) authority, the officials declined to comment regarding mortgage-specific practices that the CFPB would generally deem to be “abusive.”
The CFPB expects to issue the first summary of its examination findings this fall.
Finally, during a separate panel on August 16, Peter Carroll, Assistant Director of Mortgage Markets, CFPB provided an overview of the CFPB’s widely-reported rulemakings on the combined TILA/RESPA disclosure form, HOEPA, appraisals, ability to repay and qualified mortgages, mortgage servicing guidelines, and MLO compensation and qualification. Mr. Carroll indicated that next year the CFPB plans to focus on HMDA reporting and reverse mortgages.
In addition to the above, the Conference covered other various federal and state regulatory issues, including the following:
- In the panel “Mortgage Fraud and Other Trends Affecting Housing Finance Federal Housing Finance Agency (FHFA) Office of Inspector General,” representatives of the FHFA-OIG provided an overview of its ongoing audits of mortgage fraud;
- “Mortgage Loan Servicing: Aftermath of National Servicer Settlement/Updates & Lessons” provided an overview of the widely-reported mortgage servicing settlement announced earlier this year. Notably, Joseph Smith, Monitor of the Office of Mortgage Settlement Oversight, provided several comments regarding the settlement and fair lending concerns. Specifically, while some have expressed a concern regarding the application of principal reductions for protected classes, the Monitor noted that violations of state fair lending laws were specifically reserved in the settlement, and the Monitor takes the position that the consumer relief provisions do not authorize him to assess whether principal reductions are being equally applied with respect to protected classes;
- In the panel “Multistate Mortgage Committee Overview of Examination Procedures: Risk Scoping to Post-Exam Enforcement,” the Multistate Mortgage Committee (MMC), which coordinates examination and supervision of mortgage lenders, servicers and brokers operating in more than one state, gave an overview of its activities that (i) emphasized a risk-based approach to examinations, and (ii) outlined an examinations process that strives for uniformity, modernization, and effectiveness;
- “A Look at Foreclosure Prevention, Loan Modification Scams and the Role of the Regulators” provided an overview of loan modification and foreclosure-related concerns, including issues affecting low-income borrowers and protected classes; and
- “FinCEN, Updates on AML for Mortgage Lenders and Originators” provided an overview of anti-money laundering, specifically the recently-effective requirement for non-banking entities, including residential mortgage lenders and originators, to file suspicious activity reports.