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Director Cordray's Statements Offer Insight Into CFPB Activities

During a September 12 House Financial Services Committee hearing and in a recent interview published in the Washington Post, CFPB Director Richard Cordray made a number of statements that shed light on a wide range of topics related to the agency’s thinking and priorities. As discussed in more detail below, Director Cordray and House committee members touched on, among other things, the status of the CFPB’s small business lending data and HMDA rules, efforts to implement the CFPB’s mortgage rules (in particular the QM rule), small-dollar lending, and the CFPB’s collection and use of consumer information.

In addition, in his interview with the Washington Post, Director Cordray confirmed that the CFPB will be writing rules that apply the Electronic Fund Transfer Act (EFTA) to prepaid cards and govern debt collection practices. He also promised additional enforcement actions against debt collectors and “activity” on payday lending.

Highlights from House Hearing:

• Mortgage Rule/QM Implementation and Impact: A number of committee members from both sides of the aisle raised concerns about the impact of the CFPB’s mortgage rules, particularly its ATR/QM rule. Members are concerned with the complexity and regulatory burden of the rules, and that the ATR/QM rule is drawn too narrowly and will limit credit availability. The concerns of community bankers were again front and center—members stated that the rules unnecessarily burden community bankers and limit their ability to make loans, which may, in turn, force them to exit the mortgage market. Mr. Cordray described the various changes to the ATR/QM rule designed to accommodate community banks, reviewed the CFPB’s implementation process and resources, and pledged to continue to work to inform bankers of those accommodations and resources. More broadly, however, he stated that most institutions have told the CFPB that they will be in substantial compliance when the rules take effect in January 2014 and he did not indicate any intention to delay the effective dates of any of the mortgage rules.

  Rep. Huizenga (R-MI) focused on the ATR/QM rules’ inclusion of affiliate charges in the 3% points and fees cap and asked if the CFPB would support changing it. Director Cordray stated that the CFPB is “happy to think further” about the issue and can provide “technical assistance,” but that the rule reflects congressional intent and any substantive change would require legislation. He also acknowledged discussions with the Representative’s staff about whether title insurance should be treated differently because it is regulated.

• Cumulative Regulatory Burden: Several members raised a broader concern about the cumulative burden of regulations on financial institutions. Rep. Capito (R-WV) asked specifically about the CFPB’s regulations streamlining initiative and for evidence that it actually is moving forward. Mr. Cordray cited the CFPB’s work to eliminate an ATM notice requirement, which was removed by legislation before the CFPB finalized its effort, and explained that the CFPB now is focused on limiting burdens related to Gramm-Leach-Bliley Act privacy notices. He did not identify any other specific efforts to eliminate regulatory burden, but stated generally that the CFPB attempts to address duplicative and unnecessarily burdensome provisions in all of its rulemakings.

• TILA/RESPA Integration Rule: Two members – Reps. Miller (R-CA) and Perlmutter (D-CO) – asked about an aspect of the CFPB’s proposed TILA-RESPA integrated disclosure that would identify title insurance as “optional.” The members expressed concern that identifying it as such would not serve consumers. Mr. Cordray was not familiar with the issue, but pledged to revisit it. He also confirmed, as expected, that the final TILA-RESPA rule will be published this fall. (The CFPB’s recent rulemaking agenda stated more specifically October 2013.) Mr. Cordray promised an adequate implementation period.

• Small Business Lending and HMDA Rules: Rep. Velasquez (D-NY), who also serves as ranking member of the Small Business Committee, asked about the status of a rule to implement Dodd-Frank Act amendments to ECOA that require financial institutions to report information concerning credit applications made by women- or minority-owned businesses and small businesses. Mr. Cordray stated that the Bureau understands the importance of this data but was proceeding carefully because the rulemaking is outside the Bureau’s “comfort zone,” which is addressing consumer issues. In particular, he noted the Bureau was seeking to work with agencies that are more knowledgeable in this area, such as the Small Business Administration. However, he added that the CFPB internally has begun developing a rulemaking to implement changes to HMDA data collection. He explained that the CFPB expects that the HMDA rulemaking will inform its small business lending rule effort, and may overlap in parts.

• Small Dollar or “Payday” Lending: Small-dollar lending, particularly through the Internet, remains an active topic for both Congress and the CFPB. Several members raised a general concern with the growth of online lending and potential consumer protection challenges, while others accused the CFPB and other federal authorities of attempting to eliminate the practice altogether. Director Cordray recited the supervision and enforcement challenges associated with online lending and stated that it is a “subject of some considerable scrutiny right now, by [the CFPB] and by others.” He declined to comment more specifically on the CFPB’s involvement in reported efforts by the DOJ, the FDIC, and state authorities with regard to online lenders and the banks that process payments for them. Mr. Cordray later added that the CFPB considers the challenges of “offshore” lending to differ from those presented by Native American lenders. While both are difficult for state authorities to address, the CFPB does not consider tribal lenders to be “offshore” and believes that it is well established in federal law that the federal government can regulate tribal businesses and activities affiliated with tribes.

  Rep. Luetkemeyer (R-MO) mentioned a bill he first introduced last year to address some of these issues by creating a national charter for qualified non-depository creditors. Mr. Cordray responded that he did not have a position on the proposal at this time. Last year, the proposal met opposition from the OCC, state attorneys general, and state bank regulators.

  In response to Rep. Meeks (D-NY), who expressed concern about borrowers who need access to small dollar loans, Mr. Cordray stated that he believes financial institutions could make small dollar loans cheaply.

• Supervision and Enforcement: Rep. Neugebauer (R-TX) and others inquired about the CFPB’s examination and enforcement programs. Mr. Neugebauer asked about the CFPB’s application of the “abusive” prong in the Dodd-Frank Act “UDAAP” standard and about the scope of the CFPB’s information requests. With regard to “abusive practices,” Director Cordray stated that examiners are looking only at practices that meet the statutory definition. He explained that he has difficulty with the abusive standard, and that, in his view, something that is abusive is likely also unfair and deceptive. He promised that the CFPB will “tread carefully” and will not be “wild and overly aggressive” in its application of the abusive standard. With regard to information requests, Mr. Cordray agreed that the CFPB’s practice should be to only sample data and information in connection with exams, but added that in enforcement situations the CFPB may need much more data. Some members also criticized the salaries paid to CFPB staff, while others complained about the lack of experience of some examiners.

• CFPB Data Collection: Numerous members assailed Mr. Cordray with regard to the CFPB’s collection and use of consumer information, and the CFPB’s alleged failure to respond to information requests submitted by Republican members. Mr. Cordray asserted that the CFPB’s data collection and use is legal and necessary. He objected to the characterization that the CFPB has delayed its response to the committee, and indicated that he will be back to testify on this topic in the coming weeks.

Excerpts from Washington Post Interview:

(For the original Washington Post interview, please click here.)

• Debt Collection:  “We will be undertaking rulemaking in the debt-collection area. The work on that will get started later this fall. Debt collection is an area that is in need of revision and updating. It’s a very problematic area, one of the most complained-about areas by the public. It’s only gotten worse in the wake of the financial meltdown because so many people owe debt. An estimated 30 million Americans have a debt collector chasing after them now, so it’s a very salient issue now for the public. The Fair Debt Collection Act was passed in 1977, and there were never any provisions for rules to be written under it, so it hasn’t kept pace with the times. It’s now 35 years old, and there is room for us to update the act to take account of various court decisions, changes in the industry, changes among the consumer public to improve coverage so people are protected and treated fairly. That’s an important area for us and an area where we’ve already had some activity moving toward rulemaking. We’re also examining debt collectors. We’ve done some enforcement actions involving debt collection, and there will be more. We’ve put out a bulletin on first-party debt collectors, making clear that they’re also covered under existing law. And we’re starting to provide some tools for consumers to use, such as the template letters they can use to try and avoid undue harassment and abuse from debt collectors.”

• Small Dollar or “Payday” Lending:  “We put out the white paper on payday lending and the deposit advance products in late spring. That is leading us toward policy work in the area. There is some follow-up research work we’re doing that has been underway since the first paper came out. But there will be activity in this area in the near future. The issue coming out recently of online payday lenders who are relying on financial banks to be the mechanism for financing and collecting the money really has been interesting. Frankly, the work in that area involves coordination with both federal regulators and state officials, and it can even be international, with some online lenders originating from outside of the United States now. It’s an area where we’ve been building partnerships as well as thinking about the policy work that we need to do, and we’re making progress.” (See our prior post on the CFPB payday lending white paper.)

• Prepaid Cards:  “The fact that prepaid cards are not covered by ­consumer-protection laws at the moment is a compelling need for us to write regulations to get them covered. We’re moving forward to write rules to make sure they are protected under [the Electronic Fund Transfer Act (EFTA)]. It’s a real front-burner issue for us.” (Note that on September 12, the CFPB also issued a bulletin on the application of EFTA to payroll cards.)

• Ability-to-Pay Requirements for Non-Mortgage Products:  “It’s something that we are thinking about. Some of the most interesting issues for me have been the ones where we start to see some of the same philosophical issues extending across different markets, but potentially in different ways. So ability to pay in the mortgage market is arguable at its zenith because it’s a huge dollar transaction. You can justify more demands on the lenders and the borrower to make sure that transaction works. In the credit card context, under the [Credit Card Accountability Responsibility and Disclosure Act of 2009], there is an ability-to-repay provision in there. But it operates in a somewhat different way for credit cards than it should for mortgages. They’re different kinds of transactions, different size, different scope. You can get in and out of credit cards in a hurry. Not so easy to get in and out of mortgages. How it applies to smaller-dollar lending is a further differentiation. It’s something that we’re having to think about. The general principle, though, of ability to repay as the basis for making loans is just common sense. The lender should care about whether the borrower can repay because they’re the ones lending the money. They’re the ones at risk. The market is no longer so straightforward. With mortgages, for example, the ability to repay was arguably lost if you could sell into the secondary market. There are a number of consumer groups that have been pushing [the ability-to-repay model] as a broad principle across markets. There is quite a bit to what they’re saying. How it would apply from one market to another is worth further analysis, and that’s something we’re engaged in analyzing.”

• Supervision:  “We have to institute our supervision program for financial institutions that are used to being regulated, but not necessarily used to being regulated with a focus on consumer protection. It’s an adjustment for them. But in the non-bank sphere, they’re often not used to being regulated at all, or only on the state level. In that area, there has been a real shift toward more of a compliance mentality. And our being on the scene and doing this work has caused that shift.”

• Safety and Soundness:  “It’s the right perspective that an institution needs to merge the short-term and long-term thinking about its business model. It’s not a long-term business model to take advantage of your consumers in ways that are not sustainable. That’s what brings safety and soundness regulation and consumer protection regulation back together and really makes them harmonious."

CFPB Payday Lending Mortgage Origination Internet Lending

CFPB Finalizes Additional Modifications to Certain Mortgage Rules

On September 13, the CFPB issued final amendments to its Mortgage Servicing and Loan Originator Compensation rules. The CFPB’s press release states that the amendments (i) clarify what servicer activities are prohibited in the first 120 days of delinquency, (ii) outline procedures for obtaining follow-up information on loss mitigation applications, (iii) facilitate servicers’ offering of short-term forbearance plans, (iv) clarify best practices for informing borrowers about the address for error resolution documents, (v) facilitate lending in rural or underserve areas, (vi) clarify the restrictions on the financing of credit insurance premiums, (vii) clarify the definition of a loan originator, (viii) clarify the points and fees thresholds and loan originator compensation rules for manufactured housing employees, and (ix) revise effective dates of many loan originator compensation rule provisions to align with other mortgage rule effective dates. We are reviewing the actual final amendments and plan to provide more information and analysis in the near future. Please also see our Special Alert on these changes as proposed in June.

CFPB Mortgage Origination Mortgage Servicing Loss Mitigation

CFPB Issues Guidance on Payroll Cards

On September 12, the CFPB issued a bulletin stating that the Electronic Fund Transfer Act (EFTA) and Regulation E apply to payroll card accounts, which Regulation E defines as “accounts that are established directly or indirectly through an employer, and to which transfers of the consumer’s salary, wages, or other employee compensation are made on a recurring basis.”  This bulletin follows pressure from federal legislators on the CFPB to clarify the protections afforded to consumers receiving wages on payroll card accounts and to investigate the fees and practices associated with such accounts, and reports of at least one state-level investigation of payroll card practices.

The bulletin and press release emphasize that the following provisions apply to payroll card accounts:

• Fee disclosures.  At account opening or before the first electronic fund transfer (EFT), a payroll card issuer must provide disclosures of any fees imposed by the financial institution for EFTs, limitations on liability, and other required information.  The bulletin notes that some state laws dictate that certain information be provided before an employee elects to receive wages via payroll card.

• Account information.  A payroll card issuer must provide periodic statements as required by Regulation E generally or, alternatively, must make available to the consumer - (i) by telephone, the consumer’s account balance; (ii) electronically (such as through a website); or (iii) in writing (if requested) - a history of the consumer’s transactions and fees covering the preceding 60 days.

• Unauthorized transfers.  With limited exceptions regarding the period within which an unauthorized transfer must be reported, Regulation E’s limited liability protections apply to payroll cards.

• Error resolution.  Financial institutions must respond to a consumer’s report of errors regarding a payroll card account if the report is received within 60 days of the consumer either accessing an electronic account history or receiving a written account history on which the error appears, whichever is earlier, or within 120 days after the alleged error occurs.

• Compulsory use.  An employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution.  An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means.  The bulletin notes that most states’ laws contain additional restrictions on the manner in which employers may make wages available to their employees and that the EFTA and Regulation E preempt state laws “relating to” EFTs, among other things, only to the extent of any inconsistency.  A state law is not considered inconsistent with the EFTA and Regulation E if the state law affords consumers greater protections.

Lastly, the bulletin notes the CFPB’s authority to examine supervised entities’ use of third-party service providers and to enforce the EFTA and Regulation E against both financial institutions and employers.

CFPB Prepaid Cards EFTA

FDIC Finalizes Depositor Preference Rule

On September 10, the FDIC approved a final rule to clarify that deposits in foreign branches of U.S. banks are not insured. The impetus for the rule was the U.K. Prudential Regulation Authority’s (PRA) (formerly the Financial Services Authority) proposal to prohibit banks from non-European Economic Area countries from operating deposit-taking branches in the U.K. unless U.K. depositors in such branches would be on an equal footing in the national depositor preference regime with home-country (uninsured) depositors if a bank were to fail and require a resolution. The FDIC believes that U.S. banks seeking to comply with the PRA proposal likely will change their U.K. deposit agreements so that the deposits are payable both in the U.K. and in the U.S. The FDIC rule is intended to protect the Deposit Insurance Fund against the potential resulting liability that the FDIC could face as a deposit insurer for customers of foreign branches of U.S.-based insured depository institutions. While deposits at foreign branches of U.S. banks will not be insured, they can be treated as deposits for purposes of national depositor preference laws. The rule will not affect deposits in overseas military banking facilities governed by regulations of the Department of Defense. The rule takes effect 30 days from publication in the Federal Register.

FDIC UK PRA

Federal Reserve Banks Seek Public Input on Threats to Payment System

On September 10, the Federal Reserve Banks issued a public consultation paper  that identifies “key gaps and opportunities” in the U.S. payment system. They include: (i) payment recipients prefer other forms of payments than checks but exercise little control over the sender to request a preferred form of payment, (ii) the system lacks a “near-real-time” payment capability, (iii) innovations have not gained significant market penetration while legacy systems tend to be more ubiquitous, (iv) legacy systems lack certain desired features, including, for example, assurance that a payment will not be returned or reversed, (v) cross-border payments are slow and costly, and lack fee and timing transparency, (vi) some digital wallet applications reduce the visibility and choice of payment instrument at the point of sale, (vii) businesses’ legacy payment and accounting systems make straight-through processing difficult, but are costly to change, and (viii) data security fears inhibit adoption of electronic payments. The paper outlines certain desired outcomes and seeks input on strategies and tactics to address the perceived gaps and shape the future of the domestic payment system. Interested stakeholders can submit comments until December 13, 2013.

Payment Systems Federal Reserve Mobile Payment Systems

House Passes Insurance Licensing Bill

On September 10, the U.S. House of Representatives passed legislation, H.R. 1155, which would amend the Gramm-Leach-Bliley Act to allow for multistate licensing of insurance producers through the establishment of the National Association of Registered Agents and Brokers (NARAB). The bill would authorize NARAB to: (i) establish membership criteria, (ii) deny membership to a state-licensed insurance producer on the basis of the criminal history information obtained, or where the producer has been subject to certain disciplinary action, (iii) receive and investigate consumer complaints and refer any such complaint to the state insurance regulator, and (iv) coordinate with state insurance regulators to establish a central clearinghouse and a national database for the collection of regulatory information concerning the activities of insurance producers. The bill would retain states' regulatory authority over: (i) licensing, continuing education, and other qualification requirements of non-NARAB producers, (ii) resident or nonresident producer appointment requirements, (iii) supervision and disciplining of such producers, and (iv) setting of licensing fees for insurance producers. States also would remain responsible for consumer protection and market conduct. The bill passed the House last Congress, but never advanced in the Senate.  Earlier this year, the Senate Banking Committee reported a corresponding bill, which is awaiting consideration by the full Senate.

U.S. House Insurance Licensing

FHA Addresses Application of Unused Escrow Funds in Refinance Transactions

On September 5, HUD issued Mortgagee Letter 2013-29 regarding the application of unused borrower funds from an escrow account on an existing mortgage in FHA-insured refinance transactions. The letter states that mortgagees processing such refinances may apply unused borrower funds from an existing mortgage for any purpose authorized by the borrower, and the return of unused funds to the borrower at closing is not considered cash back to the borrower. Further, the letter provides documentation and submission requirements evidencing borrower authorization for application of unused escrow funds. The letter also reminds mortgagees that calculating the maximum mortgage on a streamline refinance transaction starts with the outstanding principal balance of the existing loan, not the payoff amount.

FHA Escrow Mortgagee Letters

DOJ Announces Settlement of Auto Lending Discrimination Suit

On September 6, the DOJ announced the resolution of a long-running lawsuit against an auto dealer and a bank that financed many of the dealer’s loans, in which the government alleged that the dealer and the bank violated ECOA by charging non-Asian customers higher interest rate markups than other customers over a three-year period. The bank entered into a partial consent decree in 2009 and agreed to pay a total of $410,000 to non-Asian borrowers to resolve the allegations against it. The dealer chose to litigate and obtained a dismissal in trial court; that order was reversed last year by the Ninth Circuit. The dealer agreed to a consent decree  with the DOJ on September 4 that fully resolved all claims against it. The dealer, which is now out of business, specifically denied the government’s allegations and the decree made clear the outcome was a “compromise of disputed allegations.” Under the terms of the decree, the dealer will pay up to a total of $125,000 to non-Asian customers who were charged higher dealer interest rate markups. If the dealer or its principal shareholder re-enter the business of automobile lending within the two year duration of the consent decree, it will be required to implement clear guidelines for setting dealer markup and pricing, in compliance with ECOA, and establish fair lending training for its employees and officers.

Auto Finance ECOA DOJ

FTC Advisory Opinion Supports Money Transmitters' Proposed Information Exchange

On September 4, the FTC’s Bureau of Competition issued an advisory opinion responding to a national money transmitters’ trade association inquiry about its planned information exchange regarding terminated U.S. money transmitter agents. According to the opinion, (i) the database will contain information regarding former U.S. sending and receiving agents whose contractual relationships were terminated due to failure to comply with federal and/or state law, or money transmitter contract terms or policies, (ii) exchange membership will be open to all licensed non-bank money transmitters, and (iii) participation in the information exchange will be voluntary, and each member of the information exchange will retain the right to decide unilaterally whether to appoint an agent that has been terminated by another exchange member. The FTC staff determined that the program (i) appears unlikely to harm competition, (ii) will contain several safeguards to lessen the risk of harm to competition and consumers, such as the appointment of a third-party vendor to maintain and secure the information exchange database, and (iii) is likely to improve the money transmitters’ ability to comply with federal and state laws designed to prevent money laundering, terrorist financing, and other criminal behavior, and enhance consumer welfare by preventing the appointment of fraudulent or criminal money transmitter agents.

FTC Money Service / Money Transmitters

FTC Announces First "Internet of Things" Settlement

On September 4, the FTC announced its first action against a marketer of an everyday product with interconnectivity to the Internet and other mobile devices – what the FTC refers to as the “Internet of Things.” The company, which markets video cameras designed to allow consumers to monitor their homes remotely, agreed to settle the FTC’s allegation that its security practices exposed the private lives of hundreds of consumers to public viewing on the Internet. The FTC claimed that the company marketed its products as “secure” when, according to the FTC, they had faulty software that potentially allowed for online viewing and listening. The company resolved the complaint without paying a penalty, but agreed to establish a comprehensive information security program designed to address security risks that could result in unauthorized access to or use of the company’s devices, and to protect the security, confidentiality, and integrity of information that is stored, captured, accessed, or transmitted by its devices. The agreement also requires the company to obtain third-party assessments of its security programs every two years for the next 20 years, and prohibits the company from (i) misrepresenting the security of its cameras or the security, privacy, confidentiality, or integrity of the information that its cameras or other devices transmit and (ii) misrepresenting the extent to which a consumer can control the security of information the cameras or other devices store, capture, access, or transmit. The FTC is planning an “Internet of Things” workshop for later this year.

FTC Privacy/Cyber Risk & Data Security