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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 Sues Mortgage Company Over Alleged Loan Officer Compensation Practices
This afternoon, the CFPB released a complaint it filed today against a Utah-based mortgage company and two of its officers for giving bonuses to loan officers who allegedly steered consumers into mortgages with higher interest rates. The complaint alleges that the company, and its president and senior vice-president of capital markets, violated the Federal Reserve Board’s Loan Originator Compensation Rule by instituting a quarterly bonus program that paid more than 150 loan officers greater bonus compensation based on the terms and conditions of the loans they closed. The CFPB claims the program incentivized loan officers to steer consumers into loans with higher rates.
According to the complaint, when the Loan Originator Compensation Rule took effect in April 2011, the company amended its program to eliminate any written reference to compensation based upon terms or conditions, making it appear on its face to be a compliant compensation program. The CFPB alleges that although the company’s regular compensation was no longer tied to terms or conditions under the new program, the managers actually continued to adjust the quarterly bonuses based upon the terms and conditions established under the compensation program.
The complaint further alleges violations of Regulation Z’s requirement that a creditor retain records of compensation paid to loan originators for two years. According to the complaint, the company violated this requirement by failing to record what portion of quarterly bonuses paid to loan originators were attributable to a given loan and by failing to maintain accurate and complete compensation agreements.
The case highlights a number of points:
- The CFPB will look beyond a company’s written compensation and compliance plans to include analysis of a company’s actual compensation payments to its loan originators;
- The CFPB is pursuing individuals in senior management;
- $1 billion companies are within range for CFPB actions;
- The CFPB is seeking an injunction, restitution, civil money penalties for each bonus paid, and costs; and
- The case was referred to the CFPB by the Utah Department of Commerce.
HUD Proposes Framework for Affirmatively Furthering Fair Housing, HUD Secretary Promises Increased Enforcement
On July 18, HUD released a proposed rule to refine the fair housing elements of the existing planning process that recipients of HUD funds – states, local governments, insular areas, and public housing agencies (Program Participants) – already undertake. To aid Program Participants, HUD will provide local and regional data to allow Program Participants (i) to evaluate patterns of integration and segregation in their area, (ii) to identify disparities in access to community assets by members of protected classes, (iii) to locate racial and ethnic concentrations of poverty, and disproportionate housing needs based on protected class; (iv) to uncover areas for improvement in their fair housing programs; and (v) to develop the tools, strategies, and priorities to respond to problems identified by the data.
The proposed rule also (i) defines “affirmatively furthering fair housing” to clarify that the phrase requires proactive steps to foster more inclusive communities and greater access to community assets for all groups protected by the Fair Housing Act; (ii) refines current Analysis of Impediment requirements; (iii) requires Program Participants to incorporate fair housing planning in existing planning processes, such as the consolidated plan and PHA Annual Plan; and (iv) encourages Program Participants to take regional approaches to address fair housing issues.
In a speech earlier in the week in which he previewed the proposed rule, HUD Secretary Donovan also promised increased enforcement of the Fair Housing Act, stating: “I want to send a message to all those outside these doors. There are no stones we won’t turn. There are no places we won’t go. And there are no complaints we won’t explore in order to eliminate housing discrimination. Period. . . . HUD is enhancing its enforcement techniques by initiating investigations on our own without waiting for individuals to file complaints. We have more than tripled the number of Secretary-initiated complaints that we have filed since 2008.”
Senate Banking Committee Approves FHFA Director Nominee, Other Nominees
On July 18, the Senate Banking Committee approved Rep. Mel Watt (D-NC) to be the next Director of the FHFA, on a 12-10 party line vote. On a voice vote, the Committee also approved Michael Piwowar and Kara Stein as members of the Securities Exchange Commission, Jason Furman to serve as member and chairman of the Council of Economic Advisers, and Richard Metsger to sit on the National Credit Union Administration Board. Finally, again by voice vote, the Committee voted to extend the term of SEC Chair Mary Jo White until June 5, 2019. The nominations could come before a vote of the full Senate in the coming weeks.
Freddie Mac Updates Numerous Selling Requirements
On July 18, Freddie Mac issued Bulletin Number 2013-13, which updates or revises numerous selling requirements. For Relief Refinance Mortgages sold under fixed rate cash commitments taken out on or after July 19, 2013, Freddie Mac is reinstating the cash adjustor for mortgages with loan-to-value ratios greater than 105% and less than or equal to 125% and is adjusting the cash adjustor value for mortgages with LTV ratios over 125%. Effective immediately, Freddie Mac is relaxing requirements regarding authorized user accounts to give sellers that option to evaluate the impact of authorized user accounts on a borrower’s credit report. If a seller determines that the impact on a borrower’s overall credit history is insignificant and the information on the credit report is representative of a borrower’s credit reputation, then (i) for Loan Prospector mortgages, the Loan Prospector decision may be considered valid and (ii) for manually underwritten mortgages the FICO score may be considered usable. The Bulletin also (i) simplifies eligibility and review requirements for condominium projects; (ii) eliminates requirements contained within Section 22.24 of the Seller/Servicer Guide for properties in subdivisions that do not have resale restrictions; (iii) updates section 22.23 of the Guide with new terminology to eliminate references to “inclusionary zoning;” (iv) updates certain ULDD data point requirements for Condominium Projects and Manufactured Homes; and (v) clarifies the eligibility of living trusts for Texas Equity Section 50(a)(6) mortgages.
CFPB Outlines Financial Literacy Strategy in Report to Congress
On July 17, the CFPB published its first annual Financial Literacy Report to Congress. The report, required by the Dodd-Frank Act, outlines the CFPB’s broad consumer education and outreach efforts. The report reviews the various resources the CFPB has developed on its website, including its complaint database and tools aimed at helping consumers understand college costs and payment options. The CFPB also highlights ongoing research to (i) determine how to measure financial well-being and identify the knowledge, skills, and habits associated with financially capable consumers; (ii) evaluate the effectiveness of existing approaches to improving financial decision-making and outcomes; and (iii) develop new approaches to financial education and evaluate their potential to improve financial well-being.
CFPB Names New Senior Staff
On July 15, the CFPB announced that it filled four senior staff positions. Sartaj Alag will serve as Chief Operating Officer. Prior to taking on this role, Mr. Alag had established the Bureau’s Office of Consumer Response and had worked in the private sector both as President of a Capital One subsidiary and as a management consultant at McKinsey & Company. Christopher D’Angelo, who joined the CFPB in June 2011 as an enforcement attorney and who most recently served as Senior Advisor to Director Cordray, will be promoted to Chief of Staff. Prior to joining the Bureau, Mr. D’Angelo served as Senior Advisor to the Under Secretary for Domestic Finance at the Treasury Department. Nora Dowd Eisenhower will become the new Assistant Director for the Office of Older Americans. Prior to joining the CFPB, Ms. Eisenhower served on the National Council on Aging, where she was the Director of the National Center for Benefits Outreach and Enrollment, and the Senior Vice President of Economic Security. Prior to her work with the National Council on Aging, Ms. Eisenhower served as Secretary of the Pennsylvania Department of Aging and as Executive Director for AARP Pennsylvania. Finally, Laurie Maggiano will join the Bureau as the Program Manager for Servicing and Securitization Markets in the Division of Research, Markets, and Regulations. Ms. Maggiano most recently served as the Director of Policy in the Office of Homeownership Preservation at the Treasury Department, where she was one of the principal architects of the Making Home Affordable program. Prior to joining Treasury, Ms. Maggiano managed servicing policy at HUD, and before that spent 20 years in the private sector as a director at Freddie Mac and as a senior vice president for two major mortgage banks.
California Enacts Fair Debt Buying Bill
On July 11, California Governor Jerry Brown signed into law SB 233, the Fair Debt Buyers Practices Act, which establishes numerous new rules related to the purchase and collection of consumer debts, including five key protections for debtors. First, the Act prohibits a debt buyer from making any written statement in an attempt to collect a consumer debt unless the debt buyer can verify certain information, such as the amount of the debt balance at charge off, the date of default or last payment, and the name and address of the charge-off creditor at the time of charge off. Second, the Act prohibits a debt buyer from making any written statement to a debtor in an attempt to collect a consumer debt unless the debt buyer has access to a copy of a contract or other document evidencing the debtor's agreement to the debt. In instances where no signed debt contract exists, the debtor must obtain sufficient evidence to demonstrate that the debt was incurred by the debtor. Third, the Act requires a debt buyer to provide a written notice with its initial written communication to the debtor that, among other things, informs the debtor of his or her right to request certain records from the debt buyer. Fourth, the Act prohibits a debt buyer from bringing suit, initiating another proceeding, or taking any other action to collect a consumer debt if the applicable statute of limitations on the cause of action to enforce the debt has expired. Finally, the Act establishes new requirements for default judgments, such as a requirement that a debt buyer submit business records to confirm a debt prior to seeking a default judgment against a debtor. Additionally, the debt buyer must authenticate the records it submits via a sworn declaration to the court. The new rules will apply to debt buyers with respect to all consumer debt sold or resold on or after January 1, 2014.
California Federal District Court Allows Government's FIRREA-Based RMBS Suit to Proceed
On July 16, the U.S. District Court for the Central District of California denied a major credit rating agency’s motion to dismiss a DOJ complaint alleging that the firm defrauded investors in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) by issuing inflated ratings that misrepresented the securities’ true credit risks, and by falsely representing that its ratings were uninfluenced by its relationships with investment banks. U.S. v. McGraw-Hill Cos., Inc., No. 13-779, slip. op (C.D. Cal. Jul. 16, 2013). The court held that the government met its initial pleading burden, in part, because it sufficiently had alleged that the rating agency “engaged in a ‘scheme to defraud investors in RMBS and CDOs tranches’ and ‘to obtain money from these investors by means of material false and fraudulent pretenses, representations, and promises, and the concealment of material facts’ with ‘intent to defraud.’” In doing so, the court allowed the government to pursue its $5 billion claims grounded in the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The court did not, however, consider the weight of the government’s evidence, specifically whether the rating agency’s alleged statements and conduct were part of an actual “scheme to defraud,” a key element to any FIRREA claim.
CFPB, Federal Reserve Board, DOJ Plan Indirect Auto Fair Lending Compliance Event
On July 15, the Federal Reserve Board announced that it will co-host an upcoming consumer compliance webinar with the CFPB and the DOJ entitled “Indirect Auto Lending – Fair Lending Considerations.” The event, which will be held August 6, 2013, 11:30 a.m. – 12:30 p.m. (ET), will feature Maureen Yap, special counsel and manager of the Federal Reserve’s Fair Lending Enforcement Section; Coty Montag, deputy chief of the DOJ’s Housing and Civil Enforcement Section of the Civil Rights Division; and Patrice Ficklin, assistant director of the CFPB’s Office of Fair Lending and Equal Opportunity. The panelists plan to discuss (i) the CFPB’s indirect auto lending bulletin and compliance with ECOA; (ii) supervisory guidance; (iii) examination procedures; (iv) public settlements; and (v) “emerging issues.” Following their presentations, the panelists will take audience questions, which may be submitted in advance.