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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 Weighs In On New York Tribal Lending Case
On November 13, the CFPB filed an amicus brief in a Second Circuit case stemming from efforts of the New York Department of Financial Services (DFS) to crack down on lenders offering allegedly illegal payday loans. Certain online lenders affiliated with Native American tribes sought to enjoin the DFS from interfering with their payday lending activities, claiming that the state’s actions violate the tribes’ inherent sovereignty and the Indian Commerce Clause of the U.S. Constitution. The federal district court denied relief last month, holding that the plaintiffs failed to identify an applicable “express federal law” prohibiting the state’s activity and that the tribes are subject to the state’s anti-usury laws, which the plaintiffs’ appealed.
In its amicus brief, the CFPB urges the court to reject the plaintiffs’ contention that the Consumer Financial Protection Act (CFPA) prevents the state from applying its consumer-protection laws to tribally-affiliated lenders, arguing instead that the CFPA “expressly preserves states’ varying consumer-protection laws as applied here, including those that would outlaw loans with certain terms.” According to the CFPB, “[a]lthough the CFPA recognizes that tribes, like states, have a role in regulating consumer financial products and services, and that the CFPB will coordinate with tribes and states in protecting consumers, that has no bearing on whether tribally affiliated lenders must comply with state laws.”
Preliminary Observations Regarding CFPB's Final Mortgage Disclosure Rule And Forms
**Update – The CFPB has now released the final rule and related materials, available here.**
Later today, as anticipated, the CFPB will release its final rule combining the TILA and RESPA mortgage disclosure forms and rules. We will review the final forms and rule, monitor the related field hearing, and prepare a preliminary Special Alert followed by a more detailed summary.
The final rule and forms follow two years of drafting, testing, and revision by the Bureau. According to the Bureau, its testing demonstrates that the new forms significantly improve the ability of consumers with a variety of experience levels and loan types to answer questions about their loans, compare competing loans, and compare estimated and final loan terms and costs.
The text of the final rule will not be available until later today. However, we are able to make several preliminary observations based on our review of the materials made available thus far, perhaps most importantly that industry will have until August 1, 2015 to make the changes to systems and training necessary to implement the new forms, which is longer than anticipated. Additional observations follow.
Loan Estimate Disclosure
- The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
- It appears that the final rule will require lenders to provide the Loan Estimate three business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays). However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
- The design and layout of the Loan Estimate does not appear to differ substantially from the proposed form, except that estimated closing costs and estimated cash to close are now disclosed in separate rows on the bottom of page 1. The CFPB also states that it modified the forms to include checkboxes to tell consumers whether they are receiving or paying cash at closing and to provide a streamlined calculation of that amount.
- Owner’s title insurance is listed as “optional” on page 2. During a recent House Financial Services Committee hearing with CFPB Director Cordray, two committee members–Reps. Miller (R-CA) and Perlmutter (D-CO)–expressed concern that identifying this cost as optional would not serve consumers’ best interests.
- The Total Interest Percentage (TIP) disclosure, which was required by the Dodd-Frank Act and opposed by industry, has been retained on page 3.
- The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page. In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”
- It is unclear from the materials provided what changes, if any, will be made to the restrictions on changes in costs (or tolerances) imposed by the Department of Housing and Urban Development (HUD) in 2010. It is also unclear whether, under the final rule, TILA or RESPA liability will apply to violations of those restrictions.
Closing Disclosure
- The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement.
- It appears that the final rule will require the lender to ensure that the consumer receive the Closing Disclosure three business days before closing. This would mean that the lender must be able to demonstrate that the consumer received the Closing Disclosure three business days before closing.
- The CFPB materials indicate that, in comparison to the proposal that changes to the information provided in the Closing Disclosure generally require re-disclosure and an additional three business day waiting period before closing, the final rule limits the additional waiting period to situations in which there is a substantial change in the APR, a change in the loan product, or the addition of a prepayment penalty.
- It is unclear from the materials provided what role, if any, the settlement agent will play in the preparation of the Closing Disclosure and whether TILA or RESPA liability will apply.
- Like the final Loan Estimate, the design and layout of the final Closing Disclosure do not appear to differ substantially from the proposed form, except for the changes noted above.
- In addition, the final Closing Disclosure, like the proposed form, eliminates the HUD-1 line numbers. The final Closing Disclosure also eliminates the Average Cost of Funds (ACF) disclosure, which was added by the Dodd-Frank Act but opposed by industry.
Other Issues
- It appears that the CFPB has not adopted the proposed requirement that lenders retain records in an electronic, machine-readable format. Instead, the CFPB will work with the Fannie Mae and Freddie Mac to create a data standard based on the Closing Disclosure.
For additional background, please review our report on the rule as proposed.
CFPB Examinations Of Card Rewards Program Underway
On November 15, Bloomberg reported that the CFPB is examining credit card issuers’ rewards programs. The article quotes CFPB Director Cordray stating that rewards programs can involve “detailed and confusing rules” and that the CFPB “will be reviewing whether rewards disclosures are being made in a clear and transparent manner.” The CFPB’s recent Credit CARD Act report identified rewards product disclosures as one of many card practices that “pose risks to consumers and may warrant further scrutiny by the Bureau.”
Bloomberg reported that the examinations cover the marketing of rewards programs, “particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it.” The article notes that there is no apparent sudden rise in consumer complaints about rewards, but the CFPB has targeted the programs because they are, according to the source, the primary reason consumers choose a particular card.
While the CFPB reportedly is not examining the disclosures on the basis that they could present UDAAP risk, the article states that the scope of the targeted examinations includes (i) the time it takes for card holders to redeem their rewards, (ii) the potentially obscure nature of the conditions on redeeming rewards, (iii) programs that require increasing amounts of spending over time to redeem an award, and (iv) forfeiture and reinstatement of rewards.
CFPB Settles With Mortgage Insurer Over Alleged RESPA Violations
On November 15, the CFPB announced a settlement with a mortgage insurer accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA. The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders’ captive reinsurers, but over time ceded increasingly large percentages of its premiums—up to 40% for each referral—in exchange for lenders’ continued referral of customers.
The proposed consent order requires the company to pay $100,000 in penalties and subjects the company to regular and mandatory compliance reporting and monitoring for a period of four years. In addition, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims.
The action follows several other RESPA enforcement actions announced earlier this year, including actions against four mortgage insurers.
Banking Regulators Finalize Revised CRA Guidance
On November 15, the Federal Reserve Board, the FDIC, and the OCC finalized revisions to the “Interagency Questions and Answers Regarding Community Reinvestment” (Q&As). The agencies adopted the revisions largely as proposed, with some minor changes in response to comments. The new Q&As, which include revisions to five questions and answers and two new questions, generally are intended to: (i) clarify how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution’s assessment area; (ii) provide guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds; (iii) clarify the consideration of certain community development services, such as service on a community development organization’s board of directors; (iv) address the treatment of loans or investments to organizations that, in turn, invest those funds and use only a portion of the income from their investment to support a community development purpose; and (v) clarify that community development lending performance is always a factor considered in a large institution’s lending test rating. The new Q&As take effect when they are published in the Federal Register.
OCC Establishes Standards For Independent Consultants Required Under Enforcement Actions
On November 12, the OCC issued Bulletin 2013-33, which establishes the standards the OCC uses when it requires banks to employ independent consultants as part of an enforcement action. The Bulletin explains that when conducting its initial assessment of the need for an independent consultant, the OCC considers, among other factors: (i) the severity of the violations; (ii) the criticality of the function requiring remediation; (iii) confidence in bank management’s ability to identify violations and take corrective action in a timely manner; (iv) the expertise, staffing, and resources of the bank to perform the necessary actions; (v) actions already taken by the bank to address the violations or issues; and (vi) the services to be provided by an independent consultant. The bulletin outlines the OCC’s process for reviewing a consultant selected by a bank, including its expectations for a bank’s due diligence process when retaining an independent consultant. The bulletin also describes the OCC’s oversight of the performance of the consultant, the nature of which can be impacted by, among other things: (i) the nature of deficiencies or violations the independent consultant is engaged to identify, including with respect to recommendations regarding remediation; (ii) the scope and duration of work; and (iii) the potential for and materiality of harm to consumers and the bank.
CFPB Teams With City of Columbus to Field Consumer Complaints
On November 12, the CFPB announced a partnership with the City of Columbus to provide local residents access to the CFPB’s consumer complaint hotline through the city’s existing constituent service hotline. Columbus residents who call the city hotline with a question or complaint about consumer financial products or services will be transferred directly to the CFPB for assistance. The CFPB announced a similar partnership with the City of St. Louis, Missouri on October 31, and has established relationships with numerous other localities in the past, including Newark, New York, Boston, and Jackson.
HUD Revises Lender Self-Reporting Requirements
On November 13, HUD issued Mortgagee Letter 2013-41, which, effective immediately, clarifies self-reporting requirements for all single-family FHA-approved lenders. The letter details lenders’ obligations to report all findings of fraud and material misrepresentations, as well as any material findings concerning origination, servicing, or underwriting of a loan that the lender is unable to mitigate. The letter defines “material finding” and provides a non-exhaustive list of examples, and describes the parameters for mitigating reportable findings. The letter outlines internal and external reporting timeframes: (i) internal reporting to senior management must take place within 30 days of an initial findings report; (ii) findings of fraud or material misrepresentation must be reported immediately to the FHA; and (iii) all other material findings must be reported no later than 30 days after the lender has completed its internal evaluation, or within 60 days of initial disclosure, whichever occurs first. The letter also explains that the FHA may request supporting documentation for use in reviewing a report, and that the FHA requires the reporting contact to have immediate access to: (i) the endorsement case binder; (ii) the quality control report; and (iii) any other documentation necessary to evaluate the finding. The letter further states that failure to comply with these requirements may result in the FHA taking administrative action against the lender.
Prudential Regulators Release Stress Test Scenarios
On November 12, the FDIC released the economic scenarios that will be used by certain financial institutions with total consolidated assets of more than $10 billion for stress tests required under the Dodd-Frank Act. Each scenario includes key variables that reflect economic activity, including unemployment, exchange rates, prices, income, interest rates, and other salient aspects of the economy and financial markets. The baseline scenario represents expectations of private sector economic forecasters; the adverse and severely adverse are hypothetical scenarios designed to assess the strength and resilience of financial institutions and their ability to continue to meet the credit needs of households and businesses under stressed economic conditions. The FDIC release follows the recent release of stress test scenarios by the Federal Reserve Board and the OCC. The Federal Reserve Board also recently issued a final policy statement that describes the process by which it will develop future stress test scenarios.