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CFPB Student Loan Ombudsman Files Third Annual Report Highlighting Bureau’s Hot Button Issues in Student Lending

Posted in CFPB Enforcement, CFPB Exams, CFPB General, Student Loans

The CFPB released its third Annual Report of the Student Loan Ombudsman, Rohit Chopra, discussing complaints received by the CFPB about private student loans and the lessons drawn by the Ombudsman from those complaints.  Before turning to the substance of those complaints, and the conclusions drawn by the Ombudsman, we think it important to put the complaints and those discussions in perspective.

Private student loans currently make up less than 7.8% of the overall student loan market, which is not entirely surprising given that lenders routinely encourage borrowers to maximize their federal loans and other aid before turning to private loans.  Despite challenging economic conditions, default rates on those loans are at historic lows of 3%, compared to 14% for federal student loans, according to MeasureOne and industry student loan data cooperative.

While consumers do complain about those loans, the complaint rate is exceedingly low. The 5,300 complaints that the CFPB received as compared to the millions of private student loans outstanding shows that lenders and servicers effectively manage most student loan accounts. Moreover, as the CFPB indicates on its website, but rarely mentions in its reports, the CFPB makes no effort to verify the accuracy of the complaints it receives.  It is unclear if the CFPB eliminates identical complaints received in prior years from its reporting.  But it is clear from the Complaint Portal that lenders and servicers promptly respond to these complaints and that in the majority of cases, the response is accepted by the complainant.

With that in mind, we turn to the Report.  The Report addresses key issues that the CFPB’s enforcement, examination, and policy arms are likely to focus on in the coming year. It indicates that the CFPB is likely to make moves to encourage student loan lenders and servicers to:

  • Provide longer-term options to borrowers in or at risk of default;
  • Go beyond existing pre-origination disclosure requirements and provide more detail about the differences between private and federal student loans at or prior to the time the loans are made;
  • Permit borrowers to return to school as a way of postponing repayment;
  • Waive any contractual rights to place borrowers into default upon the death or insolvency of the co-signer, even if the loan was originally approved based on the creditworthiness of the cosigner; and
  • Apply payments in a way that minimizes loan defaults and late fees.

The Report was most heavily focused on lenders’ alleged failure to help distressed borrowers. The CFPB has previously faulted lenders for their approach to this issue, referring in the Report to their progress as “disappointing.” The Report did acknowledge that student loan securitization adds a layer of complexity to lenders’ ability to provide more generous repayment options to borrowers. But, it also cited two other factors, which the CFPB believes to have played an equally significant role: the Bankruptcy Code’s special treatment of student loans, and lenders’ alleged failure to communicate the differences between federal and private student loan repayment options to borrowers.

If past practice is any guide, the CFPB is likely to pursue these issues through a combination of use of its bully pulpit, lobbying efforts, industry guidance, and enforcement actions. As required under Dodd-Frank, the Student Loan Ombudsman also recommended three ways that Congress may be able to address these issues. In making these recommendations however, Mr. Chopra also shed some light on how the CFPB is likely to approach the issues as well.

First, Mr. Chopra recommends that Congress consider making student loans easier to discharge in bankruptcy, thereby incentivizing lenders to provide distressed borrowers with more generous repayment options. The CFPB is likely to follow-up on this recommendation with further reporting and Congressional testimony. Given the current Congressional gridlock, however, these efforts are unlikely to result in the passage of any significant legislation.

Second, he recommends that the CFPB “determine” whether lenders provide adequate disclosures to borrowers about repayment options for private student loans. As required under Dodd-Frank, the recommendation is framed as a call for Congress to evaluate the effectiveness of current private student loan disclosure requirements. The recommendation’s wording may also signal that the CFPB is likely to begin investigating student lenders’ repayment-related disclosures for alleged UDAAP violations.

Finally, the Student Loan Ombudsman recommends that Congress exempt forgiven student loan debt from taxation as it did of forgiven mortgage debt during the height of the financial crisis. This, too, is likely to stall in Congress.

The Report is based entirely on the CFPB Student Loan Ombudsman’s analysis of approximately 5,300 private student loan related complaints and 2,700 debt collection complaints submitted to the CFPB from October 14, 2013 to September 30, 2014. This number includes only complaints to which the lenders responded, indicating that they had at least some relationship with the borrower-complainant. Earlier this year, we blogged about Mr. Chopra’s mid-year report on student loan complaints. We also covered the first and second annual reports.

CFPB Proposes No-Action Letter Policy for Innovators

Posted in CFPB General, Technology

The CFPB published for comment in today’s Federal Register a proposed policy on issuing “no-action” letters for innovative financial products or services.  Like those issued by the SEC and CFTC, the no-action letters would communicate that, subject to specific facts and circumstances, CFPB staff has no present intention to recommend initiation of an enforcement or supervisory action against the requester with respect to a specified matter.  The CFPB plans to issue its no-action letters “only rarely and on the basis of exceptional circumstances.”  The letters are intended for emerging products that promise “substantial” consumer benefit but where regulatory uncertainty hinders development of the product.  Comments on the proposal are due on or before December 15.

The proposal is part of Project Catalyst, the CFPB’s initiative for facilitating innovation in consumer-friendly financial products and services.  Under Project Catalyst, the CFPB has launched a Trial Disclosure Program and approved research pilots on early intervention credit counseling and tax-time saving.

The No-Action Letter Policy proposal describes the process for requesting a no-action letter, the factors the Bureau will consider in evaluating a request, and the limitations of no-action letters.  Information the CFPB expects to receive and assess includes:

  • The specific statutory or regulatory uncertainty facing the product and why that uncertainty cannot be addressed by modifying the product or through other means (such as by rulemaking, guidance, or a waiver under the Bureau’s Trial Disclosure Program).  The uncertainty may not concern UDAAP matters or other legal or product issues that the staff later determines are inappropriate for no-action treatment.
  • Evidence that aspects of the product may provide “substantial” benefits to consumers.  The proposal does not provide examples of when benefits are deemed to be “substantial.”  The requester must provide data showing, or suggest metrics for evaluating, the product’s substantial consumer benefits.  The Bureau will consider whether the asserted benefits are different from benefits available in the present marketplace.  If the Bureau grants the no-action letter request, it expects the entity to provide to the Bureau data regarding the product’s impact on consumers and to develop additional data in consultation with the Bureau.
  • A demonstration that the entity complies with other federal and state statutory and regulatory requirements, that it is aware of and controls for risks to consumers, and that its product structure, terms and conditions, and consumer agreements and disclosures enable consumers to meaningfully understand and appreciate the terms, characteristics, costs, benefits, and risks associated with the product and to act effectively to protect themselves from unnecessary cost and risk.

The proposal states that any no-action letter issued by the CFPB would be strictly limited.  For instance, the letter might be conditioned on the requester’s commitment to provide additional consumer safeguards or share data with the Bureau.  Moreover, no-action letters would not provide an interpretation of a statute or regulation nor a safe harbor from the Bureau’s supervision and enforcement authority.

Even after a no-action letter is issued, the CFPB may “conduct supervisory activities or engage in enforcement investigation to evaluate the requester’s compliance with the terms of the No-Action Letter or to evaluate other matters.” The letter may be modified or revoked by the Bureau at any time and, even without revocation, the staff may recommend initiating a retrospective enforcement or supervisory action if the facts or representations in the request are materially inaccurate or the requester fails to satisfy conditions or violates limitations specified in the letter.  Of course, a no-action letter would have no effect on enforcement initiatives of other federal or state agencies or private litigants.

The CFPB plans to publish on its website a version or summary of granted requests.  If it is “in the public interest,” the Bureau will publish denials and any requests it has declined to grant or deny, which may or may not be accompanied by an explanation.  We encourage the Bureau to develop standards for protecting trade or confidential information when it publishes its responses.

The proposal does not provide examples of products or services or legal issues that are appropriate for no-action treatment.  Companies should prepare carefully before presenting their products and services to the CFPB, particularly because the Bureau intends that no-action letters will be granted rarely and, even then, will be non-binding.  You can read some of our suggestions for presenting ideas to the Project Catalyst team here.  Companies also should be aware that any requests submitted to the CFPB, including about products or services that are in development, may be released in response to a FOIA request, unless the information concerns business trade secrets or other confidential commercial or financial information or is subject to another FOIA exemption or exclusion.


CFPB Proposes Changes to TILA-RESPA Integrated Disclosures Rule

Posted in CFPB General, CFPB Rulemaking

The CFPB has issued two proposed changes to the TILA-RESPA Integrated Disclosures Rule (Final Rule) that will be effective for applications received on or after August 1, 2015: (1) an adjustment to the timing requirement for revised Loan Estimate disclosures when the consumer locks a rate or extends a rate lock after the initial Loan Estimate is provided, and (2) an amendment to permit language related to new construction loans to be included on the Loan Estimate form.  Comments must be received by the CFPB on or before November 10, 2014.

As originally adopted, the Final Rule requires creditors to disclose the locked interest rate dependent charges and loan terms by providing a revised Loan Estimate on the same business day that a rate is locked.  The CFPB is now proposing to relax the timing requirement to state that creditors must provide a revised Loan Estimate no later than the next business day after the date the rate is locked, instead of the same date.

The changes in the disclosure requirement for interest rate locks comes in response to significant feedback from industry stakeholders on the provision since the Final Rule was published in 2013.  Specifically, creditors have raised consumer protection and operational concerns.  With the CFPB’s announcement, it appears that the Bureau has listened to those concerns and assessed the potential negative consequences for consumers.

In the preamble to the proposed rule, the CFPB states it “believes that, absent the proposed change, this requirement is likely to result in at least some creditors limiting consumers’ ability to lock their interest rates only to times early in a business day due to the implementation of costs of getting the disclosure to the consumer the same date if the consumer requested a rate lock sufficiently late during the business day or after hours.” The CFPB then states it “believes that consumers are unlikely to choose creditors based on the creditors’ policies regarding interest rate locks.  Moreover, consumers would be unlikely to know whether their creditors will in fact allow interest rate locks at all times until the consumer actually attempts to lock the interest rate.”

Although the proposal is a welcomed change from the same business day timing requirement of the Final Rule, the industry still may be concerned about having to issue a revised Loan Estimate on the next business day, and may still tighten interest rate lock practices if the proposed time period is adopted.  The industry may well support the ability to issue a revised Loan Estimate to reflect a locked rate in the standard timeframe for other changes, which is three business days after learning of the change.

The CFPB also is proposing to permit a change to the Loan Estimate form for loans on new construction.  In cases of new construction when closing is expected to occur more than 60 days after the initial Loan Estimate is provided, the Final Rule permits a creditor to reserve the right to provide a revised Loan Estimate any time before 60 days prior to closing if the initial Loan Estimate includes a clear and conspicuous statement of such right.  However, for most transactions the Loan Estimate is a standard form and it may not be modified except as provided by the Final Rule, and the Final Rule does not list the inclusion of such a statement as one of the permitted revisions.

The proposal would correct this oversight and provide for the inclusion of such a statement in the initial Loan Estimate.  In announcing the proposal, the CFPB stated that the proposal would “create a space on the Loan Estimate form where creditors could include language informing consumers that they may receive a revised Loan Estimate for a construction loan that is expected to take more than 60 days to settle.”  The proposal does not actually include a model version of the Loan Estimate with a model statement.  Instead, the proposal simply permits the inclusion of a statement among the information disclosed on page 3 of the Loan Estimate in the “Other Considerations” section.  Industry members may well request that the CFPB provide a model form with a model statement.

Finally, the proposal amends the 2013 Mortgage Loan Originator Final Rule to provide for the placement of the NMLSR ID on the Loan Estimate and Closing Disclosure and makes other various non-substantive corrections and updates to the regulatory text and commentary in the Final Rule.

CFPB Continues Focus on Latino Community

Posted in CFPB General, Credit Reports, Debt Collection, Diversity and Inclusion, FTC, Uncategorized

The CFPB and the FTC have announced that the agencies will host a joint roundtable entitled, “Debt Collection and the Latino Community,” on October 23, 2014. The roundtable will examine how debt collection and credit reporting issues affect Latino consumers, especially those who have limited English proficiency (LEP). Consumer advocates, industry representatives, state and federal regulators, and academics have been invited to exchange information on a range of issues. The agenda lists the following presentations and panel discussions:

  • Debt Collection & the Latino Community
  • Pre-Litigation Debt Collection from Latino Consumers
  • The Experience of LEP Latinos in Debt Collection Litigation
  • Credit Reporting Issues Among LEP Latinos
  • Developing Improved Strategies for Educating and Engaging LEP Latinos About Their Debt Collection Rights

The full-day event will conclude with a discussion between the CFPB’s Associate Director of Consumer Education and Engagement Gail Hillebrand and the FTC’s Assistant Director of the Division of Financial Practices Christopher Koegel about potential next steps by federal regulators to address the debt collection and credit reporting issues faced by the Latino community.

This roundtable reflects the CFPB’s ongoing interest in the Latino community, including the launch of the CFPB’s Spanish-language website, testing Spanish-language versions of mortgage disclosures, and enforcement actions that involved Spanish-language allegations.


CFPB Explores Checking Account Screening Policies and Practices

Posted in Deposit Accounts

Today, the CFPB held a forum to learn more about how consumers are impacted by checking account screening policies and procedures. The CFPB recognizes that checking accounts are one of the most widely used financial products by consumers, but the CFPB has expressed concerns that screening practices may be preventing consumers from gaining access to basic checking accounts. During the forum, the CFPB heard presentations from consumer groups, federal and local government officials, and industry representatives on the following topics:

  • The Account Screening Information Ecosystem and Financial Institution Screening Practices
  • Consumer Experiences
  • Improving Information and Access for Consumers

According to the CFPB, many banks and credit unions rely on reports provided by specialty consumer reporting agencies (CRAs) to determine whether to open a checking account for new customers. CRAs that specialize in checking account screening commonly provide banks and credit unions with information about a consumer’s check writing and account history, including whether a consumer has had a previous account closed and whether the consumer has a record of bounced or returned checks and overdrafts. In addition to these specialty reports, banks and credit unions may also screen consumers to determine if they pose a credit risk when deciding whether to open a consumer checking account.

In prepared remarks, CFPB Director Richard Cordray stated that, “The Consumer Bureau has three areas of concern. First, we are concerned about the information accuracy of these reports. Second, we are concerned about people’s ability to access these reports and dispute any incorrect information they may find. Third, we are concerned about the ways in which these reports are being used.”

The CFPB identified the following potential next steps to improve checking account screening policies and practices:

  • Increase the accuracy of data furnished to and reported by consumer reporting agencies;
  • Identify how institutions can use various screening tools to manage risk without unnecessarily excluding potential accountholders;
  • Inform consumers about their rights to review their account histories and correct any inaccuracies; and
  • Inform consumers about how they can access different account products that meet their needs.

Director Cordray also noted that, “We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude ‘black lists’ where consumers are turned down for an account simply because their name appears on the list. We envision a process that better understands consumers’ needs and can provide an account that is appropriate to their personal circumstances.”


CFPB Updates Mortgage Rules Readiness Guide to Cover TILA-RESPA Integrated Mortgage Disclosure Rule

Posted in CFPB General

The CFPB has released Version 3.0 of its “2014 CFPB Dodd-Frank Mortgage Rules Readiness Guide.”  The Guide, originally issued in July 2013, now contains changes to the final rules issued through August 1, 2014.  The updated Guide includes the TILA-RESPA Integrated Mortgage Disclosures Rule that takes effect in August 2015.

According to the CFPB, the Guide provides guidelines to “help financial institutions come into and maintain compliance with the new mortgage rules.”  Designed to help institutions of all sizes, the Guide consists of: (1) a summary of the rules, (2) a readiness questionnaire, (3) frequently asked questions, and (4) tools.

FDIC to Host Teleconference on ATR/QM and Loan Originator Compensation Final Rules

Posted in CFPB General, CFPB Rulemaking

On October 22 from 2:00 to 3:30 p.m., the FDIC’s Division of Depositor and Consumer Protection will host a teleconference as part of its periodic series of events for bankers on important banking regulatory issues in the compliance and consumer protection area.  According to the announcement, the upcoming teleconference will focus on common questions and answers regarding the implementation of the Ability-to-Repay/Qualified Mortgage and the Loan Originator Compensation Final Rules. Specifically, the teleconference will address issues raised by community banks about these rules.  The announcement provides no indication whether the CFPB staff will participate in the call.

The session is free, but registration is required.

CFPB Provides Guidance on the New Loan Estimate

Posted in CFPB General, CFPB Rulemaking

On October 1, 2014, the CFPB staff and Federal Reserve Board co-hosted a webinar that addressed questions about the Final TILA-RESPA Integrated Disclosure Rule that will be effective for applications received by creditors or mortgage brokers on or after August 1, 2015.  The webinar focused on the Loan Estimate and addressed specific questions regarding the content of the Loan Estimate form that relate to corresponding provisions of the Closing Disclosure.   Many of the issues covered were in response to questions received by the CFPB from mortgage industry stakeholders and technology vendors who need additional information in order to facilitate the development of compliance and quality control procedures and software.

The webinar is the third in a planned series to address the new rule.  In the initial webinar, the CFPB staff provided a basic overview of the final rule and new disclosures.  In the second webinar, the CFPB staff focused on core operation issues such as the receipt of an application, assumptions, fee tolerances, record retention, and timing for the initial and revised Loan Estimates.

According to the CFPB staff, this webinar and the ones that will follow will be in the format of a spoken Q&A.  Although the CFPB staff does not plan to issue written Q&A, the staff believes this approach will help facilitate clear guidance on the new rules in an accessible way.  As we have stated before, industry members would prefer formal written guidance.  Among other concerns, the CFPB approach presents challenges to the ability of hearing impaired individuals to benefit from the guidance.

During the webinar the CFPB staff provided a high-level overview of the rule and answered more than thirty technical questions.  Below is a summary of select questions of interest addressed by the CFPB staff.  The topics covered include: (1) brokered transactions, (2) origination charges, (3) calculating cash to close, and (4) the adjustable payment and adjustable interest rate tables.  More >

U.S. Supreme Court Invites Solicitor General’s Views On Whether Certiorari Should Be Granted In Case Involving Standing To Recover Statutory Damages Absent Any Actual Damages

Posted in CFPB General

Yesterday, the U.S. Supreme Court invited the Solicitor General to file a brief to express the Obama administration’s views on whether certiorari should be granted in a consumer case involving an important issue of statutory standing. In the case – Spokeo v. Robins – the issue is whether a plaintiff asserting a private cause of action under the federal Fair Credit Reporting Act has the requisite injury-in-fact for Article III standing when his complaint alleges no injury other than violation of the statutory right itself. See our prior e-alert on the Ninth Circuit’s decision in Spokeo, holding that standing did exist.

For the past few years, this issue of standing has been percolating in federal appellate courts in various consumer statutory contexts. In 2010, in Edwards v. First American Corp., the Ninth Circuit held that a plaintiff bringing a claim under RESPA possesses Article III standing to recover statutory damages even in the absence of any actual damages caused by the alleged RESPA violation. The U.S. Supreme Court initially granted certiorari in Edwards, and – upon the Court’s request – the Solicitor General and the CFPB jointly filed an amicus brief arguing that deprivation of statutory rights is all that is required for standing under RESPA. Ultimately, the Supreme Court did not address the merits of the issue in Edwards, and instead dismissed the writ as “improvidently granted.” See our prior blog posts about Edwards here and here.

Last year, in Charvat v. Mutual First Federal Credit Union, the Eighth Circuit held that the plaintiff did have standing to assert a claim under the federal Electronic Fund Transfer Act for the failure of an ATM to contain a transaction fee notice, even if the plaintiff had suffered only “informational injury” and not any economic or other injury. The Supreme Court denied certiorari in Charvat earlier this year. See our prior blog post on Charvat.

Spokeo gives the U.S. Supreme Court another opportunity to hear this significant issue of consumer statutory standing. For details on the parties’ arguments in Spokeo, see the petition for certiorari, opposition brief, and reply brief. In addition, several amicus briefs in support of granting certiorari have been filed in Spokeo, which can be found here (by Pacific Legal Foundation), here (by ACA International), here (by Trans Union LLC), here (by Chamber of Commerce of the United States of America), here (by eBay Inc., Facebook, Inc., Google, Inc. and Yahoo! Inc.), here (by Experian Information Solutions, Inc.), here (by Consumer Data Industry Association), here (by National Association of Professional Background Screeners), here (by New England Legal Foundation), and here (by DRI – The Voice of the Defense Bar). There is no deadline for the Solicitor General to file its brief. We will closely monitor the proceedings in Spokeo given its potential to impact the ability of consumers to recover under a wide array of consumer protection statutes where actual damages are often difficult to prove or non-existent.

CFPB’s Rulemaking Process Gets Good Report Card from OIG Report with Only Minor Criticisms

Posted in CFPB Rulemaking

A September 29, 2014 Report of the Joint Federal Reserve/CFPB Office of the Inspector General (OIG) concluded that the CFPB’s rulemaking process generally complies with the requirements of Section 1100G of the Dodd-Frank legislation and offered only minor criticisms identifying potential improvements. Section 1100G amended the Regulatory Flexibility Act to require the Bureau to (A) assess the impact of any proposed rule on the cost of credit for small business entities through regulatory flexibility analyses and (B) to convene panels to seek direct input from small business entities prior to issuing certain rules.

The CFPB’s Division of Research, Markets, and Regulations (RMR) created two internal guidance documents that outline the agency’s process to comply with these requirements. OIG reviewed both documents, along with some randomly selected rulemaking proceedings, to assess overall compliance with Section 1100G.

The report makes three recommendations predicated principally on the following findings:

  • RMR’s interim policies and procedures have been in use for approximately two years without being updated or finalized
  • Those interim policies and procedures afforded teams significant discretion in their 1100G rulemaking approach to regulatory analysis, which contributed to a variance in documentation and inconsistent knowledge transfer practices
  • RMR takes an inconsistent approach with respect to storing supporting documentation related to 1100G rulemakings.

The three recommendations offered by the report are for the Bureau to:

  1. Finalize RMR’s interim policies and procedures;
  2. Establish a standard approach to manage electronic documents that facilitates retrieval of Section 1100G rulemaking supporting documentation; and
  3. Ensure that the standard approach complies with CFPB’s Policy for Records Management, in addition to other applicable provisions, such as the Federal Records Act, including National Archives and Records Administration regulations.