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Supreme Court to hear oral argument on Jan. 21st in FHA disparate impact case

Posted in Fair Credit

The U.S. Supreme Court has set January 21, 2015 as the date for oral argument in
Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., which is the case presenting the issue whether disparate impact claims are cognizable under the Fair Housing Act.  The petitioners’ merits brief was filed on November 17th.

Given that the Supreme Court granted the certiorari petition on October 2nd, the January oral argument date seems particularly expeditious.  The scheduling of an expeditious oral argument likely reflects a desire to resolve the issue presented.  The two prior cases presenting this issue, Township of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. and Magner v. Gallagher, were both settled after the completion of merits briefing but before the Supreme Court could hear oral argument and resolve the question of whether disparate impact claims are cognizable under the FHA.



CFPB’s first criminal referral ends in 9-year sentence

Posted in CFPB Enforcement

The CFPB’s first publicly announced criminal referral has resulted in a nine-year sentence for the principal of a debt settlement company, who pled guilty to several of the charges.  The referral, which was made to the U.S. Attorney for the Southern District of New York, arose out of the CFPB’s investigation of two debt-relief service providers and related entities and was announced by Director Cordray at a May 2013 press conference.  In addition to his prison term, the principal was sentenced to three years of supervised release and ordered to pay $2.1 million in restitution and a fine of $15,000.

The CFPB has also named individuals as defendants in a number of other enforcement actions it has filed and Director Cordray has made statements indicating that the CFPB is committed to pursuing individuals, and not just companies, when exercising its enforcement authority.  In addition, given that in announcing the CFPB’s first criminal referral Director Cordray stated that the CFPB would be looking for more opportunities “to coordinate and collaborate” with the U.S. Attorney, more criminal referrals by the CFPB of both companies and individuals can also be expected.

CFPB praises change in military discretionary allotment system

Posted in Military Issues

CFPB Assistant Director for Servicemember Affairs Holly Petraeus has issued a statement applauding changes to the military discretionary allotment system announced last week by the Department of Defense (DoD).

The military discretionary allotment system allows servicemembers to automatically direct a portion of their paycheck to financial institutions or others of their choosing.  Effective
January 1, 2015, active duty service members will no longer be able to make allotments for the following types of purchases: (1) vehicles, such as automobiles, motorcycles and boats;
(2) appliances or household goods, such as furniture, washers and dryers; (3) electronics, such as laptops, tablets, cell phones and televisions; or (4) other consumer items that are tangible and moveable.  The change does not affect existing allotments, military retirees or DoD civilians.

In her comments, Ms. Petraeus noted that “the CFPB has taken multiple actions to enforce the law against entities whose businesses were largely premised on receiving payments from servicemembers, often through the military allotment system.”  Among such actions was the CFPB’s lawsuit against USA Discounters, a retailer that operates a chain of stores near military bases and offers financing for purchases through retail installment sales contracts, which involved charges of an alleged fee scam.  The August 2014 consent order required
USA Discounters to make refunds to servicemembers of more than $350,000 and pay a $50,000 civil money penalty.

AFSA vehicle sales finance study finds significant flaws in CFPB disparate impact methodology and approach

Posted in Auto Finance, Fair Credit

A study of indirect auto financing commissioned by the American Financial Services Association found that the CFPB’s proxy methodology for measuring disparities in auto dealer reserve is “conceptually flawed in its application and subject to significant bias and estimation error.”  Among the study’s other key findings was that the CFPB’s preferred alternative dealer “compensation” methods, namely the use of a fixed fee, fixed percentage of the amount financed, or hybrid of the two, may increase the cost of credit for consumers.

Conducted by Charles River Associates, the study used an array of industry data and a data base consisting of approximately 8.2 million new and used motor vehicle retail installment contracts originated during 2012 and 2013.  It measured disparities in dealer reserve using the Bayesian Improved Surname Geocoding (BISG) methodology used by the CFPB in supervisory examinations to proxy for race and ethnicity.  (The CFPB explained its use of the BISG proxy method in a white paper that accompanied the release of the CFPB’s proposed larger participant rule for the auto financing market and a special edition of Supervisory Highlights describing the CFPB’s fair credit supervisory activity in “the indirect automobile lending market.”)

The study’s other key findings were the following:

  • When appropriately considering the relevant market complexities and adjusting for proxy bias and error, the observed variations in dealer reserve are largely explained.  The researchers found little evidence that dealers systematically charge different reserves on a prohibited basis and instead found that reserve variations could “largely be explained by objective factors other than race and ethnicity.”
  • The use of biased race and ethnicity proxies creates significant measurement error, which likely results in overstated disparities.  The researchers found that the BISG proxies overestimated minority population counts and that the use of such proxies “can contribute to inflated estimates of alleged consumer harm.”
  • In consent orders involving indirect financing, the Department of Justice has recognized that dealer reserves depend on objective, observable business factors.  The researchers concluded that failure to consider legitimate business factors for observed disparities increases the potential for reaching erroneous conclusions.  The researchers also noted that these factors are generally unknown to the financial institution and regulators.
  • A portfolio-level analysis of retail installment contracts acquired from different dealerships with different operating models, cost structures, pricing policies, competitive landscapes and the like may create the appearance of differential pricing on a prohibited basis when none exists.  The researchers stated that “[g]iven the highly competitive nature of automotive finance, each financial institution observes the pricing of only a subset of a dealer’s contract portfolio, rather than the entire portfolio.”  The researchers also noted that the assignment of contracts is not random and suggested that “conclusions about dealer compensation patterns cannot be ascertained from the analysis of the contracts assigned to a given individual financial institution.”

The study concludes that the “[f]ailure to consider either competition or pricing complexities allows for the application of an overly-simplistic and biased analytical framework, which leads regulators to pursue overly onerous civil-money penalties from financial institutions.”  In this regard, the study notes that “[g]iven the asymmetric nature of information between dealers and financial institutions, financial institutions and their regulators are in a less than ideal position to evaluate the pricing dynamics of transactions at dealers.”  Notwithstanding these limitations, the researchers conclude, based upon their more refined analysis, that “these pricing dynamics are largely explained by several objective factors, rather than by race and ethnicity.”


CFPB Fall 2014 rulemaking agenda indicates further delay in proposed debt collection and other rules

Posted in CFPB Rulemaking

Based on the CFPB’s Fall 2014 rulemaking agenda, proposed rules dealing with payday loans/deposit advance products, overdrafts, and debt collection are still months away.

The CFPB’s timetables for “prerule activities” are February 2015 for payday loans/deposit advance products, July 2015 for overdrafts, and April 2015 for debt collection.  The CFPB’s Spring 2014 agenda had given timetables for “prerule activities” of September 2014 for payday loans and deposit advance products, February 2015 for overdrafts, and December 2014 for debt collection.

The agenda includes no timetable for finalizing the CFPB’s proposed larger participant rule for auto finance (the comment period for which closes on December 8) or its prepaid accounts proposal (the 90-day comment for which will not begin to run until the proposal is published in the Federal Register).  However, the agenda does give a July 2015 date for when the CFPB expects to finalize its proposed rule amending Regulation C to expand Home Mortgage Disclosure Act data reporting requirements (the comment period for which closed on October 29, 2014).  It also gives a December 2014 date for when the CFPB expects to finalize its proposed rule regarding appraisal management companies (which was proposed jointly with five other federal agencies).


CFPB Director Cordray Issues Warning to Bankers

Posted in CFPB General, Richard Cordray

Director Cordray’s remarks to the Clearing House yesterday should unsettle bankers and payday lenders alike. In his talk, Director Cordray challenged bankers to bow to the inevitable. He suggested that sooner, rather than later, the industry should invest the billions of dollars required to build a payment system with “faster and even real-time payments” where “the interests of consumers remain at the top of [bankers'] minds.” The system envisioned by Director Cordray would be guided by four principles:

First, faster payments should bring with them faster access to the funds that a consumer deposits…. Second, a faster payment system should include real-time access to information about the status of an account as well as protections from hair-trigger assessments of fees…. [Director Cordray does not favor a "model based on 'bounced check' fees." Get ready for a tough overdraft fee rule.] Third, faster payments must be accompanied by robust consumer protections with respect to fraudulent or otherwise unauthorized transactions and erroneous debits…. Fourth, and finally, a faster payment system should be accessible to all consumers and not just to the most privileged.

Director Cordray admonished banks that accept as customers for payment services “unscrupulous lenders and their payment processors.” Also, he criticized banks on the other side of payment transactions, observing that “consumers expect their own bank or credit union to be on their side.” All too often, he said, these institutions fail to honor stop payment orders, revocation orders and requests to close accounts to halt the abuse.

So who are the “unscrupulous lenders” of concern to Director Cordray? First, of course, are out-and-out fraudsters. Citing a case of a consumer who was cheated by an online payday lender that bilked consumers for over $100 million, Director Cordray noted that electronic payment systems “can be misused to victimize consumers unless banks and the system administrators work to police and enforce safeguards.”

But non-fraudulent payday lenders also came in for criticism. Director Cordray pointedly contrasted ACH return rates for credit cards, mortgage loans, and auto loans, pegged by JP Morgan Chase at less than 1 percent on average, to a “staggering” 25 percent return rate on payments for payday loans. He went on to criticize “fishing expeditions” to collect payments and the “particularly common and troublesome … practice of some online lenders [of] repeatedly sending automatic debits to collect payments.” Citing a few egregious examples, he added that, surely, “the financial institutions that accept these unscrupulous lenders and their payment processors as clients need to do a better job of ensuring that they are honoring the protections afforded consumers under the Electronic Fund Transfer Act.”

Director Cordray noted that the EFTA, TILA and NACHA rules are designed to protect consumers and merchants alike. “But even if these rules were all that they should be, merely having rules and safeguards is not enough – they need to be policed and enforced aggressively if they are to have their intended effect of actually protecting consumers.” Payday lenders should take heed of the continuing pressure on their banks: Steps need to be taken to taken to reduce return rates, potentially including new limits on repeat submissions of rejected payments. Director Cordray does not sound like a regulator who thinks Operation Choke Point has gone too far.

CFPB gives guidance and answers FAQ on the new Closing Disclosure

Posted in CFPB General, CFPB Rulemaking, TILA / RESPA

On November 18, 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 Closing Disclosure and addressed specific questions regarding the content of the Closing Disclosure.

The webinar is the fourth in a series to address implementation of the new rule.  Topics covered in the past include an overview of the final rule, frequently asked questions, and the loan estimate form.  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.

During the webinar the CFPB staff provided a high-level walk through of the Closing Disclosure Form and addressed several issues, including the following:

•     For transactions with a seller, the staff advised that the sales price should be disclosed at the top of page 1, and that for transactions without a seller, such as a refinance, a creditor should disclose the appraised value and label it “appraised prop value” (assuming there is an appraisal).  In addition, the CFPB staff referred to comment § 1026.38(a)(3)(vii)-1 and said that in cases where the creditor has not yet obtained an appraisal, the rule provides some degree of flexibility and allows creditors to disclose an estimated value as long as it is labeled “estimated prop value.”

•    The staff also said that although the categories identified on page two of the Closing Disclosure are the same as those on the Loan Estimate, the Closing Disclosure allows greater flexibility for revisions to the spacing.  For example, the number of rows can be reduced or added by the creditor for each category based on need.  According to the CFPB staff, if the rows provided are not sufficient to disclose all the items, page two may be broken into two pages – page 2(a) and page 2(b), with loan costs listed on 2(a) and other costs on 2(b).  The CFPB staff noted that Form H-25(h) in Appendix H is an example of how to divide page two into separate pages.  The staff referred to the CFPB’s TILA/RESPA Integrated Disclosure—Guide to the Loan Estimate and Closing Disclosure form  that is available on its regulatory implementation website, along with sample forms, for additional guidance.

•     The staff advised that charges disclosed in one category of the Loan Costs section in the Loan Estimate may need to be disclosed in a different category of the section in the Closing Disclosure.  For example, if title charges were disclosed in the Services You Can Shop For category of the Loan Costs section in the Loan Estimate and the borrower selected the title company identified by the creditor on the written list of providers, the title charges would have to be disclosed in the Services Borrower Did Not Shop For category of the Loan Costs section the Closing Disclosure (because the borrower would not have actually shopped for a provider under the rule).

•     The staff said that under “Other Costs” on page two of the Closing Disclosure, general lender credits not associated with any particular item must be listed at the bottom of the page as a negative number.  The lender credit must be listed along with a narrative description if any refund is being provided by the creditor pursuant to the good faith analysis of charges.  Notably, the CFPB staff said that lender credits associated with specific closing costs must be disclosed as paid by others and have an “L” for lender designation.

•     The CFPB staff pointed out that the Loan Estimate contains less detail with regard to transfer taxes than the Closing Disclosure.  The main difference between the two forms in this respect is that transfer taxes are itemized on the Closing Disclosure as opposed to aggregated into a single sum on the Loan Estimate.  The itemization is for each tax and for each government entity because multiple taxes may be assessed by each government entity.

In addition to giving a detailed walkthrough of the Closing Disclosure Form, the CFPB staff used the webinar as an opportunity answer a variety of questions posed by the industry.  We have prepared below an unofficial summary of the questions addressed by the CFPB staff. More >

CFPB issues FY 2014 financial report; GAO finds material weakness in CFPB reporting controls

Posted in CFPB General

The CFPB has issued its financial report for its 2014 fiscal year, which ended on September 30, 2014.  Perhaps most illustrative of the CFPB’s growth are the report’s statistics on the CFPB’s employees and funding.  The report indicates that the number of CFPB employees grew from 663 in FY 2011 to 1,443 in FY 2014.  Transfers to the CFPB from the Fed (which are capped by Dodd-Frank at a pre-set percentage of the Fed’s total 2009 operating expenses, subject to an annual adjustment) increased from $162 million in FY 2011 to $534 million in FY 2014.   The report also indicates that as of the end of FY 2014, 45% of the CFPB’s employees were in its Supervision, Enforcement and Fair Lending Division.

The report includes the CFPB’s annual report on its civil penalty fund (CPF).  It states that as of September 30, 2014, the CPF had $112.8 million in funds available for future allocation to harmed consumers and/or financial education.  Curiously, the report indicates that $13.38 million of the CPF was allocated for financial education in FY 2013 but there was no allocation in FY 2014. The report includes information on civil penalties collected by the CFPB in FYs 2013 and 2014, which amounted to, respectively, $49.5 million and $77.5 million. It also provides information on allocations made to consumers from the CPF during FYs 2013 and 2014.

The report contains an independent auditor’s report from the U.S. Government Accountability (GAO).  In the audit report, the GAO states that during its FY 2014 audit, it found “serious control deficiencies that affected CFPB’s determination and reporting of accounts payable accruals.  Specifically, we found that CFPB did not have effective procedures in place to determine and record an appropriate amount for goods and services received but not yet paid as of September 30, 2014.  Additionally, CFPB did not have effective review procedures to timely detect and correct inaccuracies in the accrual amounts.”

The GAO concluded that these deficiencies “represent a material weakness” in the CFPB’s internal controls.  The GAO notes that it had reported a significant deficiency in the CFPB’s reporting of accounts payable in its FY 2013 audit opinion but the corrective actions taken by the CFPB were insufficient to remedy the deficiency.  (According to the GAO, a “significant deficiency is a deficiency in internal controls “that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.”)  The GAO’s report outlines the steps the CFPB needs to take to remedy the deficiencies and warns that “because CFPB continues to grow as an agency, which has resulted in higher volumes of transactions each year, it is imperative that it address these issues in an effective and timely manner.”  The GAO also found a significant deficiency in the CFPB’s internal controls over accounting for property and equipment.

In a letter responding to the GAO’s audit report, Director Cordray outlines various corrective steps the CFPB plans to take in FY 2015 to remediate the deficiencies found by the GAO.


OIG updated work plan includes evaluations of CFPB enforcement-related processes and procedures

Posted in CFPB General

The Office of Inspector General’s (OIG) work plan, updated as of November 7, 2014, indicates that the OIG’s ongoing projects include audits of the CFPB’s information security program, pay and compensation program, distribution of civil penalty funds, public consumer complaint database and headquarters renovation costs.  Such projects also include an evaluation of the CFPB’s hiring process.

Among the OIG’s planned projects are an evaluation of the processes used by the CFPB’s enforcement office for protecting confidential information and an evaluation of the CFPB’s compliance with Dodd-Frank Act requirements for issuing civil investigative demands.  The OIG also plans to conduct an audit of the CFPB’s pay and compensation system, which will include an assessment of the controls around setting employees’ pay.

CFPB highlights alleged credit reporting errors relating to discharged student loans of disabled veterans

Posted in Credit Reports, Military Issues, Student Loans

In a new blog post, the CFPB provides credit reporting advice to service-disabled veterans who take advantage of federal student loan forgiveness available from the Department of Education for veterans who receive a 100 percent disability rating from the Department of Veterans Affairs.  The CFPB encourages veterans who use this benefit to confirm that their student loan servicer is providing correct information about their loan discharge to credit bureaus.  The blog post appears to have been triggered by complaints or reports of alleged credit reporting errors the CFPB has received from service-disabled veterans.

While framed as advice for veterans, the blog post also appears intended to serve as a warning to servicers.  Without providing any information as to the nature of the alleged errors, the CFPB stresses how such errors can negatively impact veterans.  It cites the complaint of a veteran whose credit score allegedly “fell by 150 points as a result of this type of error” and, as an “example of what could happen if a veteran tried to buy a home after a credit reporting error caused similar damage to her credit profile and score,” indicates such veteran could pay $45,000 in additional interest over the life of her mortgage loan.  The CFPB also reminds servicers that, in a bulletin issued earlier this year, companies who furnish information to credit bureaus were put “on notice” of their obligation to investigate disputed information.  The CFPB comments that it “will take appropriate action, as needed” and “will also continue to closely monitor complaints from veterans and other disabled student loan borrowers to make sure student loan servicers are furnishing correct information to the credit bureaus about disability discharges.”

Given the comments made by the CFPB in its blog post, we’re left wondering if the loans in question weren’t simply reported in accordance with the current contractually required standards for reporting discharged Title IV loans, and, if so, if the CFPB isn’t really taking issue with those standards.  In circumstances like this, it would be helpful if the CFPB would discuss its concerns with industry members, perhaps involve the Department of Education in those discussions, and then provide industry members with an opportunity to make changes in their reporting, rather than just asserting that the reporting is incorrect or inaccurate.