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Federal agencies adopt Dodd-Frank risk retention rule

Posted in Federal Agencies, Hot Issues

On October 22, 2014, six federal agencies adopted the final Credit Risk Retention Rule under Section 941 of the Dodd-Frank Act.  The final rule will require sponsors of securitizations to retain an economic interest in the assets that they securitize.

When members of the Federal Reserve voted unanimously to adopt the final rule, they expressed hope that its implementation will address concerns about the risk taking that contributed to the financial crisis.  According to Chair Janet Yellen, “Often called “skin in the game,” risk retention requirements better align the interests of sponsors and investors by providing an economic incentive for sponsors to monitor the quality of securitized assets.”

Pursuant to the Dodd-Frank Act, the final rule is being issued jointly by the SEC, FDIC, Federal Reserve, OCC, FHFA, and HUD.  The final rule generally requires sponsors of asset-backed securities to retain not less than five percent of the credit risk underlying the securities and does not permit sponsors to transfer or hedge that credit risk.

The rule also provides exemptions for certain securitizations, including securitizations of qualified residential mortgages (QRM).  Further, the rule aligns the QRM definition with that of a qualified mortgage as defined by the CFPB.  The final rule requires the agencies to review the definition of QRM within four years after the effective date of the rule with regard to the securitization of residential mortgages and every five years thereafter.

The final rule will be effective one year after publication in the Federal Register for residential mortgage-backed securitizations and two years after publication for all other securitization types.

CFPB updated mortgage servicing transfer guidance published in Federal Register

Posted in Mortgages

In yesterday’s Federal Register, the CFPB published the compliance bulletin and policy guidance (Bulletin 2014-01) regarding mortgage servicing transfers that it previously issued on August 19, 2014 (New Guidance).  The New Guidance updates and replaces earlier guidance regarding mortgage servicing transfers set forth in Bulletin 2013-01.  We summarized the New Guidance in a prior blog post.

The New Guidance as published in the Federal Register does not include Appendix A which was part of the version issued on August 19.  The Appendix contained a list of key regulatory provisions related to servicing transfers and mentioned in the New Guidance.

The Federal Register version gives the following cryptic description of the effective date of the New Guidance: “This bulletin is effective October 23, 2014 and applicable beginning August 19, 2014.”

Defendants file appeal in NY regulator’s lawsuit using Dodd-Frank authority

Posted in UDAAP

The defendants in the lawsuit brought by Benjamin Lawsky, the Superintendent of the New York Department of Financial Services, using his Dodd-Frank enforcement authority have filed an appeal with the U.S. Court of Appeals for the Second Circuit.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action for a violation of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices.

The defendants, a large subprime auto lender and its individual owner, are seeking to overturn the district court’s order denying their motion to modify a preliminary injunction entered by the court freezing the defendants’ assets and enjoining them from engaging in new loan business.  In their motion, the defendants also sought to reduce the fees of the receiver appointed by the district court.  The defendants must file their brief by December 8.

In addition to Mr. Lawsky’s lawsuit, we have also been following lawsuits filed by the AGs of Illinois and Mississippi using their Dodd-Frank enforcement authority.




Senator Crapo seeks information on CFPB’s regulatory streamlining efforts

Posted in CFPB Rulemaking

In our blog post yesterday about the CFPB’s final rule allowing an alternative online delivery method for annual privacy notices, we commented that the CFPB has made limited progress on its regulatory streamlining initiative launched in December 2011.  The CFPB’s streamlining efforts were also the subject of a letter sent to Director Cordray yesterday by Senator Mike Crapo, Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs.

Senator Crapo’s letter is intended as a follow up to Director Cordray’s September 2014 appearance before the Committee.  The letter seeks information intended to provide “a better understanding of how the CFPB plans to proceed upon a retrospective review and any future evaluation of outdated, unnecessary or unduly burdensome regulations.”  In the letter, Senator Crapo asks Director Cordray to provide what current review process the CFPB is undertaking to ensure that its existing regulations, including those for which authority was transferred to the CFPB by Dodd-Frank, are “no longer outdated, unnecessary or unduly burdensome.”

He also asks whether Director Cordray will commit to (1) having the CFPB engage in a retrospective review of its regulations as set forth in Executive Order 13579 (which called for independent agencies to develop and implement a plan for the regular review and amendment of agency regulations), and (2) conducting the retrospective review in the same manner as required for the prudential banking regulators under the Economic Growth and Regulatory Paperwork Reduction Act of 1996.  The EGRPRA requires that regulations prescribed by the Federal Financial Institutions Examination Council, OCC, FDIC and Fed be reviewed at least once every 10 years to identify outdated, unnecessary or unduly burdensome regulations.

CFPB finalizes amendments to mortgage rules

Posted in CFPB Rulemaking, Mortgages

The CFPB has issued a final rule amending certain provisions of the 2013 Title XIV final mortgage rules.  While in its press release the CFPB describes the amendments as “minor adjustments to its mortgage rules,” the final rule contains several major changes from the CFPB’s proposal.

QM Points and Fees Cure.  Generally, to be considered a qualified mortgage (QM), a mortgage loan must not contain points and fees that exceed three percent (3%) of the loan if the principal is $100,000 or more.  The final rule addresses the scenario when a lender discovers post-consummation that a loan it originated is not a QM because the points and fees exceeded the 3% (or other applicable) cap.

As proposed, the rule creates a procedure permitting the lender to refund the overage amount of points and fees to the borrower within 210 days of consummation and keep the loan’s QM status.  However, while allowing a longer cure period than the proposal’s 120 day period, the final rule only allows a cure for loans consummated on or after the final rule’s effective date and on or before the sunset date of January 10, 2021.  Also unlike the proposal, the final rule includes events that cut off the ability to cure.  The cure is only available prior to the occurrence of any of the following events: (1) the consumer’s institution of an action in connection with the loan; (2) the creditor, assignee or servicer receiving written notice from the consumer that the loan’s points and fees exceed the applicable limit, or (3) the consumer becoming 60 days past due.  And in another significant change from the proposal, the final rule requires the lender to pay interest on the points and fees overage at the contract rate applicable during the period from consummation until payment is made to the consumer.

The final rule includes a requirement for the lender to maintain and follow policies and procedures for “post-consummation review of points and fees” (but expressly does not require a full loan review as some commenters thought the proposal would have mandated).  However, the final rule does not include the CFPB’s proposed requirement that the lender must have originated the mortgage loan in good faith as a QM.

Alternative Small Servicer Definition.  Under the RESPA-TILA mortgage servicing rules, “small servicers” (as defined by the servicing rules) are exempt from certain provisions of the rules if they service 5,000 or fewer mortgage loans annually and meet other requirements.  The CFPB proposed an alternative definition of a small servicer to address concerns that nonprofits that receive fees to service loans for other associated nonprofits might not be able to qualify for the small servicer exemption.  As proposed, the final rule expands the definition of a small servicer to include a nonprofit entity that services 5,000 or fewer mortgage loans, including any mortgage loans services on behalf of associated nonprofit entities, for all of which the servicer or an associated nonprofit is the creditor.

Nonprofit Lender Exemption from ATR Provisions.  The ability-to-repay (ATR) rule exempts certain nonprofits that make mortgage loans to low or moderate income borrowers from certain provisions of the rule if they make no more than 200 dwelling-secured loans per year and meet other specific requirements.  As proposed, the final rule amends the exemption so that subordinate lien loans for down payment assistance and certain other purposes that are interest-free, forgivable, and meet certain other conditions (so-called “soft seconds”) would not count toward the annual 200 loan limit.

Effective Date.  Except for a commentary revision dealing with the relationship between the QM cure and the RESPA/Regulation X tolerance cure under the TILA-RESPA integrated disclosure rule that becomes effective next year, the final rule becomes effective upon its publication in the Federal Register.  Under Regulation X, if any charges at settlement exceed the charges listed in the good faith estimate by more than the permitted tolerance, the lender can cure the tolerance violation by reimbursing the amount by which the tolerance was exceeded on or within 30 calendar days after settlement.  The final rule adds a comment that provides that amounts paid to a consumer pursuant to the QM cure can be offset by amounts paid to the consumer pursuant to the RESPA/Regulation X tolerance cure to the extent the amount paid to cure the tolerance violation is being applied to points and fees.  Effective August 1, 2015, to coincide with the effective date of the CFPB’s final rule integrating the TILA and RESPA application and closing disclosures, that comment will be replaced with a substantially similar new comment that references the tolerance cure provision in the TILA-RESPA integrated disclosure rule.

Unaddressed Issues.  In its proposal, the CFPB requested comments on two additional issues: (1) whether and how to provide for a cure provision for QM loans that inadvertently exceed the 43% debt-to-income ratio required under the ATR rule; and (2) the credit extension limit applicable to the small creditor exemption under various Dodd-Frank rules.  The final rule does not address these issues.  In the final rule’s supplementary information, the CFPB states that it is considering comments submitted on these issues and whether to address them in a future rulemaking.




CFPB issues final rule allowing alternative online delivery method for annual privacy notices

Posted in CFPB Rulemaking, Privacy

Nearly three years after identifying the Gramm-Leach-Bliley Act (GLBA) annual privacy notice requirement as a candidate for streamlining, the CFPB issued a final rule earlier this week to allow financial institutions that meet certain requirements to deliver such notices using an alternative online delivery method.  The rule will be effective immediately upon its publication in the Federal Register.

Financial institutions have typically mailed these notices.  Under the CFPB’s final rule, a financial institution that meets the rule’s requirements will be able to save on mailing costs by posting its annual privacy notice on its website.  While offering potential benefits to banks and nonbanks, the CFPB’s final rule does not amend separate GLBA regulations that have been issued by the SEC, CFTC or FTC.  This means the CFPB’s final rule will not apply to an entity that is subject to the GLBA regulations of these other agencies.  For example, auto dealers for whom the FTC has GLBA rulewriting authority would not be able to take advantage of the CFPB’s final rule.

While industry is generally pleased with the CFPB’s issuance of the final rule, the CFPB’s progress on streamlining has been limited.  The GLBA annual privacy notice requirement was one of nine specific potential opportunities for streamlining regulations identified by the CFPB in the notice it published in December 2012.  In the notice, the CFPB also sought input from commenters on other streamlining opportunities.  Although two of the other specific opportunities identified by the CFPB have been addressed (the ATM sticker notice which was eliminated by Congress in 2012 and the credit card independent ability-to-pay requirement for applicants who are 21 or older which the CFPB eliminated last year), other streamlining opportunities identified by the CFPB and commenters continue to await the CFPB’s attention.  In the December 2012 notice, the CFPB suggested that it would focus on streamlining once it had completed the mortgage-related rulemaking required by Dodd-Frank.  Now that such rulemaking is nearly completed, we hope the CFPB will make streamlining a priority.

For a discussion of the rule’s requirements for using the alternative online delivery method, see our legal alert.

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.