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Former CFPB examiner-in-charge Bo Ranney joins Ballard Spahr and will share his insights in a Dec. 9 webinar

Posted in CFPB Exams

I am pleased to introduce my new colleague Bo Ranney to our blog readers.  Bo joins Ballard Spahr’s Consumer Financial Services Group after having spent three years at the CFPB.  I expect Bo to be a valuable resource to our clients, particularly in preparing for CFPB exams and in dealing with CFPB examiners during the course of an ongoing exam.

Bo joined the CFPB’s Office of Supervision in October 2011.  Although based in Supervision, Bo also had opportunities during his tenure with the CFPB to work on matters for the CFPB’s Office of Enforcement and Research, Markets, and Regulations (RMR) Division.

While in Supervision, Bo was involved in numerous compliance examinations of bank and nonbank institutions and led exam teams as the examiner-in-charge.  In conducting the exams, Bo reviewed an institution’s consumer files and internal documents to ensure compliance with federal consumer financial protection laws.  He also regularly met with senior management at financial institutions to discuss alleged violations discovered during an exam and collaborated with CFPB Supervision Policy and Enforcement staff regarding how the Bureau should address such violations, including whether they should be identified as a matter requiring attention (MRA) in the exam report or considered for a public enforcement action.

As part of his work in Enforcement, Bo played a key role on the team that filed the CFPB’s first application for a temporary restraining order in a matter that involved a law firm that allegedly engaged in unlawful mortgage modification practices.  He also worked on cases involving alleged violations of the Consumer Financial Protection Act, the Fair Debt Collection Practices Act, the Mortgage Assistance Relief Services Rule, and the Telemarketing Sales Rule.  While in RMR, Bo worked across multiple Bureau Divisions to help produce small entity compliance guides addressing the Bureau’s new mortgage rules and related web content.

On December 9, from 12:00 PM to 1:00 PM ET, Bo will be sharing insights from his tenure at the CFPB in a webinar, “Everything You Want To Know About CFPB Exams but Have Been Afraid To Ask: An Insider’s Perspective.”  A link to register is available here.

Mortgage company that entered into CFPB consent order moves to dismiss class action claims

Posted in CFPB Enforcement, Mortgages

Earlier this week, Castle & Cooke Mortgage, LLC, the mortgage company that entered into a consent order with the CFPB in November 2013 to settle charges that it violated the
Regulation Z loan originator compensation rule (“LO Compensation Rule”), filed a motion to dismiss three counts of the class action complaint filed against it in July 2014 in a California federal court by a consumer who received redress under the consent order.  As demonstrated by the class action filing, a CFPB consent order, in the absence of releases from affected consumers, does not necessarily bring finality to the issues it covers.

The CFPB’s complaint alleged that after the LO Compensation Rule became effective, to continue compensating its loan officers based on borrowers’ interest rates, the mortgage company devised a quarterly bonus system under which loan officers would receive greater bonuses for originating loans at higher interest rates.  According to the CFPB, the bonus system was not reflected in any compensation agreements.  While the company’s payroll records reflected the bonus payments, the CFPB claimed there was nothing indicating what portion of a loan officer’s quarterly bonus was attributable to a particular loan.  (The LO Compensation Rule was adopted by the Fed in 2010 and had a mandatory compliance date of April 6, 2011.  The CFPB’s January 2013 loan originator compensation rule, which is effective
January 10, 2014, continues the LO Compensation Rule’s prohibitions, with certain revisions.)

In agreeing to entry of the consent order, the company did not admit any of the CFPB’s allegations other than jurisdictional facts.  The consent order included a  judgment for equitable monetary redress against the company and two officers, jointly and severally, in the amount of $9,228,896.  It also included a judgment for a civil money penalty against the company and the two officers, jointly and severally, in the amount of $4.0 million.  When we reported on the consent order, we commented that the size of the monetary relief likely was intended by the CFPB to send a strong message to the mortgage industry that violations of the LO Compensation Rule will be addressed in a serious manner.

As the named plaintiff noted in his class action complaint, the consent order stated that the redress provided by the company “shall not limit consumers’ rights in any way.”  His complaint makes claims on behalf of a nationwide class, which is defined to include all individual consumers who on or after April 1, 2011 obtained a mortgage loan from the company in which the company paid a bonus or other compensation based on the loan terms other than the amount of credit extended or paid a referral fee or split a charge other than for services actually performed.  The complaint alleges that the company’s violations of the LO Compensation Rule entitle the named plaintiff and class members to actual and statutory damages.  It also alleges that the bonus payments, to the extent the recipients were not bona fide employees of the mortgage company, were unlawful referral fees or fee splits under RESPA entitling the plaintiff and class members to three times the loan origination and settlement charges they paid to the mortgage company.  The complaint also includes claims that the bonuses violated the Utah Residential Mortgage Practices and Licensing Act and constituted unjust enrichment under Utah law and, as to a California subclass, violated California’s Unfair Competition Law (UCL).

On October 27, the mortgage company filed a motion to dismiss the RESPA, Utah unjust enrichment and California UCL claims.  With regard to the RESPA claim, the company argues that the complaint alleges no facts showing that the company paid a referral fee in connection with the named plaintiff’s loan or paid anyone for services not provided.  Citing Ninth Circuit precedent that RESPA Section 8 does not prohibit overcharges, the company further argues that the named plaintiff still does not have a RESPA claim to the extent he is trying to allege that he was charged too much for his loan.  The company argues that the plaintiff’s Utah unjust enrichment and California UCL claims should be dismissed because his TILA/Regulation X and other claims provide an adequate legal remedy.  As a further reason for dismissal of the UCL claim, the company argues that only injunctive relief and restitution are available under the UCL and plaintiff’s claim is one for damages rather than restitution.



CFPB highlights unlawful practices relating to mortgage and student loan servicing, debt collection, electronic fund transfers and consumer reporting

Posted in CFPB Exams, Credit Reports, Debt Collection, Electronic Payments, Mortgages, Student Loans

While mortgage and student loan servicing violations cited by the CFPB in its Fall 2014 Supervisory Highlights have grabbed the headlines, the report also includes noteworthy observations regarding the violations found by the CFPB in debt collection, electronic fund transfers and consumer reporting. The report covers supervision work completed by the CFPB between March 2014 and June 2014.  As in prior supervisory reports, the CFPB continues to be imprecise as to the number of entities at which it found the various violations discussed, thereby obscuring the magnitude or pervasiveness of the purported problems and detracting from the transparency it has promised.

The violations found by the CFPB include the following:

Mortgage servicing.  The CFPB’s observations are based on targeted reviews it conducted for compliance with the new mortgage rules.  The CFPB found that “one or more servicers” did not have any policies and procedures relating to oversight of service providers as mandated by the new rules or had policies relating to service providers that did not satisfy specific regulatory requirements.  The CFPB also found violations relating to loan modifications.  “[I]in at least one examination,” CFPB examiners found that a servicer had failed to timely convert a substantial number of trial modifications to permanent modifications after successful completion of the trial modifications.  Observing that interest accrued during the delay at the original contract rate rather than the permanent modification’s lower rate, the CFPB indicates that “servicers” capitalized interest at the higher rate into the principal balance due under the modification and continued to report as delinquent borrowers who were delinquent at the beginning of their trial modifications.  The delays combined with the negative consequences attributable to the delays were found by the CFPB to constitute an unfair practice.

“At least one servicer” was found to have initially sent permanent modification agreements to borrowers that did not match the terms approved by its underwriting software and, after receiving signed agreements from such borrowers, sent the borrowers updated modifications with materially different terms.  Having characterized the initial agreements as “misrepresentations about the available terms,” CFPB examiners determined that “one or more servicers” engaged in a deceptive practice in connection with the modifications.  The CFPB’s examiners also identified a deceptive practice “at one or more servicers” based on the servicer having told consumers that it would not seek a short sale deficiency judgment but not specifically waiving the loan owner’s right to pursue a deficiency judgment in short sale approval agreements.

Student loan servicing.  The CFPB found that “one or more supervised entities” had engaged in an unfair practice by allocating partial payments proportionally, or pro rata, among all loans, thereby creating delinquencies on all of the borrower’s loans and then imposing a late fee charge on each loan.  “[O]ne or more supervised entities” were also found to have engaged in unfair or deceptive practices by charging late fees on full payments received during the grace period.

“[A] student loan servicer” was found to have engaged in a deceptive practice by inflating minimum payments on periodic statements and online account statements through the inclusion of accrued interest on loans that were still in deferment.  CFPB examiners found that “one or more student loan servicers” failed to provide consumers with information needed to deduct student loan interest payments on their tax returns, with “at least one examination” revealing that a servicer, without adequate disclosures, had engaged in a deceptive practice by requiring consumers to provide an additional certification regarding the loan’s use for higher education expenses to obtain 1098-E forms.  CFPB examiners found it was a deceptive practice for the servicer if the certification was not completed, to issue online account statements indicating that the borrower had paid no deductible interest when the borrower had in fact paid such interest.

Other CFPB findings were that (1) “one or more supervised entities” had engaged in deceptive practices by communicating to borrowers that student loans were never dischargeable in bankruptcy, and (2) “at least one examination” revealed that a servicer had engaged in an unfair practice by using an automated dialer to make calls to delinquent borrowers that was not programmed to account for borrowers’ locations, thereby causing borrowers to receive “inconvenient” calls in the early morning or late at night (presumably the servicer was not considered to be a debt collector but was calling borrowers at times that would have been deemed to be inconvenient under or otherwise prohibited by the Fair Debt Collection Practices Act ).

Debt collection.  CFPB examiners found “[i]n one or more examinations” that debt collectors had charged convenience fees to consumers who paid by credit or debit card and lived in states where (1) such fees were prohibited by state law, or (2) the law was silent regarding the legality of such fees and the agreements creating the debt did not expressly authorize such fees.  The FDCPA limits fees that can be charged by a debt collector to those expressly authorized by the agreement creating the debt or “permitted by law.”  The implication of the CFPB’s view that a debt collector violates the FDCPA by charging convenience fees when state law is silent and the agreement creating the debt does not expressly authorize such fees is that (notwithstanding case law to the contrary) a fee is not “permitted by law” within the meaning of the FDCPA when it is assessed pursuant to a subsequent contract.

“In at least one examination” CFPB examiners found that a debt collector violated the FDCPA by routinely threating consumers with litigation even though it only initiated litigation on a “small fraction” of the accounts it collected.  “During one or more examinations,” CFPB examiners found debt collector employees had violated the FDCPA by regularly identifying their employer without being expressly requested to do so as required by the FDCPA.  CFPB examiners “[i]n examining one or more financial institutions” found unfair practices relating to debt sales in the form of overstated APRs in the account documents provided to debt buyers and significant delays in forwarding to debt buyers post-sale payments received from consumers.

Electronic fund transfers.  CFPB examiners found violations of the Regulation E error resolution requirements, including by “one or more institutions” that, when receiving oral notice of an error from a consumer, did not initiate an investigation until the consumer returned a dispute confirmation form or told consumers complaining about unauthorized transactions that they must first contact the merchant before an investigation could begin.  “During one or more examinations,” CFPB examiners found a violation of  the Regulation E limits on consumer liability for unauthorized transfers by denying the claim of a consumer who was unable to explain how his PIN was compromised even though the consumer had provided details about the theft of his debit card and subsequent unauthorized PIN-based transfers.  CFPB examiners found that the standard error resolution notice used by “one or more of the financial institutions” examined failed to include a statement regarding the consumer’s right to obtain documentation relied on by the institution in investigating an error and that “at least one institution” used notice templates referring to the issuance of provisional credit regardless of whether such credit was issued.

Consumer reporting.  CFPB examiners found that “one or more” consumer reporting agencies (CRA) did not comply with the Fair Credit Reporting Act requirements regarding the information that must be included in a notice informing the consumer of the results of a reinvestigation triggered by a consumer’s dispute of the completeness or accuracy of his or her credit report information.  Other deficiencies observed by CFPB examiners were that the complaint procedures of “at least one or more nationwide CRA” failed to cover complaints received directly from consumers and “at least one specialty CRA” (1) provided inconsistent information to consumers about the ability to lodge disputes by telephone, and (2) maintained a weak consumer complaint program.

The CFPB’s report also includes a discussion of the CFPB’s use of resubmission standards in conducting Home Mortgage Disclosure Act data integrity reviews and recent CFPB public enforcement actions, supervisory guidance, and larger participant rulemaking.  Among those enforcement actions is the CFPB’s action against Flagstar Bank, which represented the CFPB’s first enforcement action related to its new mortgage servicing rules.

CFPB announces November 13 “mystery” field hearing

Posted in Prepaid Cards

Departing from its past practice, the CFPB has announced that it will hold a field hearing in Wilmington, Delaware on November 13 but has not yet disclosed what the hearing will be about.  Instead, the announcement says only that “[m]ore information about the event will follow.”  It also contains the standard statement that the event will feature remarks from Director Cordray, as well as testimony from consumer groups, industry representatives, and members of the public.

Since the CFPB typically uses field hearings as a backdrop for announcing new developments, we think the November 13 field hearing is likely to coincide with the CFPB’s release of a proposed rule for prepaid cards.  In his June 2014 appearance before the Senate Committee on Banking, Housing and Urban Affairs, Director Cordray stated that the proposal would likely be issued at the end of the summer.  However, a recent Bloomberg article by Carter Dougherty and Jesse Hamilton suggested a November release date for the proposal.

CFPB posts 2015 final lists of rural and rural or underserved counties

Posted in Mortgages

The CFPB has posted its 2015 final lists of Rural and Rural or Underserved Counties on its website.  The CFPB has previously posted lists of such counties for calendar years 2011-2014.

The lists are relevant to exemptions in several CFPB mortgage rules, including the CFPB’s rule requiring creditors to establish escrow accounts for certain first-lien higher-priced mortgage loans.  The CFPB’s blog post announcing the posting of the 2015 lists includes links to the various CFPB rules that refer to the lists.



ABA renews request for CFPB clarification on rolling mortgage delinquencies

Posted in Mortgages

This past July, the American Bankers Association sent a letter to the CFPB requesting several clarifications to the mortgage servicing rules.  One of such clarifications concerned application of the “120-day rule,” meaning the rule that prohibits a servicer from sending the first notice or filing for foreclosure unless a borrower’s mortgage loan is more than 120 days delinquent.  Rather than leave it to the courts to determine if a bank has correctly applied the 120-day rule, the ABA asked the CFPB to specify how the rule applies to “rolling delinquencies,” meaning delinquencies that occur when delinquent borrowers resume making payments without making up past missed payments.

As a follow up to its July 2014 letter, the ABA sent another letter to the CFPB last week providing the results of a rolling delinquency survey conducted by the ABA to assess how often such delinquencies occur and gather information regarding how banks manage delinquent mortgage loans on a rolling basis.  32 banks participated in the survey and 63% of such banks had assets of $1 billion or less.

According to the ABA’s analysis, the survey results show that bank practices involving rolling delinquencies are not uniform and may differ from bank to bank based on various considerations.  By way of examples, the ABA points to the variety of policies that banks have adopted for accepting and crediting payments and partial payments on rolling delinquencies.  It also points to the multiple methods banks use for determining when to commence foreclosure on loans that have been delinquent on a rolling basis.

The ABA observes that the survey results, taken in conjunction with feedback from ABA members, indicate that banks may weigh a variety of factors when establishing policies and procedures for handling rolling delinquencies.  In the letter, the ABA lists seven common considerations, including whether the servicer holds the credit risk for the loan (which creates strong incentives to seek foreclosure alternatives) or services the loan for another entity and is therefore subject to investor guidelines, servicing incentives and compensatory  fees.

The ABA notes that in responding to inquiries as to how banks should apply the 120-day rule to rolling delinquencies, the CFPB has informally recommended that servicers look to common interpretations of “delinquency” which may be found in best practices, industry standards, state law and contract law.  Because the 120-day rule is subject to a private right of action, the ABA requests that the CFPB, at a minimum, incorporate this informal guidance into the official servicing rule commentary.

In the new letter, the ABA reiterates its call for official regulatory clarification on how the
120-day rule applies to rolling delinquencies, and observes that such clarification is needed to prevent legal and regulatory uncertainty from being “additional factors that encourage banks to scale back their mortgage servicing activities.”

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.

Read our Legal Alert for further information on the Credit Risk Retention Rule.

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.