The proposed rule amending the Home Mortgage Disclosure Act and its implementing regulation, Regulation C, was published in the Federal Register today. As such, the official comment deadline will be October 29, 2014. We previously published a short description and analysis of the proposed rule that noted a different comment date. Our Mortgage Banking Group will continue to advise clients in connection with the proposed changes.
The CFPB announced that it has entered into a “Joint Higher Education Memorandum of Understanding” with the Departments of Veterans Affairs (VA), Defense (DOD), and Education (ED) as part of a joint effort by the agencies “to prevent abusive and deceptive recruiting practices by schools serving servicemembers, veterans, spouses and other family members.”
The MOU is described as carrying out the agencies’ “comprehensive strategy to strengthen enforcement and compliance mechanisms” developed in accordance with Executive Order 13607 signed by President Obama in April 2012. The order directed the Secretaries of Defense, VA, and Education to consult with the CFPB and the Department of Justice to take action to ensure that service members, veterans, spouses and other family members “have the information they need to make informed decisions concerning their well-earned Federal military and veterans educational benefits.” The Executive Order was intended to combat concerns about aggressive and deceptive targeting of such individuals by educational institutions to gain access to educational benefits. It also mandated the creation of uniform procedures for referring potential matters for civil or criminal enforcement to the DOJ or other agencies.
Under the Executive Order, the VA, DOD and ED were directed to establish “Principles of Excellence” (Principles) to apply to educational institutions receiving funding from federal military and veterans educational benefits programs. The Principles must require such educational institutions to provide various disclosures and protections, including information about school costs and federal financial aid eligibility as well as student support services. The MOU sets forth the responsibilities of each agency to support the Principles.
In the MOU, the CFPB agrees to:
- Designate its Assistant Director for Servicemember Affairs (currently Holly Petraeus) to serve as the point of contact for information sharing processes among the agencies
- Send alerts to each agency regarding potential significant trends and patterns of noncompliance identified in ongoing oversight activities
- Provide complaint data to the FTC’s Consumer Sentinel database
The Executive Order also required the creation of a centralized complaint system for students receiving military and veterans educational benefits to register complaints that can be responded to by various agencies including the CFPB. That system was launched in January 2014. In addition to submitting complaints about student loans via the CFPB’s complaint system, the system allows servicemembers using VA or DOD education benefits for higher education to submit complaints about educational institutions on the DOD or VA websites using new customized online reporting forms. Complaints received by the DOD or VA are forwarded to the FTC’s Consumer Sentinel database.
The CFPB has announced that it will be holding a field hearing on auto finance on September 18 in Indianapolis. The announcement indicates that the hearing will feature remarks from Director Richard Cordray, as well as “testimony” from consumer groups, industry representatives, and members of the public.
Given the CFPB’s history of using field hearings as the venue for announcing a related development, it seems highly likely that the field hearing will coincide with the CFPB’s release of a proposed larger participant rule for the auto finance market. The CFPB officially confirmed its plans to issue such a rule in the semi-annual update of its rulemaking agenda issued this past May and gave an August 2014 timetable for the proposal. That confirmation followed statements made by CFPB Deputy Director Steven Antonakes at a Consumer Bankers Association meeting in April 2014 that the CFPB’s next larger participant rule would relate to auto finance.
NOTE: We intended to post this blog entry on the Monitor on July 30 but it was inadvertently omitted.
The CFPB, after an investigation in cooperation with 13 state attorneys general, has entered into a consent order with Colfax Capital Corporation, a California consumer lending company (Colfax), and its wholly-owned subsidiary, Culver Capital, LLC, a Georgia consumer lender (Culver) (formerly known as Rome Finance Co. Inc. and Rome Finance LLC, respectively) and their principals, Ronald Wilson and William Collins. As a result of this consent order, approximately 17,000 U.S. servicemembers and other consumers will receive debt relief in the aggregate amount of approximately $92 million.
That amount represents approximately $60 million in about 12,000 financing agreements predominantly with servicemembers held by Colfax and approximately $32 million in about 5,000 similar agreements held by Culver. The relief is accomplished by ordering respondents (or anyone acting on their behalf) to cease and desist from collecting on any Rome Finance-related transactions. The Chapter 7 trustee will cooperate in this relief. Notably, despite the ban on collections of any amounts owing, the affected servicemembers and other consumers get to keep the merchandise they purchased.
Colfax is in bankruptcy as a result of a 2005 lawsuit alleging predatory sales and lending practices brought by the Tennessee Attorney General, and the Chapter 7 bankruptcy trustee has filed a non-opposition to the consent order pursuant to a duly approved compromise of controversy in the bankruptcy case. In view of the bankruptcy, the CFPB has assessed a symbolic $1.00 civil money penalty. None of the respondents admits or denies any wrongdoing or any of the stipulated facts (other than the facts necessary to establish CFPB jurisdiction) in the consent order.
The enforcement action charged the corporate respondents with a predatory lending scheme featuring ensnaring servicemembers with the promise of no money down and instant financing (in violation of UDAAP proscriptions), disguising very high finance charges by artificial inflation of the disclosed price of good purchased (in violation of Regulation Z), withholding information on billing statements (again in violation of UDAAP proscriptions), and illegal collections of void loans (in violation of certain state laws and UDAAP proscriptions).
The consent order also effects the permanent suspension and forfeiture of the corporate respondents’ business status and prohibits all respondents (or anyone acting on their behalf) from using, selling, transferring, or otherwise providing to any other person any of the corporate respondents’ intellectual property (including brand names, copyrights, trademarks, customer lists, business methods, promotional materials, and IT operating systems). The individual respondents are also permanently banned from conducting any business in the field of consumer lending. Finally, the consent order imposes a variety of disclosure obligations, operational restrictions, and ongoing reporting obligations with respect to any other businesses in which the individual respondents are involved.
Perhaps the most significant aspect of the conduct giving rise to the consent order involves the allegations of hidden charges in the marketing of products. The Bureau charged that Rome Finance and the merchants they worked with masked exorbitant finance charges by artificially inflating the disclosed price of the consumer goods being sold and, consequently, deflating the disclosed APR. For example, the CFPB cites disclosures indicating the APR was 16 percent when in fact the APR was 100 percent or more.
The CFPB has announced a senior leadership change and two new hires. It also announced new appointments to its Consumer Advisory Board, Community Bank Advisory Council, and Credit Union Advisory Council.
The CFPB announced the following senior leadership change and new hires:
- Will Wade-Gery will serve as the Assistant Director for Card and Payments Markets. Since January, Mr. Wade-Gery has been serving in the same position as the acting Assistant Director. He previously served as CFPB Senior Counselor on the Card and Payments Markets team. Mr. Wade-Gery is in charge of the CFPB’s ongoing arbitration study mandated by Section 1028 of Dodd-Frank.
- Patricia McClung has joined the CFPB as Assistant Director for Mortgage Markets. Ms. McClung previously worked at the Federal Housing Administration as a senior housing policy advisor. Before joining the FHA, Ms. McClung worked at Realtors Property Resource, a technology subsidiary of National Association of Realtors. The majority of Ms. McClung’s career was spent at Freddie Mac where she held numerous positions throughout the agency.
- Janneke Ratcliffe has joined the CFPB as Assistant Director for Financial Education. Ms. Ratcliffe previously served as Executive Director at the Center for Community Capital, at the University of North Carolina at Chapel Hill. In that role, she examined how people and communities utilize financial services. She was also a Senior Fellow at the Center for American Progress. Before serving at UNC, Ms. Ratcliffe worked at Self-Help Ventures Fund, a community development institution, and also worked at GE Capital in mortgage and mortgage insurance.
The CFPB announced the new advisory board and council members listed below. The new Consumer Advisory Board members will serve three-year terms and the new members of the Community Bank and Credit Union Advisory Councils will serve two-year terms.
Consumer Advisory Board:
- Ann Baddour, Senior Policy Analyst, Texas Appleseed, Austin, Texas
- Julie Gugin, Executive Director, Minnesota Homeownership Center, St. Paul, Minn.
- Brian Longe, Chief Executive Officer, Wolters Kluwer Financial & Compliance Services, Minneapolis, Minn.
- Joann Needleman, Vice President, Maurice & Needleman, P.C., Flemington, N.J. (We know and have high respect for Ms. Needleman who recently presented on one of our Ballard Spahr webinars.)
- J. Patrick O’Shaughnessy, President and Chief Executive Officer, Advance America Inc., Spartanburg, S.C.
- Gene Spencer, Senior Vice President, Stakeholder Engagement, Policy and Research, Homeownership Preservation Foundation, Minneapolis, Minn.
- James Van Dyke, Founder and Chief Executive Officer, Javelin Strategy & Research LLC, Pleasanton, Calif.
Community Bank Advisory Council:
- Angela Beilke, Vice President, Mortgage Department, American Bank & Trust, Davenport, Iowa
- Michael Gallagher, Senior Vice President, Risk Management Director, Enterprise Bank & Trust Company, Lowell, Mass.
- Paul Mackin, President and Chief Executive Officer, Think Mutual Bank, Rochester, Minn.
- Lynda Messick, President and Chief Executive Officer, Community Bank Delaware, Lewes, Del.
- John Motley, President, Colonial Savings, Fort Worth, Texas
- David Reiling, Chief Executive Officer, Sunrise Banks, Minneapolis, Minn.
- Monica Thomas, Executive Vice President, Illinois Service Federal, Chicago, Ill.
- Christopher Triplett, President, Chief Executive Officer and Chief Financial Officer, Newport Federal Bank, Newport, Tenn.
- Kathryn Underwood, President and Chief Executive Officer, Ledyard National Bank, Hanover, N.H.
Credit Union Advisory Council:
- Robert Falk, President and Chief Executive Officer, Purdue Federal Credit Union, West Lafayette, Ind.
- Jason Lee, Executive Vice President and Chief Financial Officer, Orion Federal Credit Union, Memphis, Tenn.
- Robin Loftus, Chief Operating Officer, Heartland Credit Union, Springfield, Ill.
- James McDaniel, President and Chief Executive Officer, Heritage Trust Federal Credit Union, Charleston, S.C.
- Robin Romano, Chief Executive Officer, MariSol Federal Credit Union, Phoenix, Ariz.
- Ronald Scott, President and Chief Executive Officer, Appalachian Community FCU, Rogersville, Tenn.
- David Seely, President and Chief Executive Officer, Kirtland Federal Credit Union, Albuquerque, N.M.
- John Winne, President and Chief Executive Officer, Boston Firefighters Credit Union, Boston, Mass.
On August 26, 2014, the CFPB staff and Federal Reserve Board co-hosted a webinar and addressed questions about the final TILA-RESPA Integrated Disclosures Rule that will be effective for applications received by creditors or mortgage brokers on or after August 1, 2015. The webinar is the second in a planned series intended to address the new rule. In the initial webinar the CFPB staff provided a basic overview of the final rule and new disclosures that we have previously covered.
According to the CFPB staff, this webinar and the ones that will follow will be in the format of a spoken Q&A to answer questions that have been posed to the CFPB. 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. Industry members, however, would prefer written guidance.
During the remarks, the CFPB staff announced that the CFPB will soon release additional guidance material on its website, including a timing calendar to illustrate the various timing requirements under the new rule. In addition, the next webinar in the series is tentatively scheduled for October 1, 2014, and will cover Loan Estimate and Closing Disclosure content questions.
Below is a summary of various answers to questions provided by the CFPB staff. The topics covered include: (1) the receipt of an application, (2) whether new disclosures will be required for assumptions, (3) record retention, (4) the tolerance applicable to owner’s title insurance, and (5) the timing for the initial and revised Loan Estimates. More >
We recently learned that earlier this month, the CFPB sent letters to payday lenders demanding copies of certain of their standard loan agreements for use in connection with the CFPB’s arbitration study. The letters are accompanied by a CFPB order that orders the lenders to file the agreement with the CFPB. The order relies on the CFPB’s authority under Section 1022 of Dodd-Frank “to gather information from time to time regarding the organization, business conduct, markets, and activities of covered persons and service providers” by using various methods, including through the issuance of orders directing covered persons to provide such information.
I’m surprised that the CFPB would still be collecting this kind of basic information at this late stage. This past April, at the 19th Annual Consumer Financial Services Institute in Chicago (which I co-chaired), the CFPB attorney who is managing the study, Will Wade-Gery, indicated that the study will be completed by the end of this year. That timing now seems questionable in light of the letters sent this month.
The CFPB is conducting the study under Section 1028 of Dodd-Frank. In April 2012, it published a request for information about the scope, methodology and data sources for the study. In September 2013, the CFPB issued orders to obtain standard checking account agreements for the study. In December 2013, the CFPB published preliminary study results.
A bill (H.R. 5062) recently passed by the House of Representatives would amend the Consumer Financial Protection Act (the CFPA), which is Title X of the Dodd-Frank legislation, to provide protection against waiver of state and federal law privileges for nondepository institutions supervised by the CFPB.
Entitled the “Examination and Supervisory Privilege Parity Act of 2014,” the bill received strong support from the American Financial Services Association (AFSA). The bill provides anti-waiver protection for “the sharing of information” with federal banking regulators, state banking regulators, or state regulators that “license, supervise, or examine the offering of consumer financial products or services.” Specifically, H.R. 5062 would amend Dodd-Frank § 1024(b)(3) as follows:
To minimize regulatory burden, the Bureau shall coordinate its supervisory activities with the supervisory activities conducted by prudential
regulators, the State bank regulatory authorities, and the State agencies that license, supervise, or examine the offering of consumer financial
products or services, including establishing their respective schedules for examining persons described in subsection (a)(1) and requirements
regarding reports to be submitted by such persons. The sharing of information with such regulators, authorities, and agencies shall not be
construed as waiving, destroying, or otherwise affecting any privilege or confidentiality such person may claim with respect to such information
under Federal or State law as to any person or entity other than such Bureau, agency, supervisory, or authority.
As drafted, the bill is not a model of clarity. For example, the added second sentence does not explicate whether it refers to the sharing of information by the Bureau or by the nonbank. Aids to construction of this language point in different directions. On the one hand, the entirety of Section 1024 is about the authority of the CFPB, and the amended § 1024(b)(3) begins with “the Bureau” as the subject of the sentence, all of which suggests that the privilege preservation relates to sharing by the Bureau. On the other hand, the introductory language at the head of H.R. 5062 announces the intention to amend the CFPA “to specify that privilege and confidentiality are maintained when information is shared by certain nondepository covered persons with Federal and State financial regulators . . . .” (Emphasis added). That suggests that it is the nonbank that must do the sharing. A third interpretation (a third hand, if you will) was uttered on the floor of the House by Rep. Shelley Caputo (R.-WV) when she said, “This bill clarifies that the sharing of information between Federal banking regulators and State agencies that license, supervise, or examine the offering of consumer financial products or services will not be construed as waiving, destroying, or otherwise affecting any privilege or confidentiality right that a person could claim.” (Emphasis added). That suggests that any kind of sharing between or among the Bureau and other Federal or State agencies, regardless of which agency initiates the sharing, would still preserve the privilege.
According to the statement submitted by AFSA in support of H.R. 5062, the bill is intended to protect a nonbank that is examined by the CFPB but does not fall under a state banking regulator’s jurisdiction from a privilege waiver if the CFPB shares privileged information with the nonbank’s state regulator.
However one interprets that second sentence, it is clear that the bill is believed necessary because these protections were not included in the legislation Congress passed in December 2012 that amended the Federal Deposit Insurance Act to provide protection against privilege waivers when privileged information is shared between or among the CFPB and federal and state bank regulators. While the majority of states give their bank supervisors authority to license various nonbank lenders, a significant number give that authority to a different state agency that would not be covered by the FDI Act provision.
The latest chapter in the CFPB’s “comprehensive effort to address consumer harm and to root out unlawful practices across the debt settlement industry” is a settlement announced yesterday with Global Client Solutions, “a leading debt-settlement payment processor,” its CEO, and the chairman of its parent company’s board of directors. In its complaint filed in a California federal court concurrently with the proposed stipulated final judgment and consent order, the CFPB alleged that the defendants had violated the Telemarketing Sales Rule (TSR) by assisting and facilitating the charging of unlawful advance fees by debt-relief companies (DRCs) and that such unlawful conduct also violated the Consumer Financial Protection Act. The consent order requires the defendants to pay over $6 million in relief to consumers as well as a $1 million civil penalty.
According to the CFPB’s complaint, since October 2010, Global processed tens of millions of dollars in allegedly illegal advance fees from tens of thousands of consumers on behalf of hundreds of DRCs across the country. The CFPB alleged that after a consumer enrolled in a debt relief program, the DRC would instruct the consumer to stop making payments to creditors and instead make payments to Global for deposit in a custodial account. The CFPB claimed that at the time Global transmitted advance fees to DRCs, it knew that it had not yet transmitted any funds from consumers’ custodial accounts to creditors. The CFPB also claimed that Global had received hundreds of complaints from or on behalf of consumers.
In addition to requiring payment of consumer redress and a civil penalty, the consent order prohibits the defendants from continuing to engage in the unlawful conduct alleged in the complaint and requires them to engage in “reasonable screening” of current and prospective DRC clients. The consent order specifies certain information that the defendants must collect from current and prospective DRCs as part of “reasonable screening,” including additional information that must be collected from any DRCs claiming not to be subject to the TSR. It also requires the defendants to take reasonable steps to assess the accuracy of such information and specifies what those steps must include.
The consent order provides that the defendants must continue to monitor DRC clients and establishes various steps they must take as part of “monitoring.” Those steps consist of: (1) semi-annual audits of each DRC’s compliance with the TSR and the Dodd-Frank UDAAP prohibition, (2) reviewing and investigating complaints received about a DRC, (3) calculating on a monthly basis for each DRC the unauthorized return rate for ACH debit transactions, and (4) conducting “a reasonable investigation” for any DRC whose unauthorized return rate exceeds 0.5% or as to which Global has received an amount of complaints that exceeds certain thresholds. (The settlement’s 0.5% unauthorized return rate threshold matches the lower threshold for such returns proposed by NACHA in November 2013.)
During an investigation, Global must suspend all payments to the DRC until the DRC has implemented any required remediation and Global has updated and verified the information it collected from the DRC as part of “reasonable screening.” Global also agrees in the consent order to retain a third party monitor to conduct a review of Global’s business and develop a plan to address any deficiencies identified by the monitor and implement the monitor’s recommendations. The consent order also includes Global’s agreement to be subject to the CFPB’s supervisory authority for 3 years.
The vast majority of the CFPB’s settlements have been in the context of an administrative proceeding and did not involve the filing of a complaint by the CFPB in a federal court. The CFPB’s filing of a complaint against Global concurrently with the consent order likely reflects the CFPB’s desire for the Global defendants to be subject to the more severe consequences that attach to violating a court order than an administrative consent order. Should the Global defendants violate the injunction entered by the court, the CFPB could move to have them held in contempt of court.
Last year, the CFPB took a similar approach of filing a federal court complaint concurrently with a consent order in connection with its settlement with Meracord, another “leading payment processor” for DRCs. Like Global, the CFPB alleged that Meracord had violated the TSR by assisting and facilitating the charging of unlawful advance fees by DRCs. However, in its announcement of the Meracord settlement, the CFPB explained that its decision to target a payment processor was based on the processor’s position as a “centralized chokepoint” for unlawful DRCs. Perhaps the CFPB’s decision not to use similar language in announcing the Global settlement reflects the strong criticism that lawmakers and industry have recently directed at “Operation Choke Point,” the coordinated federal multiagency enforcement initiative targeting banks serving online payday lenders and other companies that have raised regulatory concerns.
Concurrently with a proposal from the Fed to repeal Regulation AA (12 CFR part 227), the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) have issued interagency guidance regarding unfair or deceptive credit practices.
The Fed adopted Reg AA in 1985 pursuant to a directive in Section 18(f)(1) of the FTC Act requiring the Fed to issue rules applicable to banks that were substantially similar to rules issued by the FTC to prohibit unfair or deceptive acts or practices by nonbanks. Reg AA was patterned on the FTC’s credit practices rule (16 CFR sections 44.1-.5) (FTC Rule) and was adopted by the Fed in reliance on the FTC’s findings that the prohibited practices were unfair or deceptive.
Reg AA, as does the FTC Rule, generally prohibits (1) the use of certain provisions in consumer contracts such as confessions of judgment and security interests in household goods (other than purchase money security interests), (2) misrepresenting the nature and extent of a cosigner’s liability and failing to inform a cosigner of the nature of such liability prior to becoming obligated, and (3) pyramiding late fees.
The Fed’s proposed repeal of Reg AA results from the Dodd-Frank Act’s repeal of the banking agencies’ rulewriting authority under Section 18(f)(1) of the FTC Act. In addition, Reg AA was excluded from the Fed’s authority transferred to the CFPB under Dodd-Frank. However,
Dodd-Frank gave the CFPB independent authority to issue rules prohibiting unfair, deceptive or abusive acts or practices. (The OCC never had authority to issue UDAP rules under the FTC Act and, for that reason, the OTS version of the FTC Rule was effectively repealed by the provisions of Dodd-Frank transferring certain OTS functions to the Fed. In its proposal, the Fed notes that the NCUA is also planning to repeal its version of the FTC Rule.)
The Guidance is intended to clarify that the repeal of Reg AA and other credit practices rules “should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible.” The Guidance notes that notwithstanding the repeals, the agencies retain supervisory and enforcement authority regarding UDAPs. Accordingly the Guidance warns that the agencies “believe that, depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.”
As the Guidance notes, the FTC Rule remains in effect for creditors within the FTC’s jurisdiction and, for nonbank creditors, can be enforced by the CFPB as well as the FTC. The Guidance also notes that the FTC Rule and the repealed credit practices rule required creditors to provide a prescribed “Notice to Cosigner.” The agencies state that that they believe creditors “have properly disclosed a cosigner’s liability if, prior to obligation, they continue to provide a “Notice to Cosigner.”
It bears noting that some states have statutory provisions exempting a creditor from a state law requirement to give a state cosigner notice if the creditor gives the required federal notice. Since banks will no longer be subject to a federal law cosigner notice requirement, they should consult with counsel regarding how to proceed in such states.