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CFPB Community Bank Advisory Council to meet April 22

Posted in Credit Reports

The CFPB’s Community Bank Advisory Council is scheduled to meet in Washington, D.C. on April 22, 2015.  According to the meeting agenda, following a welcome by Director Cordray, there will be a discussion of credit scores and credit reporting, and its implications for small financial institutions.  That discussion will be led by Corey Stone, the CFPB’s Assistant Director, Credit Information and Deposits Markets.

 

 

 

How might the Supreme Court’s decision in Perez v. MBA affect the CFPB?

Posted in CFPB Rulemaking

The U.S. Supreme Court’s recent decision in Perez v. Mortgage Bankers Ass’n invalidated a significant line of  D.C. Circuit case law known, after the leading case, as the Paralyzed Veterans doctrine.  A case involving a series of contradictory Department of Labor interpretations of whether mortgage loan officers are exempt from minimum wage and overtime guarantees, Perez holds that the Paralyzed Veterans doctrine is incompatible with the plain language of the Administrative Procedure Act (APA) and impermissibly imposes notice-and-comment requirements on interpretive rules.

The original 1997 decision in  Paralyzed Veterans of America v. D.C. Arena L.P had required administrative agencies that effected a fundamental change in prior interpretations of substantive regulations to proceed via notice-and-comment rulemaking, even though they might characterize the new interpretation as an “interpretive” – as distinct from a “legislative” or “substantive” – rule.

Justice Sotomayor, in her opinion for the Court, took the position that an interpretive rule is an interpretive rule, regardless of what the interpretation is and whether or not it is consistent with the agency’s prior interpretations.  Unlike Gertrude Stein’s “A rose is a rose is a rose,” however, Sotomayor’s tautology with the phrase “interpretive rules” is neither as philosophical or clearcut, especially  — as discussed in the accompanying article — when doctrines of judicial deference are thrown into the mix.

Thus far in its short history, the CFPB has promulgated relatively few rules and has generally preferred to make law, and to interpret key provisions of Title X of the Dodd-Frank legislation, via adjudication (including consent orders).  Adjudication has been recognized as a legitimate alternative to rulemaking.since the dawn of the administrative state and the Supreme Court’s landmark 1947 decision in SEC v. Chenery Corp.  Now, however, “interpretive” rulemaking without notice-and-comment procedures may become equally, if not more, attractive, and would certainly be more efficient for industrywide regulation than case-by-case adjudication.  It would not be surprising, therefore, to see, in the wake of Perez, a shift by the Bureau towards more interpretive rulemaking, at least unless and until the Supreme Court cuts back on existing deference doctrines.

CFPB speaks at PLI’s annual Consumer Financial Services Institute

Posted in CFPB Enforcement, CFPB Exams, CFPB Rulemaking

Key members of the CFPB’s enforcement, regulatory and supervision offices spoke yesterday at PLI’s 20th Annual Consumer Financial Services Institute in New York City.  The session addressed recent developments and upcoming initiatives at the CFPB, and took the form of a Q&A between the moderator and a panel of practitioners and CFPB personnel.

The panelists from the CFPB included Anthony Alexis, Assistant Director of Enforcement; Diane E. Thompson, Managing Counsel, Office of Regulations; and Peggy L. Twohig, Assistant Director for Nonbank Supervision, Office of Supervision Policy.  Alan Kaplinsky of Ballard Spahr co-chaired the program, and acted as moderator of the CFPB session.  Chris Willis of Ballard Spahr was a panelist for the CFPB session.

During this rare opportunity to directly question key members of the CFPB, several noteworthy items were discussed, including the following:

  • The number of examiners in the CFPB’s Office of Supervision has roughly doubled in the past year.
  • The CFPB recently has made a concerted effort to issue exam reports or PARR letters much more quickly after the completion of supervisory examinations than has occurred in the past.  The CFPB also attempts to offer meaningful feedback during meetings that take place at the conclusion of supervisory examinations.
  • Regarding enforcement activities, it was repeatedly stressed that “facts matter” in determining whether particular conduct constitutes a UDAAP violation, whether enforcement activity is appropriate, and the amount of any civil penalty assessed against a company.  It was further noted that the CFPB evaluates the facts in light of the unfairness, deception and abusiveness standards.
  • Various factors can inform the decision whether to address a matter through a confidential supervisory resolution rather than a public enforcement action.  The factors noted were consistent with those regularly articulated by CFPB speakers, namely violation-focused factors (number of consumers affected, the magnitude of the harm, and the nature of the violation); institution-focused factors (the institution’s behavior after the violation occurred); and policy-focused factors.
  • The CFPB takes the position that 100% remediation to consumers is “non-negotiable.”
  • The detailed release of information about the payday rule in connection with the SBREFA process was not necessarily the approach the CFPB has followed, or would follow, in connection with other rulemaking processes.
  • The SBREFA process for debt collection rulemaking will be commenced in approximately 4-5 months, which suggests to us that proposed rules may be released toward the end of 2015 or early 2016.

OIG updates project completion dates and completes audit of CFPB’s Tableau system

Posted in CFPB General

In its work plan updated as of March 27, 2015, the Office of Inspector General (OIG) has moved back the estimated completion dates of several ongoing projects previously estimated to be completed in the first quarter of 2015.  Those projects, which include an audit of the CFPB’s headquarters renovation and an audit of the CFPB’s public consumer complaint database, now have an estimated completion date of second quarter 2015.

In addition, the OIG completed its audit of the CFPB’s Tableau system but did not release the full audit report.  Instead, it only issued an executive summary in which it stated that because of “the sensitivity of information security review work, [OIG] reports in this area are generally restricted.”  The summary describes Tableau as “a commercial-off-the-shelf tool deployed on the CFPB’s cloud computing–based [general support system or] GSS that provides business intelligence capabilities, such as data analysis and integration, for multiple CFPB systems.  The CFPB has classified Tableau as a moderate-risk system that is a component of the cloud computing–based GSS on the agency’s [Federal Information Security Management Act of 2002 or] FISMA inventory.”

The OIG found that the CFPB has taken steps to secure the Tableau system in accordance with FISMA and the CFPB’s information security policies and procedures and has developed baseline security configurations for Tableau and its supporting technology components.  However, the OIG also found that the CFPB needs to improve its implementation and monitoring of baseline security configurations to ensure that components of Tableau are securely configured.  The OIG’s report included three recommendations to strengthen configuration management processes for Tableau and identified ways for the CFPB to improve security controls related to the auditing and contingency planning capabilities for the system.

According to the summary, the CFPB agreed with the OIG’s recommendations and outlined actions that it has or will take to address the OIG’s recommendations

CFPB issues No FEAR Act report

Posted in CFPB General

The CFPB has issued its No FEAR Act Annual Report for FY 2014.  The “No FEAR Act” is the Notification and Federal Employee Antidiscrimination and Retaliation Act of 2002.  It requires federal agencies to submit an annual report to the Director of the Office of Personnel Management that includes data about federal cases filed against the agency arising under No FEAR Act laws and disciplinary actions related to discrimination, retaliation or harassment.  The laws covered by the No FEAR Act include Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963.

Last year, in reaction to the release of a CFPB internal report that showed a pattern of racial disparities in CFPB staff evaluations, the CFPB gave bonuses to employees who received lower ratings and revamped its evaluation system.  The new report indicates that during FY 2014, the CFPB experienced an increase in the number of formal complaints filed compared to FY 2013 (from nine to 35), with race and reprisal the most frequently cited bases of discrimination.  In light of these circumstances, it is somewhat surprising that the report indicates that in FY 2014, the CFPB “did not discipline any employees for discrimination, retaliation, harassment or any infraction of any provision of law covered by the No FEAR Act.”

Other information in the report includes the CFPB’s goals in FYs 2015 and 2016 for its Equal Employment Opportunity program and a description of the CFPB’s No FEAR Act training for employees.

New CFPB lawsuit targets payment processors for debt collectors

Posted in CFPB Enforcement, Debt Collection

A new CFPB enforcement action filed in federal district court in Atlanta and unsealed last week targeting an alleged debt collection scam names as defendants not only the debt collectors and their individual principals but various companies alleged to have been “service providers” to the collectors, including payment processors.  Both the CFPB and the FTC have previously brought actions against payment processors for companies involved in alleged debt settlement or relief scams.  The CFPB claims in the new action that the payment processors are subject to its enforcement authority as both “covered persons” and “service providers” under the CFPA.

The CFPB’s complaint alleges that the debt collectors, using information purchased from debt and data brokers, made phone calls to consumers in which they threatened arrest or notice to a consumer’s employer unless the consumers agreed to settle debts falsely claimed to be owed.  The complaint charges that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments.  According to the complaint, the processors engaged in deficient underwriting when they agreed to provide services for the debt collectors and failed to appropriately monitor the debt collectors’ accounts, including by ignoring signs that the debt collectors were committing fraud such as high chargeback volume.  The defendants also included a company that provided telephone broadcast services used by the debt collectors to deliver automated messages to consumers.

The complaint charges the debt collectors with numerous violations of the FDCPA and the CFPA’s prohibition of unfair or deceptive acts or practices.  The individual defendants are charged with providing “substantial assistance” to the debt collectors’ unfair or deceptive conduct, in violation of 12 U.S.C. section 5536(a)(3).  Section 5536(a)(3) makes it unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 [which prohibit unfair, deceptive or abusive acts or practices]…and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

The payment processors and telephone broadcast service company are charged both with engaging directly in unfair acts or practices and providing “substantial assistance” to the debt collectors’ unfair or deceptive conduct.  The relief sought by the CFPB in the complaint includes injunctive relief, civil money penalties, disgorgement or compensation for unjust enrichment, and “such relief as the Court finds necessary to redress injury to consumers,” including rescission or reformation of contracts, refunds, restitution and damages.

On March 26, 2015, the district court entered an ex parte temporary restraining order that, in addition to other relief, froze the assets of the debt collectors’ and individual defendants, required the debt collectors and individual defendants to repatriate foreign assets, and gave the CFPB immediate access to the debt collectors’ business premises.

The TRO’s asset freeze applies to any financial institution or payment processor that receives actual notice of the TRO and “is in active concert or participation with” the debt collectors or individual defendants.  The TRO also includes a provision that directs any financial institution or other third party that is served with the TRO or has knowledge if it, and holds or controls any documents or assets of the debt collectors or individual defendants, to preserve such documents and assets and give the CFPB immediate access to documents and information about assets.

The TRO expires on April 14.  A hearing on the CFPB’s request for a preliminary injunction is scheduled for tomorrow (April 7).

 

 

 

CFPB revises TILA, RESPA exam procedures to incorporate integrated disclosures rule

Posted in CFPB Exams, Hot Issues, TILA / RESPA

The CFPB has revised the chapters of its Supervision and Examination Manual specific to TILA and RESPA, incorporating the TILA/RESPA integrated disclosures (TRID) requirements that are set to take effect on August 1, 2015.  These chapters replace versions of the TILA and RESPA procedures released on November 27, 2013.

As is the case for most statute-specific portions of the Manual, the TILA and RESPA chapters each contain two parts:  a narrative portion outlining the substantive requirements and restrictions of the law and its implementing regulation, and a detailed examination checklist.  While neither portion of the new TILA and RESPA chapters sheds much light on the Bureau’s supervisory priorities with respect to early TRID rule exams, the narrative portion of the new TILA chapter does provide a good high-level summary of the rule, which aggregates the primary text with the relevant commentary.  (Because the TRID rule installed its disclosure, timing, and other requirements in TILA’s Regulation Z, the new REPSA chapter merely cross-references the narrative portion of the new TILA chapter.)

More importantly, the CFPB’s release of these chapters signals that it has begun, or will shortly begin, intensive examiner training on the rule.  The release also may indicate that the CFPB does not intend to delay the effective date of the rule beyond August 1.  The industry will likely pursue a statement from the CFPB providing for some type of leniency in enforcement through 2015, and the CFPB’s decision to revise the examination guidance does not preclude it from issuing such a statement.

The narrative portion of the new TILA chapter specific to the TRID rule runs from page 35 through page 50, and the TILA examination procedures specific to the TRID rule run from page 4 through page 42.  The narrative portion of the new RESPA chapter specific to the TRID rule is on page 5, and, as discussed above, the RESPA examination procedures include no instructions specific to the TRID rule.

The CFPB’s contemplated payday/title/high-cost lending proposals: our thoughts on collection practice limits

Posted in Payday Lending, Vehicle Loans

This is the last of a series of blog posts in which we share our reactions to the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”).  In this blog post, we share our thoughts on the CFPB’s proposed limits on payment collection practices.  (Our previous blog posts have looked at the CFPB’s grounds for the proposals, how the proposals will impact “short-term” Covered Loans, the flaws we see in the CFPB’s ability to repay analysis, and the 36% “all-in” rate trigger and restrictions for “longer-term” Covered Loans.)

The contemplated rules on payment collection practices would require lenders making Covered Loans to give written notice at least three business days in advance of charging the borrower’s deposit or prepaid account for a payment and would require a new payment authorization if two successive payments fail.  See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015), p. 4.  Depending upon the details of the ultimate rules and the CFPB’s willingness to make appropriate modifications, we are somewhat less critical of these ideas than the other contemplated rules.  Our suggestions include the following:

  • Importantly, the CFPB suggests that it is considering allowing notice of impending payments to be made by email or any other “electronic means to which the consumer consents, such as by phone call, text message, or mobile application.”  See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015), p. 30.  Hopefully, the CFPB will ultimately endorse notice of this type and conclude that it should not be necessary for lenders to comply with ESIGN’s (overly) rigid “reasonable demonstration” requirement.
  • The requirement to provide written notice of a payment attempt at least three business days in advance would force lenders to wait at least three business days to resubmit a failed payment.  We think this will interfere with current practices and make it far harder to collect Covered Loans.  Moreover, consumers likely expect that lenders will promptly re-submit dishonored payments.  Accordingly, while some advance notice of re-submission might be warranted, we do not believe that it should entail a delay of three business days.
  • Additionally, the CFPB should clarify that it is permissible for the creditor to take the new payment authorization required after two consecutive dishonored payments by a recorded telephone call and not just in writing.
  • Currently, the CFPB contemplates treating dishonored debit card payments the same as other types of dishonored payments.  This ignores a fundamental distinction between debit card payments and other forms of payment—when debit card payments fail, it is at the time of authorization and not at the time of processing.  Accordingly, a rejected debit card payment does not give rise to bank NSF fees.  Due to this circumstance, we would submit that there is no compelling need to require three days’ advance notice of a debit card re-submission or to limit re-submissions without new authorization to a single attempt. In short, the rules should not restrict debit card re-submissions.

The upcoming rule-making will not be easy.  We plan to blog frequently along the way.

Some issues for “longer-term” loans under the CFPB’s contemplated payday/title/high-cost lending proposals

Posted in Payday Lending, Vehicle Loans

In this blog post, we share our thoughts on the 36% “all-in” rate trigger and restrictions for loans considered to be “longer-term” under the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”).  (Our previous blog posts have looked at the CFPB’s grounds for the proposals, how the proposals will impact “short-term” Covered Loans and the flaws we see in the CFPB’s ability to repay analysis.)

36% “all-in” rate trigger.  CFPB rules under consideration for “longer-term” Covered Loans, with terms exceeding 45 days, are limited to loans that: (1) have “all-in” annual percentage rates (APRs) exceeding 36%; and (2) either create a security interest in the consumer’s motor vehicle or authorize the lender to collect payments by accessing the consumer’s bank account or paycheck.  See Press Release, “CFPB Considers Proposal to End Payday Debt Traps” (Mar. 26, 2015) (“Press Release”), p. 3.  As with short-term Covered Loans, the CFPB contemplates that lenders will be allowed to make longer-term Covered Loans either using an ATR analysis or, at the lender’s option, without an ATR analysis but subject to elaborate restrictions.

The CFPB skates on very thin ice when it chooses to severely restrict longer-term Covered Loans based on “all-in” APRs exceeding 36% while it leaves lower-rate loans outside the coverage of its contemplated rules.  Section 1027(o) of Dodd-Frank explicitly denies the CFPB authority to set usury limits, yet the contemplated proposal does just that.  With the 36% rate trigger, the CFPB is effectively saying that specified longer-term loans are perfectly lawful if the all-in APR is 36% or less but unlawful at a higher rate.

There is one type of higher-rate loan the CFPB apparently intends to leave alone—unsecured “signature” loans payable more than 45 days after origination.  While the CFPB seems to believe—incorrectly, in our view—that it can restrict interest rates when they are coupled with other loan features, there is no obvious way it could regulate signature loans without nakedly addressing rates in isolation.  Conversely, eliminating the rate trigger on longer-term Covered Loans would seriously interfere with credit products for which there is virtually universal support, such as the unsecured installment loans offered through the Lending Club and Prosper online marketplaces.

Restrictions.  As with short-term Covered Loans, the CFPB contemplates two options for longer-term Covered Loans. Press Release, pp. 3-4.  Under the first option, the longer-term Covered Loan would need to pass an ATR analysis.  Under the second option, the lender could make Covered Loans with terms from 45 days to six months (no maximum term applies to longer-term Covered Loans made under ATR authority) provided that debt service is limited to five percent of the borrower’s verified gross income and the lender does not make more than two such Covered Loans within any 12-month period.  (We do not address a third option here, based on an NCUA program, since it does not appear at all viable to us.)

Once again, the contemplated CFPB limitations are severe. For Covered Loans made on the basis of an ATR evaluation, the issues discussed above would apply, although ATR issues are necessarily more severe for short-term Covered Loans than for longer-term Covered Loans.  Only a small segment of longer-term Covered Loans will meet the five percent and six-month limitations contemplated by the CFPB.  Indeed, for Covered Loans studied by the CFPB, only 18 percent had payment to income ratios below five percent and only nine percent had ratios below five percent and terms of six months or less.  See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015), p. 50.

The materials released by the CFPB do not explain its basis for selecting five percent and six-month thresholds for longer-term Covered Loans that do not utilize ATR authority.  In the absence of any compelling explanation, a rule that threatens to eliminate over 90% of the market seems overly tough.  If one were to accept the CFPB’s theory that it is entitled to regulate on the basis of interest rates—and we do not—should it not be more liberal when rates are at the low end of the regulated range rather than the upper reaches?  If a lender can make a six-month loan at a triple-digit interest rate, we believe it should be able to make a one-year loan at a 37% rate.

In our next blog post, we will look at the CFPB’s contemplated rules for payment collection practices.

Some issues for “short-term” loans under the CFPB’s contemplated payday/title/high-cost lending proposals

Posted in Payday Lending, Vehicle Loans

In this blog post, we share our thoughts on how the CFPB’s contemplated proposals taking aim at payday (and other small-dollar, high-rate) loans (“Covered Loans”) will impact “short-term” Covered Loans and the flaws we see in the CFPB’s ability to repay analysis.  (Our last blog post looked at the CFPB’s grounds for the proposals.)

Impact.  The CFPB plans to provide two options for “short-term” Covered Loans with terms of 45 days or less.  One option would require an ability to repay (ATR) analysis, while the second option, without an ATR evaluation, would limit the loan size to $500 and the duration of such Covered Loans to 90 days in the aggregate in any 12-month period.  These restrictions on Covered Loans made under the non-ATR option make the option plainly inadequate.

Under the ATR option, creditors will be permitted to lend only in sharply circumscribed circumstances:

  • The creditor must determine and verify the borrower’s income, major financial obligations (such as mortgage, rent and debt obligations) and borrowing history.
  • The creditor must determine, reasonably and in good faith, that the borrower’s residual income will be sufficient to cover both the scheduled payment on the Covered Loan and essential living expenses extending 60 days beyond the Covered Loan’s maturity date.
  • Except in extraordinary circumstances, the creditor would need to provide a 60-day cooling off period between two short-term Covered Loans that are based on ATR findings.

In our view, these requirements for short-term Covered Loans would virtually eliminate short-term Covered Loans.  Apparently, the CFPB agrees.  It acknowledges that the contemplated restrictions would lead to a “substantial reduction” in volume and a “substantial impact” on revenue, and it predicts that Lenders “may change the range of products they offer, may consolidate locations, or may cease operations entirely.”  See Outline of Proposals under Consideration and Alternatives Considered (Mar. 26, 2015) (“Outline”), pp. 40-41.  According to CFPB calculations based on loan data provided by large payday lenders, the restrictions in the contemplated rules for short-term.  Covered Loans would produce: (1) a volume decline of 69% to 84% for lenders choosing the ATR option (without even considering the impact of Covered Loans failing the ATR evaluation), id., p. 43; and (2) a volume decline of 55% to 62% (with even greater revenue declines), for lenders using the alternative option. Id., p. 44.  “The proposals under consideration could, therefore, lead to substantial consolidation in the short-term payday and vehicle title lending market.” Id., p. 45.

Ability to Repay Analysis.  One serious flaw with the ATR option for short-term Covered Loans is that it requires the ATR evaluation to be based on the contractual maturity of the Covered Loan even though state laws and industry practices contemplate regular extensions of the maturity date, refinancings or repeat transactions.  Instead of insisting on an ATR evaluation over an unrealistically short time horizon, the CFPB could mandate that creditors refinance short-term Covered Loans in a manner that provides borrowers with “an affordable way out of debt” (id., p. 3) over a reasonable period of time.  For example, it could provide that each subsequent short-term Covered Loan in a sequence of short-term Covered Loans must be smaller than the immediately prior short-term Covered Loan by an amount equal to at least five or ten percent of the original short-term Covered Loan in the sequence.  CFPB concerns that Covered Loans are sometimes promoted in a deceptive manner as short-term solutions to financial problems could be addressed directly through disclosure requirements rather than indirectly through overly rigid substantive limits.

This problem is particularly acute because many states do not permit longer-term Covered Loans, with terms exceeding 45 days.  In states that authorize short-term, single-payment Covered Loans but prohibit longer-term Covered Loans, the CFPB proposals under consideration threaten to kill not only short-term Covered Loans but longer-term Covered Loans as well.  As described by the CFPB, the contemplated rules do not address this problem.

The delays, costs and burdens of performing an ATR analysis on short-term, small-dollar loans also present problems.  While the CFPB observes that the “ability-to-repay concept has been employed by Congress and federal regulators in other markets to protect consumers from unaffordable loans” (Outline, p. 3), the verification requirements on income, financial obligations and borrowing history for Covered Loans go well beyond the ability to repay (ATR) rules applicable to credit cards.  And ATR requirements for residential mortgage loans are by no means comparable to ATR requirements for Covered Loans, even longer-term Covered Loans, since the dollar amounts and typical term to maturity for Covered Loans and residential mortgages differ radically.

Finally, a host of unanswered questions about the contemplated rules threatens to pose undue risks on lenders wishing to rely upon an ATR analysis:

  • How can lenders address irregular sources of income and/or verify sources of income that are not fully on the books (e.g., tips or child care compensation)?
  • How can lenders estimate borrower living expenses and/or address situations where borrowers claim they do not pay rent or have formal leases?  Will reliance on third party data sources be permitted for information about reasonable living costs?
  • Will Covered Loan defaults deemed to be excessive be used as evidence of ATR violations and, if so, what default levels are problematic?  Unfortunately, we believe we know the answer to this question.  According to the CFPB, “Extensive defaults or reborrowing may be an indication that the lender’s methodology for determining ability to repay is not reasonable.” Id., p. 14.  To give the ATR standard any hope of being workable, the CFPB needs to provide lenders with some kind of safe harbor.

In our next blog post, we will look at the CFPB’s contemplated 36% “all-in” rate trigger and restrictions for “longer-term” Covered Loans.