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CFPB and federal banking regulators increase focus on cybersecurity

Posted in Cybersecurity

As part of their increased focus on cybersecurity, the CFPB and federal banking are taking steps to raise financial institutions’ awareness about the need for preparedness.  On June 24, 2014, the Federal Financial Institutions Examination Council (FFIEC) launched a web page that combines available resources from the federal regulators on cybersecurity. 

In addition to heightening institutions’ awareness of cybersecurity risks, the web page is intended to create a repository of prior FFIEC cybersecurity documents and guidance.  The web page was established in conjunction with the CFPB, the Fed, the FDIC, the NCUA and the OCC.  For more information, see our legal alert.

On Wednesday, July 16, Ballard attorneys will be conducting a cybersecurity webinar.  A description of the webinar with a link to register is available here.

House to hold hearings on “Operation Choke Point”

Posted in Payday Lending

Two House committees have scheduled hearings this week on “Operation Choke Point,” the coordinated federal multiagency enforcement initiative targeting banks serving online payday lenders and other companies that have raised regulatory concerns. 

Tomorrow, July 15, the House Financial Services Committee will hold a hearing entitled “The Department of Justice’s ‘Operation Choke Point.’”  The witnesses scheduled to appear are:

  • Stuart F. Delery, Assistant Attorney General, Department of Justice
  • Scott G. Alvarez, General Counsel, Federal Reserve Board
  • Richard J. Osterman, Acting General Counsel, Federal Deposit Insurance Corporation
  • Daniel P. Stipano, Deputy Chief Counsel, Office of the Comptroller of the Currency 

On Thursday, July 17, the House Judiciary Committee will hold a hearing entitled “Guilty until Proven Innocent? A Study of the Propriety & Legal Authority for the Justice Department’s Operation Choke Point.”  A witness list has not yet been posted on the Committee’s website.  

“Operation Choke Point” has recently come under fire in a critical staff report issued by the House Oversight and Government Reform Committee and a payday industry lawsuit brought in Washington, D.C., federal court against the FDIC, the Fed and the OCC.  With regard to the CFPB’s role in “Operation Choke Point,” when asked during his appearance last month before the House Financial Services Committee whether the CFPB was working with the FDIC and Department of Justice, Director Cordray’s response was that the CFPB works regularly with the other agencies on issues involving “know your customer.” 




CFPB issues policy guidance on mini-correspondent structure for mortgage lenders

Posted in Mortgages

On July 11, 2014, the CFPB issued supervisory and enforcement guidance entitled “Policy Guidance on Supervisory and Enforcement Considerations Relevant to Mortgage Brokers Transitioning to Mini-Correspondent Lenders.”  The guidance addresses regulatory requirements applicable to mortgage brokers under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA). 

The CFPB notes that it is aware of increased interest among some mortgage brokers to restructure their business to become mini-correspondent lenders “in the possible belief that doing so will alter the applicability of important consumer protections that apply to transactions involving mortgage brokers.”  The CFPB specifically identifies the following requirements: 

  • The RESPA requirements to disclose mortgage broker compensation on the Good Faith Estimate and HUD-1 Settlement Statement. 
  • The TILA requirements to include compensation paid to a mortgage broker in points and fees under the high-cost loan rule and to satisfy the qualified mortgage conditions under the ability to repay rule.
  • The TILA requirements regarding compensation paid to a mortgage broker under the loan originator compensation rule, and the prohibition against steering by a mortgage broker under such rule. 

The CFPB describes a “correspondent lender” as a party that performs the activities necessary to originate a mortgage loan, and specifically identifies the following functions: (1) taking and processing applications, (2) providing required disclosures, (3) often, although not always, underwriting the loan and making the final credit approval decision, (4) closing the loan it its name, (5) funding the loan, often through a warehouse line of credit, and (6) selling loans to investors.  The CFPB states it understands that some mortgage brokers may be setting up arrangements with wholesale lenders in which the brokers purport to act as mini-correspondents.  The CFPB describes a “wholesale lender” as an entity that typically provides the funding for loans in transactions involving mortgage brokers. 

The CFPB explains that in a mini-correspondent arrangement, a mortgage broker may in form appear to be the lender or creditor in each transaction by engaging in activities such as closing the loan in its name, funding the loan from what is designated as a warehouse line of credit and receiving compensation through what may nominally take the form of a premium for the sale of the loan to an investor.  The CFPB notes that mortgage brokers making such a transformation may start out as small correspondents dealing with only a few investors (hence the “mini-correspondent” moniker).  However, the CFPB asserts that in substance the mortgage brokers “may not have transitioned to a mini-correspondent role and may be continuing to serve effectively as mortgage brokers.  That is, these mortgage brokers may continue to facilitate brokered loan transactions between borrowers and wholesale lenders . . . .” 

To provide guidance, the CFPB sets forth a number of questions that it may ask to assess whether a company using a mini-correspondent structure is actually acting as a creditor, or is acting as a mortgage broker.  The CFPB notes that the questions in the guidance are not exhaustive and that no single question is necessarily determinative of how the CFPB may exercise is supervision and enforcement authority.  The questions reflect areas that likely are of concern to the CFPB, including whether the warehouse line arrangement that the mini-correspondent uses to fund loans is bona fide and whether the mini-correspondent is actually performing the functions of a creditor.  Among the various questions are the following: 

  • Is the warehouse line of credit provided by a third-party warehouse bank?
  • Is the warehouse bank providing the line of credit one of, or affiliated with any of, the
    mini-correspondent’s investors that purchase loans from the mini-correspondent?
  • How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit? 
  • Does the mini-correspondent have more than one warehouse line of credit?
  • Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
  • What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
  • What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
  • What entity (mini-correspondent, warehouse lender, investor) is performing the majority of the principal mortgage origination activities?  

The Policy Guidance is non-binding guidance regarding the CFPB’s exercise of its supervisory and enforcement authority under RESPA and TILA.  Nevertheless, it appears the CFPB intends to send a strong message regarding attempts by mortgage brokers to restructure their operations as mortgage lenders.  In announcing the guidance, Director Richard Cordray stated “Before the financial crisis, consumers seeking mortgages were steered toward high-cost and risky loans that were not in the consumer’s interest.  The CFPB’s rules on mortgage broker compensation are intended to protect consumers from this type of abuse.  Today we are putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”

OIG updated work plan adds focus to information security, compensation, and distribution of civil penalty funds

Posted in CFPB General

The most notable items added by the Office of Inspector General (OIG) to its work plan, updated as of July 7, 2014, are audits of the CFPB’s information security program, pay and compensation program, and distribution of civil penalty funds.

Information Security

Pursuant to the Federal Information Security Management Act of 2002 (“FISMA”), each agency Inspector General must annually evaluate the agency’s information security program. OIG will implement the statutory requirements by auditing

  • the Bureau’s compliance with FISMA and related information security policies, procedures, standards, and guidelines; and
  • the effectiveness of security controls and techniques for a subset of the Bureau’s information systems.

Pay and Compensation

The same 2010 Dodd-Frank legislation (“Dodd-Frank”) that created the CFPB requires it to provide employee compensation and benefits that are, at a minimum, comparable to those of the Board of Governors of the Federal Reserve System. As part of OIG’s audit of the Bureau’s pay and compensation program for compliance, OIG will evaluate the controls around setting employee pay.

Distribution of Civil Penalty Funds

Civil money penalties assessed by the prudential bank regulators are payable to the U.S. Treasury. By contrast, civil penalties obtained by the CFPB in either administrative or judicial actions must be paid into a Civil Penalty Fund (the “Fund”) established by Dodd-Frank. The purpose of the Fund is primarily to compensate consumers harmed by activities for which the civil penalties were imposed. A secondary purpose, to the extent that victims cannot be located or payment to them is impracticable, is to finance consumer education and financial literacy programs.

Although an audit of this fund was previously reported as being completed and no longer a “work in progress,” it appears there is more work to be done. OIG will audit the internal controls related to the Fund and will assess

  • the effectiveness of internal controls surrounding the distribution of money to victims, payment of administrative costs, and financing of consumer education and financial literacy programs;
  • compliance with applicable policies and procedures.

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Posted in CFPB General

Once each year the ABA Journal puts out a suggestion box for its Blawg 100, an annual listing of the 100 best legal blogs. For the past two years, CFPB Monitor has been honored to join this lofty list of top blogs. We would be grateful to continue the trend in 2014. If you value the content we provide, please consider nominating us. Nominations (up to 500 words) are due by 5:00 p.m. ET on Friday, August 8. Here is a link to the nomination form.

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CFPB obtains $10 million of relief for payday lender’s collection calls

Posted in CFPB Enforcement, Payday Lending

Yesterday, the CFPB and ACE Cash Express issued press releases announcing that ACE has entered into a consent order with the CFPB. The consent order addresses ACE’s collection practices and requires ACE to pay $5 million in restitution and another $5 million in civil monetary penalties.

In its consent order, the CFPB criticized ACE for: (1) instances of unfair and deceptive collection calls; (2) an instruction in ACE training manuals for collectors to “create a sense of urgency,” which resulted in actions of ACE collectors the CFPB viewed as “abusive” due to their creation of an “artificial sense of urgency”; (3) a graphic in ACE training materials used during a one-year period ending in September 2011, which the CFPB viewed as encouraging delinquent borrowers to take out new loans from ACE; (4) failure of its compliance monitoring, vendor management, and quality assurance to prevent, identify, or correct instances of misconduct by some third-party debt collectors; and (5) the retention of a third party collection company whose name suggested that attorneys were involved in its collection efforts.

Notably, the consent order does not specify the number or frequency of problematic collection calls made by ACE collectors nor does it compare ACE’s performance with other companies collecting seriously delinquent debt. Except as described above, it does not criticize ACE’s training materials, monitoring, incentives and procedures. The injunctive relief contained in the order is “plain vanilla” in nature.

For its part, ACE states in its press release that Deloitte Financial Advisory Services, an independent expert, raised issues with only 4% of ACE collection calls it randomly sampled. Responding to the CFPB claim that it improperly encouraged delinquent borrowers to obtain new loans from it, ACE claims that fully 99.1% of customers with a loan in collection did not take out a new loan within 14 days of paying off their existing loan.

Consistent with other consent orders, the CFPB does not explain how it determined that a $5 million fine is warranted here. And the $5 million restitution order is problematic for a number of reasons:

  • All claimants get restitution, even though Deloitte found that 96% of ACE’s calls were unobjectionable. Claimants do not even need to make a pro forma certification that they were subjected to unfair, deceptive or abusive debt collection calls, much less that such calls resulted in payments to ACE.
  • Claimants are entitled to recovery of a tad more than their total payments (including principal, interest and other charges), even though their debt was unquestionably valid.
  • ACE is required to make mailings to all potential claimants. Thus, the cost of complying with the consent order is likely to be high in comparison to the restitution provided.

In the end, the overbroad restitution is not what gives me most pause about the consent order. Rather, the CFPB has exercised its considerable powers here, as elsewhere, without providing context to its actions or explaining how it has determined the monetary sanctions. Was ACE hit for $10 million of relief because it failed to meet an impossible standard of perfection in its collection of delinquent debt? Because the CFPB felt that the incidence of ACE problems exceeded industry norms or an internal standard the CFPB has set?

Or was ACE penalized based on a mistaken view of its conduct? The consent order suggests that an unknown number of ACE collectors used improper collection practices on an unspecified number of occasions. Deloitte’s study, which according to one third party source was discounted by the CFPB for unidentified “significant flaws,” put the rate of calls with any defects, no matter how trivial, at approximately 4%.

Ironically, one type of violation described in the consent order was that certain collectors sometimes exaggerated the consequences of delinquent debt being referred to third-party debt collectors, despite strict contractual controls over third-party collectors also described in the consent order. Moreover, the entire CFPB investigation of ACE depended upon ACE’s recording and preservation of all collection calls, a “best practice,” not required by the law, that many companies do not follow.

Despite the relative paucity of problems observed by Deloitte, the good practices observed by ACE and the limited consent order criticism of formal ACE policies, procedures and practices, in commenting on the CFPB action Director Cordray charged that ACE engaged in “predatory” and “appalling” tactics, effectively ascribing occasional misconduct by some collectors to ACE corporate policy. And Director Cordray focused his remarks on ACE’s supposed practice of using its collections to “induc[e] payday borrowers into a cycle of debt” and on ACE’s alleged “culture of coercion aimed at pressuring payday borrowers into debt traps.” Director Cordray’s concern about sustained use of payday loans is well-known but the consent order is primarily about incidences of collector misconduct and not abusive practices leading to a cycle of debt.

CFPB rule-making is on tap for both the debt collection and payday loan industries. While enhanced clarity and transparency would be welcome, this CFPB action will be unsettling for payday lenders and all other financial companies involved in the collection of consumer debt.

We will discuss the ACE consent order in our July 17 webinar on the CFPB’s debt collection focus.

CFPB to hold July 17 field hearing on consumer complaints

Posted in CFPB General

The CFPB has announced that on July 17, 2014, it will hold a field hearing in El Paso, Texas on consumer complaints.  Director Cordray will be speaking at the event, which will also feature testimony from consumer groups, industry representatives, and members of the public. 

Given the CFPB’s practice of using field hearings as a forum to announce related CFPB developments, it is likely the event will include such an announcement.  As the CFPB is currently moving forward on a proposed small dollar loan rule, one possibility is that the CFPB will use the event to announce the release of a report on the payday loan complaints it has received.  The CFPB began taking such complaints in November 2013.  It has previously issued “snapshot” reports on other categories of complaints it has received, such as private student loan complaints and complaints from military servicemembers, but has not yet issued a report on payday loan complaints.

Another possibility is that the CFPB will announce a further expansion of its complaint system to include a new product or service, such as complaints about prepaid cards.  The CFPB is expected to issue a proposed prepaid card rule at the end of this summer.


The CFPB issues guidance on ensuring equal treatment for same-sex married couples

Posted in CFPB General

On June 25, 2014, the CFPB issued guidance setting forth basic principles on the issue of equal treatment for legally-married same-sex couples. The CFPB noted that this guidance was issued in response to the decision in United States v. Windsor, 133 S. Ct. 2675 (2013), in which the U.S. Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”). Section 3 of DOMA provided: “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

The CFPB stated that its guidance was for purposes of all statutes, regulations and policies enforced, administered or interpreted by the CFPB. It declared that, to the extent permitted by federal law and consistent with the legal position announced by the U.S. Department of Justice, it will be the CFPB’s policy to recognize all marriages valid at the time of the marriage in the jurisdiction where the marriage was celebrated. Thus, a person who is married in any jurisdiction will be regarded as married nationwide for purposes of the federal statutes and regulations under the CFPB’s jurisdiction regardless of the person’s place of residency. However, consistent with other federal agencies, the CFPB will not regard a person to be married by virtue of being in a domestic partnership, civil union or other relationship not denominated by law as a marriage.

Under this policy, the CFPB stated that it will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” and “wife,” and similar terms relating to marriage or family status, to include same-sex marriages and married same-sex spouses. The CFPB stated that it will apply this policy to the Equal Credit Opportunity Act and Regulation B, the Fair Debt Collection Practices Act, the Interstate Land Sales Full Disclosure Act and Regulation J, the Truth in Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Bureau Ethics Regulations, and the Procedures for Bureau Debt Collection. As part of its discussion, the CFPB noted specific parts of each such statute or regulation that use words or phrases such as “spouse,” or “husband and wife,” and stated that it will apply this language to married same-sex couples and gender-neutrally.

CFPB Provides Guidance on Ability to Repay Rule Application to Assumptions of Residential Mortgage Loans

Posted in CFPB General, CFPB Rulemaking, Mortgages

On July 8, 2014 the CFPB provided guidance on the application of the Regulation Z ability to repay rule (section 1026.43) to assumptions of residential mortgage loans for purposes of clarifying the application of the rule in cases in which a relative acquires title to a security property upon the death of the borrower and wants to assume the loan, and also in similar situations. Creditors may rely on the CFPB interpretation under Truth in Lending Act section 130(f), which provides a safe harbor from TILA liability for actions taken or omitted in good faith in conformity with a CFPB rule, regulation or interpretation.

Prior CFPB guidance indicated that the ability to repay rule applied to refinancings and assumptions under Regulation Z sections 1026.20(a) and 1026.20(b), respectively. The CFPB notes that both industry and consumer advocates have expressed uncertainty regarding the application of the rule in cases in which a successor seeks to be added as an obligor or substituted for the current obligor on an existing mortgage. The CFPB describes a successor as a person who receives legal interest in a property, typically by a transfer from a family member, by operation of law upon another’s death, or under a divorce decree or separation agreement. Although the successor acquires title to the property, by virtue of the acquisition the successor does not become legally obligated on any existing mortgage loan. Last October, the CFPB addressed the obligations of servicers with regard to successors in Bulletin 2013-02, and while the CFPB provided guidance regarding assumptions it did not address the ability to repay rule. We previously reported on the Bulletin.

The CFPB notes that there can be significant consequences for a successor who is not able to become an obligor on an existing mortgage loan, and provides an example of a successor not being able to obtain a modification because he or she is not a party to the existing loan and cannot enter into a modification agreement. As the CFPB observes, if the ability to repay rule applies to a successor’s assumption of an existing mortgage loan, such an assumption is less likely to occur.

The CFPB interprets the ability to repay rule as incorporating the existing Regulation Z standard for transactions involving a change in obligors as set forth in section 1026.20(b) and, therefore, unless a change in obligors satisfies the definition of “assumption” under that section the change does not trigger the ability to repay rule requirements. The CFPB then notes that an “assumption” for purposes of section 1026.20(b) occurs when a creditor agrees in writing to accept a new consumer as a primary obligor on an existing mortgage loan, and the loan would constitute a residential mortgage transaction for that new consumer. Under Regulation Z, a residential mortgage transaction is a transaction in which a consumer finances the acquisition or initial construction of the consumer’s principal dwelling.

The CFPB interprets the ability to repay rule as not applying when a creditor agrees in writing to allow a successor to become the obligor on an existing mortgage loan because there is no assumption for Regulation Z section 1026.20(b) purposes. Because the successor had previously acquired title to the property, the transaction is not a residential mortgage transaction for the successor and, therefore, is not an assumption subject to the ability to repay rule.

The CFPB notes that the transaction still is a consumer credit transaction and is subject to other Regulation Z requirements, including the requirement to provide monthly statements under section 1026.41 and the requirements to provide notices of interest rate adjustments under sections 1026.20(c) and (d).

CFPB Issues Report on the Use of Remittance Histories in Credit Scoring

Posted in Credit Reports, Remittance Transfers

On July 3rd, the CFPB released a Report on the Use of Remittance Histories in Credit Scoring (the “Report”). Section 1073(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB Director to study the feasibility of and impediments to using remittance transfer information (i.e., information regarding electronic fund transfers made by U.S. consumers to recipients abroad) in credit scoring, ostensibly with the intention of determining the utility of such information as a way to enhance such consumer credit scores, and/or increase the numbers of persons for whom such scores could be assigned. The CFPB issued a report in fulfillment of that requirement in July, 2011.

In that report the CFPB stated it would conduct additional research to better explore the potential for remittance information to enhance credit scores, either by: (i) improving the ability of the credit scores to more accurately predict credit risk, or (ii) raising the scores of those consumers who send remittance transfers. This new Report discusses the CFPB’s empirical research efforts and results to date specific to these topics.

Regarding the first topic, the CFPB’s analysis suggests that remittance history information would provide insufficient additional benefit to the predictiveness of a credit scoring model to permit scores to be generated for consumers whose credit file alone would otherwise be unscorable.

With respect to the second topic, the Report concludes that it is unlikely that including remittance transfer information in a credit scoring process will increase the credit scores of consumers who send remittance transfers. In fact, the inclusion of such information was seen to have, if anything, the opposite effect, though the reasons for such results were seen as having less to do with the remittance information itself as potentially other selection effects.

In the course of its analysis of the second topic, the CFPB found that the observed credit predictive value of remittance transfer information varied according to the locations to which the remittances were actually sent. This finding led the CFPB to warn of a potential fair lending danger in using such geographic destination information for credit scoring models or otherwise in making credit decisions, in that such use may have a disproportionately negative impact on certain racial or national origin groups, and that a lender’s consideration of the geographic destination of an applicant’s remittances could itself constitute discrimination based on national origin.