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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.

OIG finds flaws in approval process used for CFPB headquarters renovation

Posted in CFPB General

The ballooning cost estimates for renovating the CFPB’s Washington, D.C. headquarters was the subject of verbal sparring between Director Cordray and Republican Congressmen during Director Cordray’s most recent appearance before the House Financial Services Committee.  That sparring is likely to become even more heated as a result of a letter issued earlier this week by the Office of Inspector General (OIG) for the Fed and CFPB evaluating the CFPB’s renovation budget. 

The OIG evaluation was requested by Republican Congressman Patrick McHenry, who chairs the Committee’s Subcommittee on Oversight and Investigations.  The letter indicates that the CFPB’s approval processes require major investments to be reviewed by the CFPB’s Investment Review Board (IRB) and while IRB approval is not necessary for the CFPB to include a major investment in its budget, such approval is needed for budgeted funds to be available for expenditure.  To obtain IRB approval, a CFPB program office must complete an IRB “business case” which, according to the CFPB’s internal guidance for making a “sound business case,” requires consideration of alternatives, including a comparison of the costs and benefits of alternatives and the rationale for the investment.  It also requires a return on investment to be shown and stresses the importance of a quantitative analysis. 

The OIG found that that CFPB did not follow all of its internal guidance when completing the business case for the renovation.  By way of example, the OIG found that while the CFPB listed alternatives in its business case, it did not complete any analyses of those alternatives and did not include any quantitative information or calculations related to a return on investment.  The OIG was informed by CFPB officials that the IRB approved the business case without such information “because funding approval was viewed as a formality given that the decision to proceed with the renovation had already been made.”  The CFPB, however, was unable to locate for the OIG any documentation of the decision to fully renovate the building. 

The OIG observes that “while the decision to renovate may pre-date the current IRB policies, these policies were in place when the business case was submitted for funding approval.”  Although the OIG states that it could not conclude that a complete analysis would have changed the decision to approve funding, it comments that without such an analysis, “the value of the IRB process as a funding control is diminished and a sound business case is not available to support the funding of the renovation.”  The OIG further comments that “expected cost information is not available as a baseline to facilitate management of changes in estimated renovation costs.”


Industry trade groups urge OMB not to approve CFPB arbitration telephone survey

Posted in Arbitration

Three prominent industry trade groups are urging the Office of Management and Budget (OMB) not to approve the CFPB’s proposal to conduct a national telephone survey of 1,000 credit card holders as part of its study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services. 

After releasing its initial proposed survey in June 2013, the CFPB revised the proposed survey in May 2014 based on the comments it received on the initial survey.  In its Federal Register notice announcing the revised survey, the CFPB indicated that the survey was intended to explore: (a) the role of dispute resolution provisions in consumer card acquisition decisions, and (b) consumers’ default assumptions (meaning consumers’ awareness, understanding, or knowledge without supplementation from external sources) regarding their dispute resolution rights vis-à-vis their credit card issuers, including their awareness of their ability, where applicable, to opt-out of mandatory pre-dispute arbitration agreements. 

While noting their appreciation of the CFPB’s efforts to incorporate the comments it received on its initial proposed survey, the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable (Associations) state in their comment letter that they “strongly recommend that OMB not approve the [revised] proposal because it will not produce information of practical utility, remains materially flawed, and is inconsistent with the statutory mandate.”  The CFPB’s arbitration study is mandated by Section 1028 of the Dodd-Frank Act, which authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” mandatory arbitration agreements if it finds that doing so is “in the public interest and for the protection of consumers.”  

According to the Associations, for responses to the proposed survey to be meaningful, the CFPB must obtain other information that cannot be reliably obtained through a telephone survey.  Examples of such other information given by the Associations are the reasons people may not be aware of their dispute resolution rights, the reasons such rights are not a factor in choosing a credit card, and consumer dispute resolution preferences.  The Associations assert that such reasons and preferences are materially important to the policy consideration of whether use of mandatory arbitration would be “in the public interest and for the protection of consumers” and without such information, the CFPB’s analysis will lack the factual basis “required to consider how consumers are or would be affected and the public interest best served.”  They further assert that because of its flaws, the proposed survey does not satisfy the standard for OMB approval which requires OMB to consider whether an agency’s proposed information collection “is necessary for the performance of the functions of the agency, including whether the information shall have practical utility….” 

The Associations recommend that the CFPB spend its resources on obtaining more useful and complete information through other means, such as consumer focus groups.  While asserting that the proposed survey is fundamentally inadequate, the Associations also suggest improvements to the survey. 

In April 2012, the CFPB published a request for information about the scope, methodology and data sources for the study.  In December 2013, the CFPB published preliminary study results.  This past April, at the 19th Annual Consumer Financial Services Institute in Chicago (which I co-chaired), Will Wade-Gery (who is managing the study for the CFPB) indicated that the study will be completed by the end of this year.

GAO report recommends increased CFPB participation in virtual currency efforts

Posted in Hot Issues

In a report issued last week on virtual currencies, the Government Accountability Office recommended increased CFPB participation in interagency efforts related to such currencies. 

The report, entitled “Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protections Challenges,” reviews various actions that federal financial regulators and law enforcement agencies have taken related to the emergence of virtual currencies.  Those actions include the issuance of regulatory guidance and the investigation of crimes and violations that have been facilitated by the use of virtual currencies.  

The report observes, however, that interagency working groups have not focused on consumer protection issues.  It states that “because virtual currency systems provide a new way of making financial transactions, and the CFPB’s responsibilities include ensuring that consumers have timely and understandable information to make responsible decisions about financial transactions,” the CFPB “might be a relevant participant in a broader set of collaborative efforts on virtual currencies.”  The report further states that without CFPB participation, “interagency groups are not fully leveraging the expertise of the lead consumer financial protection agency, and the CFPB may not be receiving information that it could use to assess the risks that virtual currencies pose to consumers.” 

The report includes the CFPB’s letter responding to the report in which in concurs with the GAO’s recommendations that the CFPB (1) identify which interagency working groups could help the CFPB maintain awareness of emerging consumer protection issues or would benefit from CFPB participation, and (2) decide, in coordination with the agencies already participating in efforts related to virtual currencies which efforts the CFPB should participate in. 

In November 2013, Ballard Spahr partner Mercedes Kelley Tunstall, who leads the firm’s Privacy and Data Security Group, testified on virtual currencies before two subcommittees of the U.S. Senate Committee on Banking, Housing and Urban Affairs.  Mercedes advises banking clients nationwide on payments and cybersecurity issues, including those involving virtual currencies.  At the hearing, she addressed the commercial viability of digital currencies, regulatory options, and how to respond to other emerging virtual currencies. 


Hensarling and CFPB disagree on impact of Supreme Court’s Canning decision

Posted in CFPB General

It should be no surprise that the CFPB and Republican Congressman Jeb Hensarling, who chairs the House Financial Services Committee, have different perspectives on the U.S. Supreme Court’s ruling last week that President Obama exceeded his Constitutional recess appointment authority when he filled three vacancies on the National Labor Relations Board in January 2012 . 

In a statement issued after the court’s decision in NLRB v. Noel Canning was announced, Mr. Hensarling commented that the decision shows “clearly and unquestionably [that] President Obama exceeded his authority when he appointed Director Cordray, just as he exceeded his authority when he made these NLRB appointments.”  According to Mr. Hensarling, the fact that Richard Cordray served as CFPB Director for 18 months before he was confirmed by the Senate “calls into question the legality of the official actions he took during this time period and may represent a legal risk for the CFPB.” 

The CFPB, as might be expected, downplayed the decision’s significance.  According to a Politico report, CFPB General Counsel Meredith Fuchs issued a statement indicating that the CFPB “do[es] not expect this decision to impact the CFPB or its important work.”  She is also reported to have said that “Director Cordray was confirmed by the Senate in July 2013.  The CFPB was not part of this case, and today’s decision does not include or mention the bureau or Director Cordray.” 

While I agree with Congressman Hensarling that the Canning decision provides potential ammunition for challenging CFPB actions taken before Director Cordray’s confirmation, I would give low odds to such a challenge’s chances of success.  As I told reporters from Politico and the Wall Street Journal who asked me to comment on what the decision means for the CFPB, someone could theoretically challenge the validity and effect of Mr. Cordray’s ratification of the actions he took prior to his confirmation as Director.  However, at the end of the day, I very much doubt whether such a challenge would succeed.

CFPB: Industry should “start now” to comply with workplace diversity and inclusion standards

Posted in CFPB People, CFPB Rulemaking, Diversity and Inclusion

On June 26, 2014, I participated in a panel presentation at the MBA Strategic Markets and Diversity Summit, in Washington, D.C. Stuart Ishimaru, Director of the Consumer Financial Protection Bureau’s Office of Minority and Women Inclusion, also sat on the panel.

The presentation focused on Section 342 of the Dodd-Frank Act and the proposed Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices (the Proposed Standards). The Proposed Standards were issued by six agencies mandated to assess the diversity and inclusion policies and practices of regulated entities in the financial services industry. We are awaiting issuance of the final standards by these agencies.

Some of the most common questions being asked about the Proposed Standards are:

When are entities expected to comply?

I asked Mr. Ishimaru if he could let us know when the final standards are expected to issue and whether regulated entities will be provided lead-in time to take necessary compliance measures. While Mr. Ishimaru could not say with certainty when the final standards will be issued, he recommended that entities “start now” to take compliance steps. We understand that final standards are expected before year-end 2014.

To whom do the standards apply?

Section 342 applies to “entities regulated by [an] agency.” This means that all entities regulated by the CFPB or by any one of the following eight agencies are covered: Department of the Treasury, Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), all Federal Reserve Banks, Board of Governors of the Federal Reserve System, National Credit Union Administration (NCUA), Office of the Comptroller of Currency (OCC), and Securities and Exchange Commission (SEC). In addition to the CFPB, the agencies that issued the Proposed Standards are OCC, Federal Reserve Board, FDIC, NCUA, and SEC.

The Proposed Standards recognize that some regulated entities also are required to file EEO-1 reports with the Equal Employment Opportunity Commission (EEOC) and/or are federal contractors covered by affirmative action laws. These requirements are triggered by the size of the employer and whether the employer has a federal contract or subcontract above the dollar threshold. However, the proposed standards are broader and not limited in their application to only entities covered by these legal requirements.

What compliance steps are required?

The Proposed Standards, in their current form, contain specific standards across four key areas: (1) organizational commitment to diversity and inclusion; (2) workforce profile and employment practices; (3) procurement and business practices – supplier diversity; and (4) practices to promote transparency of organizational diversity and inclusion.

Recognizing that one size does not fit all, the Proposed Standards note that an entity may tailor its approach to compliance, taking into consideration the entity’s size, total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics.

Given Mr. Ishimaru’s recommendation to begin now taking measures to comply, I suggest regulated entities start by assessing what diversity and inclusion measures already are in place and can be continued or built upon going forward. In addition, certain of the Proposed Standards are highly likely to be part of the final standards, including the development of a strategic plan, diversity policies, metrics and progress reporting, and outreach. These areas would be good starting points for an entity’s diversity and inclusion program.

Related blog posts and alerts:

Federal Agencies Set Up Dodd-Frank-Mandated Offices of Minority and Women Inclusion

Offices of Minority and Women Inclusion to hold roundtables

Diversity standards highlighted in Director Cordray’s remarks to Congressional Black Caucus Foundation

CFPB Office of Women and Minority Inclusion to propose diversity standards for regulated entities

Federal Regulators Propose Standards for Assessing Diversity Policies of Regulated Entities

CFPB extends diversity standards proposal comment period 

* Brian Pedrow is a partner in Ballard Spahr’s Labor and Employment Group

U.S. Supreme Court decides recess appointments case

Posted in CFPB General

The U.S. Supreme Court today issued a decision in NLRB v. Noel Canning in which it held that President Obama’s January 2012 recess appointments to the National Labor Relations Board were invalid.

The NLRB recess appointments were made on January 4, the day after a new session of Congress had begun with a pro forma January 3 session and two days before another pro forma session was held on January 6.  The Senate thereafter continued to hold additional  pro forma sessions until reconvening on January 23.  The D.C. Circuit, in the decision reviewed by the Supreme Court, concluded that the NLRB appointments violated the U.S. Constitution’s Recess Appointments Clause (RAC) because the RAC only allows a president to make such appointments during an intersession recess of the Senate, and they can only be used to fill vacancies that first arose during the recess in which the appointments were made.

Although Richard Cordray’s recess appointment as CFPB Director was not at issue in Canning, we followed the case very closely because his appointment was made on the same day and through the same assertion of recess appointment authority as the NLRB appointments.  The Supreme Court’s rationale discussed below for invalidating the NLRB appointments means that Director Cordray’s recess appointment was indeed invalid.  However, Director Cordray’s confirmation by the Senate as CFPB Director in July 2013 and his subsequent ratification of the actions he took prior to his confirmation means that the Canning decision has no impact on Mr. Cordray’s legal status as CFPB Director or the validity of any CFPB actions taken prior to his confirmation.  (While someone could theoretically challenge the validity and effect of Director Cordray’s ratification, we highly doubt that such a challenge would succeed.)

Ironically, while the Supreme Court adopted a broader reading of the president’s RAC authority than the D.C. Circuit, President Obama and his successors may have less need to avail themselves of that authority as a result of Senate Democrats having “gone nuclear” last fall.  In November 2013, Senate Democrats voted to change Senate filibuster rules to only require 51 (a simple majority) rather than 60 votes for most Presidential nominees to proceed to a full Senate vote.

In its Canning decision, the Supreme Court held the following:

  • the President’s recess-appointment power can be exercised during either a recess that occurs between Senate sessions or that occurs within a session of the Senate and is of “substantial length”
  •  the President’s recess-appointment power can be exercised to fill a vacancy either that initially occurs during a recess or that initially occurs before a recess and continues to exist during the recess
  • the Senate was not in recess when it was conducting pro forma sessions in January 2012 (On this point, the court held that for purposes of the RAC, “the Senate is in session when it says it is, provided that, under its own rules, it retains the capacity to transact Senate business.”  It found that the January 2012 pro forma sessions met that standard. According to the court, the 3-day recess between the January 3 and January 6 pro forma sessions was too short to trigger the president’s RAC authority.)


New studies challenge CFPB claims that student loan debt is discouraging homeownership

Posted in Student Loans

The charge that student loan debt is causing young adults to postpone home ownership has come from various quarters, including the CFPB.   However, two new studies, one the subject of an article released earlier this year and the other the subject of a Brookings Institution report released this week, suggest those charges are overblown. 

The article, entitled “Is Student Loan Debt Discouraging Home Buying Among Young Adults?,” was written by Jason Houle from Dartmouth College and Lawrence Berger from the University of Wisconsin.  Based on their review of the relevant data, the authors state that while finding “a very modest association between debt and home ownership, we find little evidence that student loan debt is a ‘major culprit’ of declining home ownership among young adults.  Instead, it is likely that declining home ownership among young adults—which predates the recent rise in student loan debt—is more responsive to structural changes in the economy and changes in the transition to adulthood.” 

The Brookings report, entitled “Is a Student Loan Crisis on the Horizon?,” was issued by Brookings’ Brown Center on Education Policy.  The authors, Beth Akers and Matthew Chingos, examined more than 20 years of data from the Survey of Consumer Finances administered by the Federal Reserve Board to track how the education debt levels and incomes of young households have evolved between 1989 and 2010.  Their key findings included the following:

  • Roughly one-quarter of the increase in student debt since 1989 can be directly attributed to Americans obtaining more education, especially graduate degrees. While the average debt levels of borrowers with a graduate degree more than quadrupled ( from just under $10,000 to more than $40,000), the average debt levels of borrowers with only a bachelor’s degree increased by a smaller margin ( from $6,000 to $16,000).
  • Increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.
  • The monthly payment of student loan borrowers has stayed about the same or even lessened over the past two decades.
  • Typical student loan borrowers are not worse off now than they were a generation ago, with the data showing no increase, and if anything, a decline, in the percentage of borrowers with high payment-to-income ratios.  

The Brookings report finds that “the new evidence suggests that broad-based policies aimed at all student borrowers, either past or current, are likely to be unnecessary and wasteful given the lack of evidence of widespread financial hardship.”  The authors suggest that “policy efforts should focus on refining safety nets that mitigate risk without creating perverse incentives.”