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CFPB proposes delay in effective date of Reg Z prohibition on financing credit insurance premiums

By Alan S. Kaplinsky on Posted in Mortgages

The CFPB has issued a proposal to temporarily delay the June 1, 2013 effective date of the Regulation Z prohibition on financing credit insurance premiums (Section 1026.36(i)).  The proposal responds to concerns raised by industry about the CFPB’s interpretation that the prohibition would apply to level premiums (meaning premiums that remain the same amount each month, are paid in full each month and are not financed). 

The prohibition was one of the amendments to Regulation Z made by the CFPB’s final rule on loan originator compensation issued in January 2013.  It was intended to implement new Truth in Lending Act Section 129C(d) added by the Dodd-Frank Act.  Section 129C(d) generally prohibits a creditor from financing the purchase of credit insurance in connection with any residential mortgage loan or extension of credit under an open-end plan secured by the consumer’s principal dwelling.  It also provides that fees for credit insurance “calculated and paid in full on a monthly basis shall not be considered financed by the creditor.” 

Industry was blindsided when, after conclusion of the notice and comment period, the CFPB included language in the background discussion of the final loan originator compensation rule indicating that it interpreted the rule to bar level premiums.  Because that language had not previously appeared in the background discussion of the CFPB’s proposed loan originator compensation rule, industry had no opportunity to comment on the prohibition’s applicability to level premiums before the rule was finalized.  Since adoption of the final rule, industry has been urging the CFPB to revisit its interpretation and clarify that level premiums are outside the scope of the prohibition because they are “calculated on a monthly basis” even though they do not decrease each month as the loan balance decreases and are not “financed” because they do not increase the borrower’s principal loan amount and are paid in full each month. 

If the CFPB’s interpretation that level premiums are encompassed by the prohibition were to become effective, it would effectively shut down the sale of mortgage life insurance. That’s because the entire industry charges mortgage life insurance premiums on a level and not a declining basis. We have been retained by several industry participants to urge the CFPB to revisit its interpretation of the prohibition as encompassing level premiums.  That language is also contrary to the interests of consumers since it would have required companies to charge higher monthly premiums in the earlier years of loans when the principal balances are highest. 

Comments on the proposal are due by May 25, 2013.  In its discussion of the proposal, the CFPB indicates that it plans to publish a new proposal regarding the scope of the prohibition and propose a new date for when the prohibition would become effective following finalization of that proposal.

Second Circuit ILSA decision follows CFPB position

By Barbara S. Mishkin on Posted in CFPB General

The decision of the U.S. Court of Appeals for the Second Circuit in Berlin v. Renaissance Rental Partners, LLC issued on May 6 represents a win for the CFPB’s amicus program. At the court’s invitation, the CFPB filed a letter brief supporting the consumer/appellee’s position that a single-floor condominium unit in a multistory building is a “lot,” thus triggering the disclosure and reporting requirements of the Interstate Land Sales Full Disclosure Act (ISLA).  The Second Circuit concluded that the CFPB’s interpretation was “reasonable and therefore warrants deference.”

ILSA is a consumer protection statute governing the sale or lease of undeveloped lots in large developments. ILSA protects consumers by requiring developers to register their plans with the CFPB (previously HUD) and to provide specific disclosures to consumers. Under Dodd-Frank, rulemaking and other authority relating to ILSA transferred from HUD to the CFPB in 2011.

The Berlin decision is one of the topics that will be discussed in a webinar–”The CFPB and the Interstate Land Sales Full Disclosure Act: What’s New?”–to be conducted by Ballard Spahr attorneys on May 21, 2013.  More information on the webinar is available here.

 

CFPB announces criminal referral relating to alleged debt-relief scam

By Barbara S. Mishkin on Posted in CFPB Enforcement

At a press conference yesterday in New York City, Director Cordray announced that the CFPB had made a criminal referral to the United States Attorney for the Southern District of New York arising out of the CFPB’s investigation of two debt-relief service providers and related entities.

In its press release about the referral, the CFPB announced that it had also filed a civil complaint in the SDNY federal district court against such providers, related entities and an individual alleging that the defendants had charged advance fees in violation of the FTC’s Telemarketing Sales Rule and engaged in deceptive and unfair practices in violation of the Consumer Financial Protection Act of 2010 (meaning Title X of Dodd-Frank).

In the complaint, the CFPB seeks to halt the defendants’ operations and obtain restitution and civil penalties as well as other relief.  Calling the action part of the CFPB’s “comprehensive effort to prevent consumer harm in the debt-relief industry,” the CFPB stated in the press release that it “is focusing not only on debt-relief service providers, but also on those who facilitate their unlawful conduct and who may also violate federal consumer financial laws.”

Although the CFPB has previously brought enforcement actions against debt-relief and mortgage modification service providers, it has not previously announced any criminal referrals in connection with those actions or other enforcement actions.  However, according to Director Cordray, the CFPB will be looking for more occasions “to coordinate and collaborate” with the U.S. Attorney.

CFPB finalizes revisions to remittances rule and sets October 28 effective date

By Mercedes Kelley Tunstall on Posted in Remittance Transfers

Despite the urging of many industry commenters that it eliminate altogether the requirement for remittance transfer providers to disclose recipient institution fees, the CFPB chose not to go that far in the revisions to its remittance transfers rule that it finalized last week.  However, the revised final rule does recognize some business realities and restricts the scope of the disclosure requirement and makes other favorable changes.  The final rule will take effect
on October 28, 2013. 

We have prepared a legal alert that discusses the three areas addressed by the revisions.

CFPB issues more small entity compliance guides for mortgage-related rules

By Barbara S. Mishkin on Posted in Mortgages

The CFPB has issued several more Small Entity Compliance Guides on its mortgage-related rules.  In addition to its guide on the ability-to-repay and qualified mortgage rule, the CFPB has now issued Small Entity Compliance Guides on the 2013 HOEPA rule, escrow rule for higher-priced mortgages, ECOA valuations rule, and TILA higher-priced mortgages appraisal rule. 

Each of the guides indicates that it is intended to provide a summary of the underlying rule that “highlights issues” that small creditors, and their partners or others that work with them, “might find helpful to consider when implementing the rule.”  Each guide also cautions that it is not a substitute for the underlying rule.

CFPB payday and deposit advance loans white paper draws industry fire

By Alan S. Kaplinsky on Posted in Deposit Advance Loans, Payday Lending

The CFPB’s white paper on payday and deposit advance loans received well-deserved criticism in a letter to Director Cordray from the Community Financial Services Association of America (CFSA), a national trade organization for payday lenders.  

The CFSA’s letter characterizes the paper’s data as “demonstrably incomplete and misleading” and indicates that the paper’s “tone, conclusions, and specific language [seem] aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts, but rather are driven by agendas and unsupported, anecdotal information.” 

The letter comments that, by excluding from its discussion of usage payday customers who elect to use the payday advance one time, the paper “paints an incomplete and inaccurate picture of the product, its use and the consumer’s experience.”  The CFSA also comments on the absence of “vital real world context” from the report, observing that the paper “does not consider the totality of the short-term credit marketplace, including the many available options that consumers consider and choose not to employ.”  Most significantly, the CFSA states: 

The Bureau cannot draw any meaningful conclusions to inform policy until it follows up this preliminary review with the difficult work of understanding the choices and consequences faced by those in need of short-term credit and the risks of driving people to higher-cost products, expensive penalties or less-regulated providers.  In short, it is irresponsible and arbitrary to look at payday lending and deposit advances in a vacuum, as the Bureau has done in this report. 

We have expressed similar concerns about the white paper’s failure to address the very real benefits of payday loans or the question whether (and when) such benefits outweigh the costs. 

As it continues to look at the short-term credit marketplace, we hope the CFPB will engage in the thorough analysis urged by the CFSA and attempt to address the shortcomings in its white paper that the CFSA has identified.

 

What is the CFPB thinking? An update from PLI’s 18th Annual Consumer Financial Services Institute

By Stefanie Jackman on Posted in CFPB Enforcement, CFPB Exams

Last week, I had the opportunity to hear several high-ranking lawyers with the CFPB speak at PLI’s 18th Annual Consumer Financial Services Institute in Chicago.  As an initial matter, the attendees owe a debt of thanks to each of CFPB lawyers for taking the time to attend the seminar, which Alan Kaplinsky co-chaired.  I know that many members of the audience appreciated the opportunity to hear directly from the people at the CFPB involved in determining the direction of the CFPB’s examination and enforcement efforts.  Below are a few notable comments and remarks regarding the CFPB’s current positions and future goals.

First, during her keynote address, Meredith Fuchs (the CFPB’s General Counsel) stated that one of the CFPB’s future goals is to increase the amount of transparency regarding its examination results.  Ms. Fuchs stated that to this end, the CFPB will soon publish a “Supervisory Highlights” report.  This report will provide a high-level summary of the CFPB’s findings and conclusions to date in connection with its examinations.  Ms. Fuchs did assure the audience that the identities of the subjects of those examinations will not be revealed in the report.  Alice Hrdy (Deputy Assistant Director, Office of Supervision Policy) echoed
Ms. Fuchs in this regard and also reiterated a theme that we have heard before from the CFPB, i.e., that the industry should not read too much into the presence of enforcement attorneys during exams.  According to Ms. Hrdy, the fact that very few enforcement actions have resulted from examinations shows that the enforcement role is not significant in the examination process.  However, when a member of audience suggested that perhaps the time has come for enforcement to exit the examination process, Ms. Hrdy’s response suggested that the CFPB does not share this view.  Therefore, I expect that the involvement of enforcement attorneys in examinations will continue for the foreseeable future, which risks continued concern in the consumer financial services industry about the CFPB’s examination process and its true purpose. 

With regard to the CFPB’s current enforcement priorities, Ms. Fuchs noted that the CFPB has implemented an advance notice process that will work similar to the Wells Notice used by the SEC prior to initiating an enforcement action.  Under the CFPB’s process, a company that may be subject to a potential enforcement action will receive advance notice from the CFPB regarding its intent to pursue an action.  Thereafter, the company will have an opportunity respond and attempt to persuade the CFPB to change course.  It will be interesting to see how this plays out and whether the industry will take advantage of this opportunity.  Hopefully, the CFPB will demonstrate a willingness to consider the company’s response in a meaningful way in reconsidering what the appropriate course of action, if any, should be against the company. 

Additionally, we heard from Anthony Alexis (Deputy Enforcement Director for Field Litigation).  My colleague, Alan Kaplinsky, pressed Mr. Alexis for information regarding the total number of active CIDs served by the CFPB.  In response, Mr. Alexis continued the CFPB’s tradition of declining to provide any specific numbers or information about this topic.  Instead, Mr. Alexis repeated what we have heard before – that the CFPB has served CIDs to companies in a variety of areas of the consumer financial services industry but did not provide any more specific detail. 

Alan also asked how a company will know when the CID process is complete.  Mr. Alexis’ response suggested to me that the CFPB does not have a consistent process by which such notice is delivered to companies at the conclusion of the investigation.  Instead, Mr. Alexis mentioned a number of potential ways in which such information could be conveyed, including: (1) through a discussion with CFPB enforcement attorneys; (2) through a formal closing letter (which is not always sent); or (3) as a result of the company inquiring as to how much longer the company will be required to continue its litigation hold.  My interpretation of Mr. Alexis’ response is that companies may want to consider following up with CFPB as to whether the CID process is concluded from time to time after completing its response to a CID.  Otherwise, the company risks a potentially significant investment of time and resources in continuing preservation efforts that may not be necessary.

Finally, during her keynote remarks, Ms. Fuchs highlighted four areas for continuing focus by the CFPB: 

  1. Disparate impact.  In the eyes of the CFPB, disparate impact is here to stay and will continue to be a significant part of the CFPB’s examination and enforcement efforts. 
  2. Identification of deceptive and misleading advertising.  Ms. Fuchs noted that an advertisement does not have to be “outright misleading” to be deceptive or misleading.  Rather, an advertisement can run afoul of this prohibition if critical information is not readily understandable, buried in the advertisement, or presented in a way that made it difficult for consumers to compare products. 
  3. Continuing scrutiny of financial products that function as “debt traps.”  Ms. Fuchs defined these products as those where profitability is tied to consumers rolling over their debts on a recurrent basis.
  4. Scrutiny of companies not chosen by consumers.  By way of illustration, Ms. Fuchs referred to the mortgage servicing industry as an example of an area where consumers do not have a choice in selecting the company with which they do business.  Ms. Fuchs explained that this concerns the CFPB because consumers often lack any ability to change who services their loan or have any other available method for recourse against their servicer in the event that customer service problems or other issues arise during the course of that business relationship.  While Ms. Fuchs used the mortgage servicing industry as an example of where the CFPB is concerned about consumer choice, I did not understand Ms. Fuchs to imply that the CFPB would limit its analysis of this issue to just that industry. 

The S.G.’s cert. petition in Noel Canning; no opposition will be filed

By Keith R. Fisher on Posted in CFPB Enforcement, CFPB People

As reported in last week’s news flash, the Solicitor General (S.G.), as expected, has, on behalf of the NLRB, filed in the Supreme Court a petition for a writ of certiorari to the D.C. Circuit in the Noel Canning case. As we have noted previously, the Noel Canning decision, which invalidated the recess appointments of three NLRB members as incompatible with the Recess Appointments Clause of the Constitution (the “RAC”), also cast a cloud over the validity of the contemporaneous recess appointment of Richard Cordray as CFPB Director.

A backup to the default process of Senate “advice and consent” for Presidential appointments, the RAC, Art. II, § 2, Cl. 3, provides: “The President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session.” In Noel Canning, the D.C. Circuit held (1) that the words “the Recess” referred only to an intersession recess of Congress, and not to an intrasession recess and (2) that to qualify for a recess appointment under the RAC, the vacancy must “happen” during the intersession recess.

The petition invokes a split in the circuits (most notably with Evans v. Stephens, 387 F.3d 1220 (11th Cir. 2004) (en banc), cert. denied, 544 U.S. 942 (2005) – the rationale of which the D.C. Circuit expressly rejected) and attacks both holdings in Noel Canning head on.

After pointing out that the decision would dramatically curtail the scope of Presidential authority under the RAC and calls into question every NLRB order issued since January 4, 2012, the petition argues that neither the text nor the historical implementation of the RAC supports confining it to intersession recesses. The use of “the” is not dispositive, since the definite article can equally refer to an individual item or a class of items (compare “the pen is on the desk” with “the pen is mightier than the sword”), and prior practice (mostly in the 20th century) has accorded a “functional” approach to the word “recess” that would encompass both the intersession and intra-session varieties.

The petition next argues that Executive branch practice – comprising the actions of former Presidents and several Attorney General opinions — has construed the phrase “that may happen” as referring to vacancies that exist during a recess, regardless of whether they came into existence then or antedated the recess. That construction, the S.G. asserts, is supported by the Evans case and two other circuit court opinions: United States v. Woodley, 751 F.2d 1008, 1012-1013 (9th Cir. 1985) (en banc), cert. denied, 475 U.S. 1048 (1986), and United States v. Allocco, 305 F.2d 704, 709-15 (2d Cir. 1962), cert. denied, 371 U.S. 964 (1963). The petition also argues – less compellingly, in my view — that something can be said to “happen” throughout a period and not merely at one point in time (e.g., World War II “happened” during the 1940s, even though it began in 1939).

More persuasively, the petition argues that the consequences of denying review are severe. They include hamstringing the NLRB, calling into question dozens of prior recess appointments of prior administrations (and the validity of acts performed by those appointees), and other collateral consequences. For present purposes, there are also collateral consequences for the CFPB and the validity of actions taken under Mr. Cordray if certiorari in Noel Canning is denied.

Thus, while it is premature, at this juncture, to weigh in generally on the merits and demerits of the S.G.’s arguments about the proper interpretation of the RAC (we shall certainly do so here if the Court takes the case), the existence of a split in the circuits and the obvious importance of the case to the functioning of our form of Government cannot be denied. This significantly raises the odds of obtaining the writ. It is perhaps for that reason – and the absence of compelling arguments to the contrary – that the Respondent has advised the Court it does not intend to oppose the petition.

While I do not believe that the Court will duck the case on “political question” grounds, there is certainly an overtly political aspect to the case. Indeed, the case only arose as a result of the use of “pro forma sessions” in the Senate at three-day intervals, which, though they contemplated the conduct of no senatorial business, were intended to preclude the President from making any recess appointments by negating the existence of a recess or adjournment of any sort. (Art. I, § 5, Cl. 4 provides, “Neither House, during the Session of the Congress, shall, without the Consent of the other, adjourn for more than three days, nor to any other Place than that in which the two Houses shall be sitting).

This was an innovation adopted by the Democratically-controlled Senate during the administration of George W. Bush, to keep him from using the RAC to appoint federal judges whose nominations otherwise stood slim chance of being confirmed by the Senate. Those same pro forma sessions were invoked with respect to the period December 2011 through January 2012. Some Senate business was, in fact, conducted during this period. In-depth analysis of these facts was, however, conspicuously absent from the petition.

At issue is the tension between two potential abuses of power. One is that the Senate could prevent the President from making recess appointments even when the Senate is unavailable to give its advice and consent. This is possible under the D.C. Circuit’s interpretation of the RAC. The S.G.’s interpretation, in contrast, would allow the President to use the RAC to evade the advice and consent process altogether, even though the Constitution, structurally speaking, makes the latter (Art. II, § 2, Cl. 2) the default mechanism and the former merely an emergency backup.

Under the Supreme Court’s Rules, Petitioner’s brief on the merits must be filed within 45 days of granting the writ of certiorari; Respondent’s brief on the merits is due 30 days after that, and Petitioner’s reply brief 30 days after that. The total duration of the merits briefing process is thus 105 days. Even if the Court were to grant certiorari tomorrow, the briefing process could not be completed before the Court adjourns in June for its summer recess. That means that the earliest oral argument in the case could be heard, and a decision rendered, would be during the October 2013 Term.

CFPB official to appear at Senate Commerce Committee hearing on credit reports

By Barbara S. Mishkin on Posted in Credit Reports

On May 7, the Senate Commerce Committee’s Subcommittee on Consumer Protection, Product Safety, and Insurance will hold a hearing titled “Credit Reports: What Accuracy and Errors Mean for Consumers.” 

The first witness panel consists of Corey Stone, the CFPB’s Assistant Director for Deposits, Cash, Collections, and Reporting Markets, and Maneesha Mithal, the FTC’s Associate Director for the Division of Privacy and Identity Protection.

CFPB/FTC target debt collection data in June 6 roundtable

By Alan S. Kaplinsky on Posted in Debt Collection

The CFPB and FTC have announced that they will co-host a roundtable on June 6, 2013 in Washington, D.C. to examine the flow of consumer data throughout the debt collection process.  Titled “Life of a Debt: Data Integrity in Debt Collection,” the roundtable will look at such topics as: 

•             the amount of documentation and other information currently available to different types of collectors and at different points in the debt collection process;

•             investigating disputed debts under the FCRA;

•             verifying disputed debts under the FDCPA, including the information needed to verify and substantiate debts;

•             time-barred debts;

•             the costs and benefits of providing consumers with additional disclosures about their debts and debt-related rights; and

•             information issues relating to pleading and judgment in debt collection litigation.

The roundtable reflects the mounting documentation-related challenges now facing the debt collection industry and creditors attempting to collect their own debts, whether in the form of new state evidentiary requirements for collection actions or attacks on documentation in collection actions by borrowers’ attorneys.  

It also reflects the CFPB’s and FTC’s increased focus on debt collection.  In addition to its authority to examine members of the debt collection industry who qualify as “larger participants,” the CFPB has authority to examine debt collection by entities it has authority to examine (such as large banks, payday and private student lenders, and mortgage servicers) and service providers to such entities.  The CFPB ‘s second annual report on FDCPA activities issued in March 2013 left little doubt that debt collection will be a CFPB priority in 2013.  The FTC, which shares jurisdiction with the CFPB for FDCPA enforcement, continues to bring cases targeting debt collectors.  Earlier this year, it issued a “first of its kind” empirical study of debt buyers. 

To assist debt collectors, debt buyers and creditors in responding to documentation-related challenges and in preparing for their first CFPB exams, Ballard Spahr’s Consumer Financial Services Group has created a Collection Documentation Task Force that conducts extensive audits of collection procedures and counsels on best documentation practices.  The Task Force brings together litigators in the group with experience defending mortgage lenders and other consumer lenders in documentation-related lawsuits nationwide and regulatory lawyers in the group with deep knowledge of the Office of the Comptroller of the Currency’s national bank foreclosure review process and federal and state debt collection laws.

The roundtable particpants will include consumer advocates, credit issuers, collection industry members, state and federal regulators, and academics.