On December 4, the Fed will be holding a webinar on small creditor qualified mortgages. Presenters from the CFPB will discuss the Bureau’s ability-to-repay/QM rule and address the rule’s provisions directed at small creditors. The webinar is free and more information and a link to register is available here.
In addition to our own criticism of the CFPB’s April 2013 White Paper on payday and deposit advance loans, the paper has drawn well-deserved fire from industry. As we reported, that fire included a June 2013 petition to the CFPB filed by the Community Financial Services Association (CFSA), a national payday lending trade group, seeking the White Paper’s retraction. First and foremost, the petition disputed the White Paper’s claim that its loan samples were “representative.”
In August 2013, the CFPB responded with a letter denying the petition, although it asserted that it had posted a clarification on its website regarding “the manner in which lenders electronically initiate repayment from borrowers’ accounts.” In September 2013, the CFSA sent a letter to the CFPB appealing from all aspects of the CFPB’s response except the asserted clarification. Such aspects include the CFPB’s “continued assertion of the objective and useful nature of the Bureau’s sampling methodology.”
In a letter dated November 18 signed by David Silberman, the CFPB’s Associate Director for Research, Markets, and Regulation, the CFPB summarily denied the CFSA’s appeal “in its entirety.” According to Mr. Silberman, the CFPB’s August response “addressed every argument raised in support of” the CFSA’s retraction request and “provided clarification of the methodology used to analyze borrower behavior as reflected in the refined data set.”
Earlier this week, the CFPB issued a study comparing annual spending on financial education to annual spending on financial industry marketing efforts. Intended to support the CFPB’s call for increased financial education and financial skill building opportunities for American consumers, the studies key findings are that 25 times as much is spent on marketing financial products and services to consumers each year than on financial education and about two dollars per person per year is spent nationally on financial education.
We find it troubling that the study seems designed to stigmatize the financial services industry for inadequate spending on consumer education. The study makes no attempt to compare what the financial services industry spends on consumer education to what is spent on consumer education by other industries such as sellers of non-financial consumer products. In addition, the study’s estimates of spending on marketing do not take into consideration the fact that marketing materials for many financial products and services often include an educational component.
Most importantly, the financial services industry has not challenged the CFPB’s position that increased financial education is needed and has voiced support for the CFPB’s initiatives. For example, in response to the study, the President of the Consumer Bankers Association issued a statement in which he said that “CBA’s retail banks are deeply committed to educating their customers and working with the CFPB to improve financial literacy.” He also commented that “as every government agency should know, it is not about the amount of money spent, but the quality and effectiveness of the program.” Given industry’s recognition of the importance of financial education, we wonder why the CFPB felt it more worthwhile to devote its resources to producing the study rather than to the furthering of its financial education initiatives.
Earlier this week, Rohit Chopra, CFPB Assistant Director and Student Loan Ombudsman, spoke to the Federal Reserve Bank of St. Louis about student loan debt. As he has on other occasions, Mr. Chopra referred to $1.2 trillion in student loan debt without pointing out that over $1 trillion of that debt comes from federal student loans. Most of Mr. Chopra’s prepared remarks then consisted of familiar themes: the increase in overall student loan debt since 2007, the purported impact of student loan debt on the housing market, purported similarities between the mortgage and student loan market, and the potential application of mortgage-related reforms to student loan debt, such as ability to repay and securitization “skin in the game” requirements.
Among the purported similarities between the mortgage and student loan market described by
Mr. Chopra were alleged servicing-related problems experienced by students. While Mr. Chopra has previously attempted to draw such parallels, we detected a potential new direction in his latest remarks. In particular, his comment that “several major market participants in the FFEL program do not appear to be succeeding in enrolling struggling student loan borrowers in income-contingent plans” could portend an attempt by the CFPB to increase enrollment in repayment programs by characterizing federal student loan servicers as having a duty to sign up borrowers.
At a minimum, Mr. Chopra’s remarks indicate that borrower enrollment in repayment programs by servicers will be a likely focus of CFPB examinations and investigations once the CFPB’s student loan servicer “larger participant” rule is finalized. They may also indicate that the CFPB will seek to use all of its various authorities, including its authority to prohibit unfair, deceptive or abusive acts and practices, to address this issue. In that regard, student loan servicers that do not expect to qualify as “larger participants” should be aware that the CFPB has used its authority to issue civil investigative demands (CIDs) to conduct quasi-examinations of institutions that are not subject to its supervisory authority to assess their compliance with applicable consumer financial laws.
Numerous media sources have reported that Senate Democrats “went nuclear” today and, by a vote of 52-48, 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.
Following Richard Cordray’s confirmation by the Senate as CFPB Director this past July, many observers questioned why Senate Republicans “caved.” The Senate’s action today offers a likely explanation. In July, Senator Harry Reid had threated to “go nuclear” to ensure Mr. Cordray’s confirmation. It now seems fair to assume that Senate Republicans who voted to confirm
Mr. Cordray had good reason at that time to believe Senator Reid would have made good on his threat had Republicans continued to block the nomination.
The CFPB’s auto fair lending guidance continues to draw criticism from members of Congress, most recently from Congressman Blaine Luetkemeyer, a member of the House Financial Service Committee.
In a November 15 letter to Director Cordray, Mr. Luetkemeyer challenged the CFPB for not having studied how a shift to flat fee compensation for dealers would affect the cost of credit to borrowers, particularly low-and moderate-income borrowers. Director Cordray, responding earlier this month to a letter from a bipartisan group of 22 U.S. Senators raising concerns about the guidance and asking about the extent to which the CFPB had looked at how flat fees would affect the cost of credit for consumers, indicated that the CFPB had not studied “how market-wide adoption of a single non-discretionary compensation program would affect the availability of credit.”
The likelihood that the CFPB’s guidance would increase costs for consumers was something we flagged just a week after the guidance was issued. Mr. Luetkemeyer stated in his letter that “[i]t is imperative that the Bureau take the opportunity to conduct an in-depth study on this issue.”
According to a Bloomberg report by Carter Dougherty, Director Cordray confirmed last week that the CFPB will be looking at credit card rewards programs. Director Cordray is reported to have indicated that the CFPB will be focusing on rewards program disclosures and considering the need for additional protections.
The Bloomberg report also indicated that, according to an individual at the CFPB involved in the project, the CFPB’s interest in rewards programs was not triggered by consumer complaints, as complaints related to such programs represent only a small percentage of total credit card complaints received by the CFPB. This individual is reported to have stated that the CFPB’s interest stems from the view that rewards programs are the primary influence on a consumer’s decision to obtain a particular credit card.
Director Cordray’s statement is consistent with the report the CFPB issued last month on the impact of the CARD Act. In that report, the CFPB highlighted credit card rewards programs as an “area of concern” that “may pose risk to consumers and that will warrant further scrutiny by the Bureau.” The CFPB questioned whether specific actions required to earn rewards and formulas for computing rewards are adequately disclosed and raised concerns about the complexity of program terms involving the value of reward points and redemption and forfeiture rules.
Today, the CFPB issued its long-awaited final rule consolidating the application and closing disclosures required by the Real Estate Settlement Procedures Act and Truth in Lending Act for mortgage loan transactions. The new disclosure forms, which the CFPB have made the centerpiece of its “Know Before You Owe” efforts, consist of a three-page “Loan Estimate” and a five-page “Closing Disclosure.” The forms are part of a 1887-page final rule.
Creditors will be required to begin using the new forms by August 1, 2015. We are preparing a legal alert to provide details on the final rule and will make the alert available on the blog.
The CFPB has filed an amicus brief in the U.S. Court of Appeals for the Second Circuit in The Otoe-Missouria Tribe of Indians et al. v. New York Department of Financial Services et al., a case stemming from New York’s concerted crackdown on the online payday lending industry. The brief, which supports the DFS, has not yet been posted on the CFPB’s website.
The online tribal lenders are appealing from the district court’s ruling that the DFS could take direct and indirect actions against them. The lenders had sought to enjoin the DFS’s efforts to stop them from lending to New York residents, arguing the crackdown infringed on their constitutional rights as sovereign nations.
While taking no position on the applicability of New York law to the lenders’ operations, the CFPB argues in its brief that the court should reject the lenders’ argument that the Consumer Financial Protection Act (Title X of Dodd-Frank) demonstrates a federal interest in protecting tribally-affiliated lenders from state regulation that would otherwise apply. The CFPB contends that rather than demonstrating an interest in “uniform consumer protection regulation” or “preserving consumer access” to short-term credit, the CFPA “generally reaffirms that states may continue to apply their own laws post-CFPA, and demonstrates that Congress did not intend for ‘uniform’ nationwide regulation that would displace all state law.” The CFPB points to CFPA Section 1041 which provides that the CFPA generally does not displace state law except to the extent it is inconsistent with the CFPA. According to the CFPB, under the CFPA, “a state generally remains free to regulate or ban products that it believes to be harmful to consumers, even if those regulations go beyond federal rules. “
The CFPB also refutes the lenders’ contention that the CFPA demonstrates a federal interest in preventing states from applying their laws to tribally-affiliated entities because the CFPA defines the term “State” to include not just the fifty states but also “federally recognized Indian tribe[s].” According to the CFPB, while the CFPA recognizes a role for tribes in regulatory enforcement of consumer protection laws, it does not demonstrate a federal interest in exempting tribes or affiliated entities from otherwise applicable state laws.
In its brief, the CFPB references its September 26, 2013 order denying the petition filed jointly by three tribal payday lenders asking the CFPB to set aside the civil investigative demands (CIDs) the lenders received from the CFPB. The CFPB notes that it rejected the lenders’ argument that they were not subject to the CFPB’s CID authority because they are affiliated with Indian tribes. We understand, however, that the lenders have not yet responded to the CIDs despite being directed by the CFPB’s order to produce all responsive documents, items and information covered by the CIDs within 21 days. In addition, the CFPB has not yet taken enforcement action against the lenders.
At the CFPB’s auto finance forum on November 14, Director Cordray and other CFPB officials reiterated their distaste for dealer finance charge participation as a method of dealer compensation in the indirect auto finance market. (As readers know, dealer participation involves dealers setting the finance charge above the rate at which a bank or finance company has indicated it might be willing to buy a contract; the dealer keeps a portion or all of the difference.)
Director Cordray and Patrice Ficklin, Assistant Director of the Office of Fair Lending, used their remarks to make the case that dealer participation is irreparably flawed because it allows dealers a level of discretion that frequently results in statistically significant disparities in rates paid by African American, Hispanic and Asian car buyers compared to rates paid by Caucasian buyers with similar credit characteristics and, at best, requires costly, ongoing monitoring and remediation of this alleged discrimination by the purchasers of such contracts. However, Ms. Ficklin was emphatic that compensating dealers on a flat-fee basis is not the only other option, saying that “the CFPB believes there are a variety of alternatives to discretionary markups.”
Although court challenges to the disparate impact theory continue, sometime next year, we expect that the CFPB and DOJ will bring and settle several cases against large banks and indirect auto finance companies alleging that the practice of dealer finance charge participation has a disparate impact against members of protected classes in violation of the Equal Credit Opportunity Act. We expect that these settlements will require the entities involved to employ alternative dealer compensation systems to mitigate fair lending risk.
During the forum’s first panel, comprised of regulators from the CFPB’s “sister agencies,” Steven Rosenbaum, the Housing and Civil Enforcement Section Chief at the Department of Justice, reported that the DOJ and CFPB are pursuing “a number” of joint indirect auto finance investigations. Earlier in the same panel, Ms. Ficklin said that the Bureau has found statistically significant disparities in rates exceeding 10, 20 or 30 basis points, amounting to overpayments of tens of millions of dollars.
Closing remarks by Eric Reusch, the Program Manager for Auto and Student Loans in the Division of Research, Markets and Regulations, appear to indicate that the CFPB is studying whether alternatives to dealer participation—including compensation in the form of a flat percentage of the amount financed or a fixed percentage that is tied both to the amount financed and the duration of the contract—effectively mitigate fair lending risks for consumers while also “fairly” compensating dealers. (We presume that these models would require auto finance companies to exercise controls to prevent allegations that consumers are steered into larger amounts financed.) As the Bureau proceeds with any studies, we hope that it will disclose its methodology.
Mr. Rosenbaum from the DOJ and Donna Murphy from the OCC also fired shots across the bow to auto finance companies and dealers regarding their Servicemembers Civil Relief Act (SCRA) compliance, saying that their agencies are keenly focused on detecting and taking action against SCRA violations.
On November 20, Ballard Spahr attorneys and Deepak Gupta will conduct a webinar, “Why the Disparate Impact Theory May Not Matter to Fair Lending Supervision and Enforcement at the CFPB.” A link to register and more information is available here. On December 12, Ballard Spahr will host a webinar, “Understanding the CFPB’s Defense Strategy on Military Lending.” A link to register and more information is available here.