The CFPB has announced that its FY 2014 service contract inventory is available for public viewing. The inventory provides information on service contracts over $25,000 funded by the CFPB in FY 2014.
In addition to the inventory, the CFPB issued a summary listing its ten largest contract obligations. The two largest obligations were for “Support-Professional: Program Management/Support” in the amount of $25,853,343 and “IT & Telecommunications-Telecommunications and Transmission” in the amount of $22,960,594. These obligations represented, respectively, 18.96% and 16.84% of the CFPB’s total FY 2014 obligations.
It is interesting to note that among the ten largest obligations were “Support-Management: Advertising” in the amount of $5,996,698 and “Special Studies/Analysis-Economic” in the amount of $4,323,880. The subjects of the CFPB’s advertising include various CFPB initiatives such as “Paying for College” and “Owning a Home.” The special studies and analyses conducted by the CFPB include “analytical support to review and analyze [an institution’s] mortgage loan application data and/or origination data,” with the CFPB’s “fair lending analysis [to] include an assessment of potential underwriting and pricing disparities for protected classes under Equal Credit Opportunity Act” and “additional analyses that may include the evaluation of potential redlining, reverse redlining and product steering.” Also included in such studies and analyses is the “collection and analysis of credit card data.”
The CFPB issued a final rule on June 10, 2015 allowing it to supervise nonbank companies that qualify as “larger participants of a market for automobile financing.” Relatedly, it adopted simultaneously a separate rule defining certain automobile leases as a “financial product or service.” These rules will be effective 60 days after their publication in the Federal Register.
To enable its examiners to immediately begin to prepare for examinations of qualifying entities, the CFPB concurrently released its auto finance examination procedures. These procedures will be used by CFPB examiners to examine both bank and nonbanks.
The larger participant rule is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.” Nonbank larger participants can include specialty finance companies, manufacturer “captive” finance companies, and “Buy Here Pay Here” (BHPH) finance companies. Because Dodd-Frank allows the CFPB to supervise all service providers for supervised entities, regardless of size, the rule also allows the CFPB to supervise all service providers to “larger participant” auto finance companies.
The CFPB’s press release states that the CFPB adopted the larger participant rule largely as proposed, with only minor changes. As proposed, the final rule defines a “larger participant” as a nonbank covered entity engaged in “automobile financing” that has at least 10,000 aggregate annual originations. For a detailed summary of the final rule, see our legal alert.
On June 18, 2015, from 12 p.m. to 1:30 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Implications for Banks and Nonbanks from the CFPB’s Auto Finance Larger Participant Rule and New Auto Finance Exam Procedures.” In the webinar, we will discuss the rule in detail and what companies need to do now to prepare for the CFPB’s new scrutiny of their auto finance and leasing activities. We will also discuss the new exam procedures. The webinar registration form is available here.
The Federal Trade Commission has provided its annual Financial Acts Enforcement Report to the CFPB covering the FTC’s enforcement activities in 2014 related to compliance with Regulation Z (Truth in Lending), Regulation M (Consumer Leasing), and Regulation E (Electronic Fund Transfers). Under Dodd-Frank, the FTC retained its authority to enforce these regulations with respect to entities within its jurisdiction. The FTC and CFPB coordinate their enforcement and related activities pursuant to a MOU entered into in 2012 and reauthorized in 2015.
Reg Z/TILA. The FTC’s enforcement activities included two actions for civil penalties involving alleged deceptive advertising by auto dealers filed in federal district court, nine consent orders settling deceptive advertising claims against auto dealers, and a stipulated order against a subprime auto lender charged with using illegal servicing and collection tactics. Other TILA-related enforcement activities included actions against payday lenders, companies advertising mortgage loans (lead generators and a homebuilder), and companies providing mortgage assistance relief services (several of which involved forensic audit scams in which the providers offered, for a fee, to review or audit mortgage documents of distressed homeowners to identify legal violations).
Reg M/ Consumer Leasing. The FTC’s enforcement actions included final consent orders with ten auto dealers to settle deceptive advertising claims.
Reg E/EFTA. The FTC’s enforcement actions included five cases involving negative option plans, three cases involving payday lending, and one case involving retail financing.
Yesterday, the CFPB finalized its larger participant rule for nonbank auto finance companies, making them subject to supervision after the effective date of the rule. But the Bureau’s press release and newly-released auto finance examination procedures, to me, are even more significant, because they signal areas of future concentration for the Bureau in examinations of both banks and nonbanks in the auto finance space.
Below are a few key areas of focus that I gleaned from reading yesterday’s releases:
- Ancillary products, like GAP insurance and extended service contracts, are not mentioned in the press release, but receive heavy attention in the exam procedures. Given the history of regulatory attention to similar products in other market sectors over the past two decades, it’s no surprise that the CFPB is signaling lots of scrutiny of these products in the auto finance market.
- Leasing is clearly a headline issue, with the CFPB devoting a massive discussion in the Supplementary Information accompanying the final rule to explaining why it believes it has jurisdiction over most consumer vehicle leases under Section 1002(15)(A)(ii) of Dodd-Frank. Additionally, the CFPB simultaneously adopted a separate rule defining certain automobile leases that are not “the functional equivalent of purchase finance arrangements” as a “financial product or service.” The examination procedures pay special attention to the advertising and disclosure of lease terms, and the operation of termination-related fees (like excess wear and tear, excess mileage and early termination liability).
- Advertising of auto finance terms is prominently mentioned in the press release and exam procedures, and the exam procedures specifically discuss whether “affiliates” are advertising credit terms. To me, this seems like a clear reference to automobile manufacturers’ advertising of subvented financing and leasing promotions that are offered through their captive finance companies.
- The press release highlights a focus on whether “consumers understand the terms they are getting,” which makes me think about daily simple interest. Daily simple interest is ubiquitous in the auto finance industry. Examining the clarity of how daily simple interest is described in the retail installment contract, I believe, will be one of the CFPB’s priorities.
- Related to that point is payment allocation, which is specifically highlighted in the exam procedures. How payments are allocated between late fees, finance charge and principal, and how that allocation is disclosed to consumers, will be another likely CFPB focus area.
- Two areas of third-party monitoring and due diligence that the CFPB mentioned in the exam procedures are especially notable to me: auto dealers and repossession agents. Both pose significant operational challenges. Repossession also is mentioned in the press release.
- GLBA and information-sharing issues are heavily featured in the exam manual.
- There is an explicit reference in the exam manual to underwriting, default rates, which I believe refers to an ability to repay analysis, and this is likely to be a focus area for subprime auto finance.
I don’t regard many of these issues as a surprise, but they do serve as a valuable roadmap to any bank or nonbank auto finance operation to use in preparing for a future CFPB examination or enforcement investigation. We will be holding a webinar on June 18 for clients and industry participants to discuss the larger participant rule and the implications of these examination procedures for banks and nonbanks in greater detail. Hit this link to register.
The CFPB, together with the Solicitor General, has submitted an amicus brief in Hawkins v. Community Bank of Raymore, the case in which the question before the U.S. Supreme Court is whether the Equal Credit Opportunity Act (ECOA) applies to loan guarantors. The Court agreed to hear the case in March 2015 and is expected to hear oral argument in the Court’s term that begins in October 2015.
The Supreme Court will be reviewing the decision of the U.S. Court of Appeals for the Eighth Circuit which affirmed the district court’s ruling that the ECOA did not provide a cause of action to the plaintiffs who alleged that they were required to sign guaranties of several loans made by the bank to a company their husbands controlled. The plaintiffs claimed that by requiring the guaranties, the bank violated the ECOA provision that prohibits discrimination by a creditor against an “applicant” on the basis of marital status. The Eighth Circuit ruled that Regulation B’s definition of “applicant,” which includes a guarantor, was not entitled to deference because it contradicted the ECOA’s unambiguous text.
The CFPB has rulemaking and enforcement authority under the ECOA. In its amicus brief, the CFPB argues that the Regulation B definition is entitled to “great deference” under Chevron U.S.A. Inc. v. NRDC, Inc. According to the CFPB, deference is “especially appropriate” because Congress has repeatedly amended the [ECOA] without disturbing the [Federal Reserve] Board’s longstanding interpretation of ‘applicant.’” It further argues that Regulation B’s definition of “applicant” is consistent with the ECOA’s text and serves the ECOA’s purposes by protecting spouses who are asked to sign guarantees based solely on marital status from discriminatory harm.
The CFPB was among six federal agencies that issued final new diversity and inclusion standards earlier this week. The other agencies were the OCC, Fed, FDIC, NCUA and SEC. The standards go into effect on June 10, 2015 and apply to all entities regulated by the CFPB or one of the other agencies. Given the June 10 effective date, regulated entities have little time to waste in taking steps to incorporate the standards into their daily business practices.
Dodd-Frank Section 342 required the CFPB and other agencies to create an Office of Minority and Women Inclusion (OMWI) and directed each OMWI to develop standards for assessing the diversity policy and practices of entities regulated by the agency. While the final standards generally track the standards proposed by the agencies in October 2013, they provide some clarifying language in response to public comments. They also recognize that one size does not fit all and allow each entity to tailor its compliance approach to fit the entity, taking into account its size, total assets, number of employees, governance structure, revenues, number of members and/or customers, contract volume, geographic location, and community characteristics.
The final standards contemplate that regulated entities will make certain information available to the public and their primary federal financial regulators. The CFPB and other agencies invite comments on topics regarding the information collection process and parameters, seeking input on how this requirement might affect regulated entities. Comments must be submitted by August 10, 2015, and the effective date of the collection of information will be announced in the Federal Register following Office of Management and Budget approval.
For a more detailed discussion of the final standards, see our legal alert. Ballard Spahr will be hosting a webinar at 3 p.m. ET on July 15, 2015 for regulated entities interested in learning more about the standards and how best to comply. A link to register for the webinar is available here. (Please note that due to scheduling issues, we have changed the webinar date that is indicated in our legal alert and on the registration form.)
Two days after announcing a proposed consent order with a mortgage company and its CEO to settle charges that the company paid bonuses and higher commissions to loan officers in violation of the Regulation Z loan originator compensation (LOC) rule, the CFPB announced a second settlement with another mortgage company involving alleged violations of the LOC rule. The consent order in the second settlement requires the mortgage company, which is no longer in business and in the process of dissolving, to pay a civil penalty of $228,000.
According to the consent order, the mortgage company paid monthly fees to marketing services entities (MSE) that were associated with each of its branch offices and set the fees based on the profitability of the associated branch. The owners of the MSEs, who included branch managers, and in some instances, other loan originators in a branch, drew the monthly fees as additional compensation. The consent order asserts that the fees paid to the MSEs by the mortgage company included income from loans originated by the owners of the MSEs that was based on the interest rates charged on the originated loans. As a result, the CFPB determined that the MSE owners received compensation based on the terms of the loans they originated in violation of the LOC rule.
The Offices of Inspector General for the Fed/CFPB, FDIC, Treasury and NCUA have issued a report setting forth the results of their review of the extent to which the CFPB and prudential regulators (FDIC, Fed, OCC and NCUA) were coordinating their supervisory activities and avoiding duplication of regulatory oversight responsibilities.
To assess the agencies’ efforts, the steps taken by the OIGs included reviewing relevant provisions of the Dodd-Frank Act, interviewing CFPB and prudential regulator officials, reviewing MOUs developed by the CFPB and prudential regulators, and conducting research to determine if there were complaints from regulators or financial institutions regarding regulatory overlap. Dodd-Frank gave the CFPB exclusive authority to examine institutions with assets over $10 billion and their affiliates for compliance with federal consumer financial laws. The OIGs reviewed the agencies’ key coordination efforts for large institutions, including sharing examination schedules and conducting simultaneous examinations, sharing draft examination reports, sharing supervisory letters, addressing conflicting supervisory determinations, and initiation of enforcement proceedings.
For institutions with assets of $10 billion or less, Dodd-Frank left the authority to examine such institutions for compliance with federal consumer financial laws with the prudential regulators but allowed the CFPB to include its examiners on a sampling basis in examinations. The report discusses the CFPB’s activities pertaining to smaller institutions with regard to participating in examinations, sharing reports and enforcement proceedings. The report indicates that the CFPB has not asked to include any of its examiners on a sampling basis and has requested a limited number of examination reports pertaining to smaller institutions.
The OIGs found that the CFPB and prudential regulators were generally coordinating their regulatory oversight activities for federal consumer financial laws, consistent with Dodd-Frank and the May 2012 MOU among the CFPB and prudential regulators on coordination of activities with respect to larger institutions. The OIGs also found that opportunities exist for enhanced coordination. Such opportunities include: (1) conducting more simultaneous examinations, (2) improving communication among regulators of matters identified in draft supervisory letters, (3) creating a framework for the handing of conflicting supervisory determinations, (4) developing a CFPB policy for providing notifications or recommendations to the prudential regulators when the CFPB believes a smaller institution has violated a federal consumer financial law, and (5) giving more timely notice to prudential regulators of CFPB information requests.
A group of 32 Democratic U.S. senators sent a letter to Director Cordray last week regarding the CFPB’s efforts to address payday lending in which they urged him “to issue the strongest possible rules to end the damaging effects of predatory lending.” (It is unsurprising that the letter garnered no Republican sponsors but somewhat interesting that fully 12 Democratic senators did not sign the letter.)
The senators want the CFPB’s proposed rules to require an ability-to-repay determination, a requirement the CFPB featured in its recent preview of contemplated rules and a centerpiece of rulemaking advocated by many consumer groups (such as the National Consumer Law Center and other consumer groups that supported the senators’ letter). The senators assert that lending in the absence of such a requirement “causes substantial harm to consumers.”
In its Spring 2015 agenda issued last month, the CFPB indicated that it plans to issue a Notice of Proposed Rulemaking regarding payday lending “later in 2015 after additional outreach and analysis.” The Democratic letter calling for tough rules does not cite any new data supporting its claims of “damaging effects” of payday lending. We continue to hope that the “additional … analysis” promised by the CFPB will include careful consideration of recent studies we have written about, which cast serious doubt on the benefit to payday loan borrowers of an ability-to-repay requirement.
In a memo to state banking associations, the American Bankers Association raises concerns about the costs to industry of the CFPB’s use of its expansive authority to gather information under Section 1022 of the Dodd-Frank Act.
As indicated in the memo, to inform its rulemaking process on overdraft protection services, the CFPB ordered three financial services core processors in November 2014 to provide significant amounts of information and anonymized data about the overdraft services they provide for depository institutions. The ABA states that one of those processors has informed its clients that it may pass on to them the processor’s costs in responding to the CFPB’s order.
While urging the state associations to encourage the CFPB to seek all relevant information before engaging in rulemaking (including with regard to the overdraft programs of community financial institutions), the ABA also wants the associations to insist that the CFPB fund its own data collection efforts. The ABA plans to call on the CFPB to bear the cost of its information gathering, either by conducting the research itself or reimbursing those to whom it has issued information orders (such as the processors). Noting that the CFPB’s FY 2016 budget is estimated to be $605.5 million and will fund 1,690 full-time employees, the ABA observes in the memo that “clearly the Bureau has the resources to reimburse the companies from which it has requested data, or otherwise conduct and pay for its research.”
The ABA also observes that Section 1022 grants the CFPB “sweeping and potentially unconstitutional power,” and asks the state associations to support its efforts to amend Section 1022 or, “at the very least, to ensure that the costs of these information gatherings be borne/reimbursed by the Bureau, and that they be conducted with appropriate due process protections.”