CFPB Monitor

News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

Treasury Dept. marketplace lending findings expected to be released next week

Posted in Marketplace Lending

The CFPB recently joined other federal regulators who have indicated a growing interest in marketplace lending with its announcement that it is accepting consumer complaints about loans obtained through marketplace lenders.  The U.S. Department of the Treasury had previously demonstrated its interest in marketplace lending by issuing a request for information (RFI) in July 2015.

Politico has reported that “multiple sources have indicated” that the Treasury will release a white paper next week containing its findings from the responses it received to the RFI.  According to Politico, the Treasury received over 100 responses.  Politico also reported that a Treasury spokesperson indicated in a statement that the white paper will contain research and recommendations on the industry.

When it issued the RFI, the Treasury indicated that the information it sought was intended to allow it to study the business models of online marketplace lenders and the products offered to small businesses and consumers; the potential for online marketplace lending to expand credit access for historically underserved markets; and how the financial regulatory framework should evolve to support the industry’s “safe growth.”


FFIEC proposes new rating system

Posted in CFPB Exams

The Federal Financial Institutions Examination Council (FFIEC), whose members include the CFPB, is proposing a new uniform interagency consumer compliance rating system to reflect changes in consumer compliance supervision since the current rating system was adopted in 1980.  The other FFIEC members are the Fed, FDIC, NCUA, OCC and State Liaison Committee.  The FFIEC states that the proposed revisions “were not developed to set new or higher supervisory expectations for financial institutions and their adoption will represent no additional regulatory burden.”  Comments on the proposal are due on or before July 5, 2016.

The rating system uses a scale of 1 through 5, with 1 representing the highest rating and lowest degree of supervisory concern and 5 representing the lowest rating and most critically deficient level of performance and thus the highest degree of supervisory concern.  In the proposal’s Supplementary Information, the FFIEC observes that when the current system was adopted, examinations focused more on transaction testing for regulatory compliance rather than on an institution’s compliance management system (CMS) to ensure compliance with regulatory requirements and prevent consumer harm.  The proposed changes to the rating system “are designed to more fully align” the rating system with the risk-based approach to consumer compliance examinations that the FFIEC agencies have adopted over the intervening years.

The proposed rating system would include three categories of assessment factors: board and management oversight, compliance program, and violations of law and consumer harm.  The assessment factors in the three categories would consist of the following:

  • To assess an institution’s board and management oversight, examiners would consider: oversight and commitment to the institution’s CMS; effectiveness of the institution’s change management process; comprehension, identification and management of risks arising from the institution’s products, services, and activities; and any corrective action undertaken as consumer compliance issues are identified.
  • To assess an institution’s compliance program, examiners would consider: whether the institution’s policies and procedures are appropriate to the risk in the institution’s products, services, and activities; the degree to which compliance training is current and tailored to risk and staff responsibilities; the sufficiency of monitoring, and if applicable, auditing, to encompass compliance risks; and the responsiveness and effectiveness of the consumer complaint resolution process.
  • To assess an institution’s violations of law and consumer harm, examiners would consider: the root causes of any violations identified during examinations; the severity of any consumer harm resulting from the violations; the duration of time over which the violations occurred; and the pervasiveness of the violations.  The rating system would include incentives for self-identification and prompt correction of violations.

An institution’s overall rating under the proposed system is intended to reflect a comprehensive evaluation of the institution’s performance under the rating system by considering the categories and assessment factors in the context of the institution’s size, complexity, and risk profile.  The proposed system would not assign specific numeric ratings to any of the above assessment factors and an institution’s rating would not be based on a numeric average or any other quantitative calculation.  As a result, an institution would not have to receive a satisfactory rating in all categories to receive an overall satisfactory rating.  Conversely, even if some assessments are rated as satisfactory, an institution can still receive an overall less than satisfactory rating.

On May 25, 2016, from 12:00 PM to 1:00 PM ET, Ballard Spahr attorneys will conduct a webinar on “How to Ace Your CFPB Exam.”  A link to register is available here.


CFPB publishes two resources for small creditors

Posted in CFPB General, TILA / RESPA

The CFPB recently published a fact sheet for small creditors operating in rural or underserved areas. As we have reported, the CFPB issued a final rule, which became effective on January 1, 2016, revising the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). Regulation Z allows small creditors operating in rural or underserved areas to make balloon-payment qualified mortgage loans (under the ability to repay rule) and balloon-payment high cost mortgages, and may avoid the escrow account requirement for certain higher priced mortgage loans. The fact sheet explains the changes made to these definitions. The fact sheet also refers to the application process for requesting a county or census block to be designed as rural, which we previously addressed.

The CFPB also published a small creditor qualified mortgage flowchart reflecting the rules in effect as of April 1, 2016. The chart addresses small creditor qualification, loan features, balloon payment features, underwriting, points and fees, portfolio, and compliance presumption factors. Our discussion of some of these factors can be found here.

The factsheet and chart can be found under “Quick references” on the CFPB Compliance & Guidance page, at this link.

Alan Kaplinsky to represent industry at May 5 CFPB arbitration field hearing

Posted in Arbitration

Alan Kaplinsky, who leads Ballard Spahr’s Consumer Financial Services Group, has been asked by the CFPB to testify as an industry representative at the CFPB’s May 5 field hearing on arbitration.  We expect the hearing to coincide with the CFPB’s release of a proposed rule on the use of arbitration agreements in certain consumer financial services contracts that would prohibit financial institutions from using arbitration agreements to block consumers from filing class action lawsuits.

The May 5 field hearing will be the fourth field hearing that the CFPB has held about arbitration.  The first hearing was held in Dallas, Texas on December 12, 2013.  Alan testified as an industry representative at the second hearing, which was held on March 10, 2015 in Newark, New Jersey, and at the third hearing, which was held on October 7, 2015 in Denver, Colorado.


Chamber of Commerce suggests issues for CFPB to address at May 5 arbitration field hearing

Posted in SBREFA panel

The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness has sent a letter to Director Cordray suggesting a series of issues for Mr. Cordray to address in his prepared remarks at the CFPB’s field hearing on arbitration scheduled for this Thursday, May 5.

As the Chamber’s letter notes,  the CFPB  foreshadowed in the materials given to the SBREFA panel  that the CFPB was contemplating a ban on the use of class action waivers in arbitration agreements.  The Chamber observes that the CFPB’s final arbitration study did not analyze whether the practical effect of a rule prohibiting class action waivers would be to eliminate the use of consumer arbitration from the consumer financial services market altogether.  The Chamber suggests that Director Cordray provide the CFPB’s views on this issue in his prepared remarks.

Among the other issues the Chamber would like Director Cordray to address in his remarks is “how a consumer with a small claim based on unique circumstances would be able to vindicate those legal claims if companies, faced with the need to reserve millions of dollars for class action defense, were to cease subsidizing consumer arbitration programs.”  The Chamber notes that under current class action rules, many small claims that involve issues of concern to consumers, such as alleged overcharges or the failure to timely credit a deposit, are unlikely to be classable because they are individualized disputes.  The Chamber observes that for such claims, “consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court. ”

We note that, in a blog post today, Professor Jeff Sovern commented on the Chamber’s letter, asking whether consumers would “really suffer if they couldn’t bring arbitration claims for $25?”  According to Professor Sovern, the CFPB’s arbitration study “found that consumers almost never bring arbitration claims when less than $1,000 is at issue, so the ability to assert small claims in arbitration isn’t worth much.”  He asserts that consumers who want to assert $25 claims could still do so in small claims courts.

Professor Sovern’s comments overlook the fact that because the AAA due process protocol requires a carve-out in arbitration agreements for small claims that can be pursued in small claims court.  The predicate of the Chamber’s hypothetical example is a one-off individual claim that is not classable because it is not part of a systemic problem involving many consumers.  As a result, small claims court is the only recourse for a $25 claim of this kind and not class actions as Professor Sovern suggests.

In addition, the Chamber is likely concerned about non-classable claims that, because they exceed the small claims court limit, are ideal cases to be resolved in arbitration.  Neither the CFPB nor Professor Sovern have determined how such cases will be resolved if the result of the CFPB’s rule is the abandonment of consumer arbitration by consumer financial services providers.  Without arbitration, consumers with such non-classable claims will lose their only practical recourse.

CFPB Amends ILSA Regulations to Allow Electronic Registration Filings

Posted in CFPB Rulemaking

The CFPB has announced that it is amending the Interstate Land Sales Full Disclosure Act’s implementing regulations to allow electronic registration filings.

The Dodd-Frank Act transferred rulemaking authority over the ILSA from HUD to the CFPB. The ILSA requires certain developers to register their subdivisions plans and provide disclosures to consumers regarding the lots or condominiums being purchased. The amendments to Regulations J and Regulation L permit developers to submit registration filings electronically in addition to the current paper filing procedure. The CFBP also launched a new webpage dedicated to the ILSA and which includes instructions for electronic filings.

These amendments mark the first rulemaking from the CFPB related to the ILSA. The regulations will become effective, and the electronic filing option will become available, 30 days after publication in the Federal Register. The regulations were finalized by the CFPB without notice and comment based on the CFPB’s position that notice and comment was not required under the Administrative Procedure Act because the amendments relate only to agency procedure and practice.

The CFPB has been working to implement an electronic registration system since at least the spring of 2013. Electronic filing likely will make the registration process easier for developers. The move away from paper filings also allows the CFPB to track and quantify data concerning registrations, such as quantifying the number of lots registered in each state or identifying trends in a certain geographic area.

CFPB issues 2015 fair lending report

Posted in Fair Lending

The CFPB has issued a report covering its fair lending activities during 2015.  The report states that in 2015, CFPB fair lending supervisory and public enforcement actions required institutions to provide approximately $108 million in remediation.  Much of the information contained in the report was the subject of previous blog posts.

Like its 2014 fair lending report, the 2015 report begins with a discussion of the types of information considered by the CFPB in its risk-based prioritization approach for determining “how best to address areas of potential fair lending harm to consumers in the entities, products, and markets under our jurisdiction.”  In the report’s section on supervisory activities, the CFPB reviews information previously provided in its Summer 2015, Fall 2015, and Winter 2015 editions of Supervisory Highlights.  In the section on enforcement, the CFPB reviews several fair lending public enforcement actions and its implementation of several consent orders.  It also notes that in 2015, the CFPB referred 8 matters to the Department of Justice.

The enforcement section also includes a discussion of pending fair lending investigations.  The CFPB states that in 2015 mortgage lending remained a top priority, with the CFPB focusing its fair lending enforcement efforts on redlining.  The report indicates that at the end of 2015, “the Bureau had a number of authorized enforcement actions in settlement negotiations and pending investigations.”  In addition, in 2015, the CFPB “also focused on institutions’ indirect auto lending, specifically discrimination resulting from lender compensation policies that give auto dealers discretion to set loan prices.”  The report states that at the end of 2015, the CFPB “had a number of authorized enforcement actions in settlement negotiations and pending investigations.”  The report also indicates the CFPB “had a number of pending investigations in other markets including credit cards” at the end of 2015.

In the section on rulemaking, the CFPB discusses its final rule amending Regulation C (which implements HMDA) and its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.)  We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement Section 1071.

The report indicates that the first stage of the CFPB’s Section 1071 work will be focused on outreach and research, after which it “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for  information-gathering and public disclosure.”  The report states that the CFPB “has begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements,” and “is also considering how best to work with other agencies to, in part, gain insight into existing small business data knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.”

Two other sections of the report discuss the CFPB’s coordination with other federal agencies on fair lending issues (such as through an interagency task force and working groups) and outreach to industry and consumers (such as through its webinars, blog posts, compliance bulletins and supervisory highlights).  There is also a discussion of a Memorandum of Understanding  (MOU) that the CFPB entered into with HUD on September 2, 2015 “delineating how each agency will use and properly share information to enhance fair lending compliance and interagency collaboration around institutions and issues over which the two agencies share jurisdiction.”  (Curiously, the report does not contain a link to the MOU, and our attempt to find the MOU on the CFPB’s website was unsuccessful.)

Under the MOU, HUD can access the CFPB’s Government Portal to view consumer complaints and give reports to the CFPB on fair lending complaints received by HUD.  Additionally, the MOU includes the agencies’ agreement to: coordinate joint fair lending investigations to minimize duplication of efforts; meet quarterly to discuss current fair lending investigations of entities within both agencies’ jurisdiction; coordinate actions, including determining whether multiple or joint actions are necessary and appropriate; notify each agency of relevant information under specified circumstances; and meet annually to assess the implementation of the MOU.

The last section of the report is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.


Dept. of Education announces student loan credit reporting and servicing initiatives

Posted in Student Loans

Last week, the CFPB announced that it had issued a Request for Information seeking comment on a set of prototype disclosures (the “Payback Playbook”) to assist federal student loan borrowers in selecting between alternative repayment plans.  The CFPB’s announcement was accompanied by an announcement by the Department of Education of two new student loan-related initiatives, one directed at credit reports and the other directed at servicing.  The ED’s initiatives were undertaken with the Treasury Department, in consultation with the CFPB.

Credit reporting.  The ED’s fact sheet indicates that the initiative’s goal is “to modernize the way student loans appear on borrowers’ credit reports.”  It states that the ED is “working collaboratively with the credit reporting industry to develop guidance for servicers, lenders, and others who furnish data to credit bureaus to determine how best to report student loan data to ensure that credit reporting for student loans fairly, consistently, and accurately reflects repayment activity.  In the coming months, the [ED] will implement this effort as part of its new vision for serving student loans.”

The fact sheet describes the elements of an updated credit reporting system.  Such elements include:

  • Credit reporting will reflect changes in the way federal loans are made, such as using common reporting standards for common features of Direct Loans and guaranteed loans and having servicers provide information that clearly indicates programmatic differences between such loans.
  • Credit histories will be reported in the same way for each borrower so similarly-situated individuals are treated similarly, such as by having servicers use the same basic reporting framework that standardizes reporting of loan details and establishing clear requirements for servicers to follow when providing additional information about a borrower’s credit history.
  • Credit histories will accurately reflect the unique characteristics and terms of federal loans, such as having the expected duration of a loan reflect the repayment terms for both fixed-amortization and income-driven repayment plans, ensuring the reporting of accurate information about servicing transfers, and distinguishing borrowers experiencing financial distress from borrowers who invoke their right under federal law to reduce or postpone monthly payments.

Servicing.  The ED’s fact sheet lists borrower “rights and expectations” concerning student loan repayment rights which include the following:

  • The borrower’s right to receive “personalized, actionable, and effective information about alternative repayment plans,” access to “knowledgeable, well-trained staff who can evaluate borrowers’ specific circumstances to help them stay on track,” access to staff trained to assist borrowers at risk for default and military borrowers, and appropriate information and assistance with income-driven repayment plans.
  • Consistency in common servicing functions such as in maintaining affordable payments under an income-driven repayment plan, honoring of directions  for processing payments, easy access to payment histories and basic loan information, instructions for requesting payoff statements and making payoffs, and consistent service when servicers change.
  • Accountability of servicers for errors, such as through the ED’s monitoring of complaints submitted to the online complaint system being developed by the ED, a servicer escalation process in which borrower disputes are reevaluated by senior personnel, and servicer monitoring of third-party contractors
  • Transparency in information about the performance of private and federal student loans and practices of individual student loan lenders and servicers through portfolio performance data, including data at the individual servicer level, such as information on aggregate student loan outcomes, and enhanced reporting and robust information about the Federal Student Loan Portfolio.

Industry trade groups’ renewed challenge to HUD disparate impact rule could yield helpful precedent for ECOA cases

Posted in Fair Credit

The D.C. district court recently granted two industry trade associations whose members sell homeowners insurance leave to file an amended complaint in their lawsuit challenging the Fair Housing Act (FHA) disparate impact rule (Rule) adopted by the U.S. Department of Housing and Urban Development (HUD).  In their amended complaint, the trade associations allege that the Rule is inconsistent with the U.S. Supreme Court decision last June in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc.  Should the district court reach the merits of the trade associations’ claims, its decision could provide helpful precedent for creditors in challenges to the CFPB’s or DOJ’s use of a disparate impact theory of liability under the Equal Credit Opportunity Act (ECOA).

The trade associations originally filed their complaint in American Insurance Association and National Association of Mutual Insurance Companies v. U.S. Department of Housing and Urban Development in June 2013.  The original complaint alleged that, in promulgating the Rule, HUD exceeded its authority under the Administrative Procedure Act because the FHA prohibited only disparate treatment.  Agreeing with the trade associations, the district court issued a decision in November 2014 vacating the Rule.  HUD appealed the decision and the D.C. Circuit, at the request of HUD, agreed to hold the case in abeyance pending the Supreme Court decision in Inclusive Communities.  The D.C. Circuit subsequently granted the trade associations’ motion requesting that the District Court decision be vacated and the case be remanded for consideration in light of Inclusive Communities.  Notwithstanding HUD’s opposition, the district court granted the trade associations’ motion to amend.

In Inclusive Communities, the Supreme Court held that disparate impact claims are cognizable under the FHA but discussed at length limitations on disparate impact liability that “are necessary to protect potential defendants against abusive disparate impact claims.”  In their amended complaint, the trade associations allege that these limitations provide four grounds for vacating the Rule as unlawful under Inclusive Communities to the extent it applies to the underwriting and ratemaking decisions of insurers.  As described in more detail in our legal alert, these grounds include the Supreme Court’s admonition that, without adequate causality safeguards at the prima facie stage, disparate impact liability “might cause race to be used and considered in a pervasive way;” the Court’s emphatic statement that the “robust causality requirement” is necessary to ensure that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create;” and the Court’s statements that disparate impact liability does not mandate the displacement of valid governmental or private policies, only the removal of “artificial, arbitrary, and unnecessary barriers.”

Given that non-mortgage creditors, like insurers, do not collect data on an applicant’s race, a district court ruling that addresses when disparate impact liability would be deemed to inject race pervasively into otherwise “race blind” underwriting and pricing practices could have positive implications for non-mortgage creditors facing ECOA disparate impact claims.  A district court ruling elaborating upon the robust causality requirement also could assist creditors in defending against ECOA claims.

Additionally, a finding by the district court that the Rule’s burden shifting framework impermissibly allows plaintiffs to second guess which of two reasonable approaches a defendant should follow could similarly be helpful precedent in ECOA cases.  Such a finding would also serve as a rebuttal to comments about Inclusive Communities made last October by Patrice Ficklin, Director of the CFPB Office of Fair Lending, at the American Bar Association’s Consumer Financial Services Institute.  In response to a question from my colleague Mark Furletti, Ms. Ficklin stated that, while some had interpreted language in Inclusive Communities to be helpful to defendants with respect to the burden shifting that takes place under a disparate impact analysis, any such language was mere “dicta” and the decision did not lighten or change a defendant’s burden.

We will continue to follow the case, with the next significant development likely to be HUD’s decision whether to answer or move to dismiss the amended complaint.



CFPB seeking comment on new repayment plan disclosures for federal student loan borrowers

Posted in Student Loans

The CFPB has issued a Request for Information (RFI) seeking comment on a set of prototype disclosures to assist federal student loan borrowers in selecting between alternative repayment plans.  Comments are due on or before June 12, 2016.

Referred to by the CFPB as “the student loan Payback Playbook,” the prototypes consist of three potential Playbooks.  Playbooks A and B provide information about the borrower’s current repayment plan and two alternative repayment plans.  One alternative is a plan with an amortizing payment schedule (e.g. graduated repayment, extended repayment, extended-graduated repayment) and the other is an income-driven repayment plan (e.g. Pay As You Earn, Income-Based Repayment, Income-Contingent Repayment).  According to the CFPB, Playbooks A and B are identical, other than the description of income information and estimated payment amount under an income-driven repayment plan.  With respect to such plans, Playbooks A and B “present two approaches to personalization.”  Playbook A offers “a more precise estimate of a monthly payment” and “informs the borrower that this estimate was derived from actual information about his or her income and family size.”

Playbook C is intended for borrowers who are at risk of default (such as a borrower who has missed payments, not completed a program of study, or exhibits other criteria predictive of future financial distress.)  It provides information on a single income-driven repayment plan, and includes a personalized description of the estimated monthly payment.

The RFI seeks general feedback on the three Playbooks, feedback on a list of issues related to specific elements of the Playbooks, and feedback on the Playbooks’ “efficacy and applicability” to specific populations of student loan borrowers listed in the RFI.  In addition, the CFPB has added a page to its website through which it is soliciting feedback from borrowers on a series of questions about the Playbooks.  The RFI also contains a list of general questions on which the CFPB is seeking input from the public “about the effects of increased disclosure of information regarding repayment options in written communications to student loan borrowers from student loan servicers.”

The RFI indicates that the Playbooks’ development was informed by the CFPB’s May 2015 RFI on student loan servicing  that sought public input on all aspects of student loan servicing, including industry practices that may create repayment challenges or hurdles for distressed borrowers and economic incentives that may affect the quality of service.  The CFPB’s press release also describes the RFI as building on the Joint Statement issued by the CFPB, Department of Education (ED), and Department of the Treasury in September 2015 which presented a framework for standardizing student loan servicing practices across the various federal and private borrowing programs.  According to the RFI, comments received by the CFPB may be used in connection with the ED’s development of the disclosures that it must require student loan servicers to provide pursuant to the Student Aid Bill of Rights issued by President Obama in March 2015.

The RFI was accompanied by the CFPB’s release of a guide for servicemembers entitled “Tackling student loan debt.”  The guide describes federal and private student loan protections and repayment options available to servicemembers.