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Key Takeaways from the OCC Forum on Supporting Financial Innovation

Posted in CFPB General

While the CFPB has not yet held a public event devoted to FinTech or financial innovation, the Office of the Comptroller of the Currency (OCC) recently held a Forum On Supporting Financial Innovation in the Federal Banking System to discuss the agency’s approach to FinTech and other innovative products. The forum follows up on the OCC’s white paper with a similar name.

The all-day forum included a keynote address by the Comptroller of the Currency, Thomas J. Curry, and a series of panel discussions involving representatives from the OCC, large and small banks, a marketplace lender, consumer advocates, and various consultants.

We believe there are three key takeaways from the event.

First, the OCC seems to recognize that many consumers and small businesses have difficulty obtaining credit, and that efforts to protect borrowers through regulation can actually harm borrowers by reducing credit availability. This appears to be one reason why the OCC wants to encourage financial innovations. It also sees FinTech as an opportunity to improve the speed and accuracy of transactions, as well as the integrity of records. Mr. Curry stated that he would like FinTech firms to feel comfortable engaging with the OCC about their new financial technologies, given the OCC’s expertise in the field.

Second, what the OCC supports is “responsible” innovation. Multiple OCC representatives in their remarks stated that the OCC has “made a commitment” to supporting innovation, but every one of them simultaneously made clear that the agency will not “relinquish its responsibilities” or “abandon its core principles” in doing so. OCC representatives indicated that while the OCC would encourage pilot programs, for example, it is wary of providing safe harbors for such programs due to the potential for consumer harm. (We note that the OCC’s reluctance to provide safe harbors dovetails with the CFPB’s policy of providing only limited “no-action” letters, which are largely toothless: they can be modified or withdrawn by the CFPB at any time, are not binding on the CFPB in the future, and provide no immunity against private litigation or enforcement actions by other state and federal agencies.) It remains to be seen where the balance will be struck between attempting to protect borrowers and supporting new technologies and business methods that expand the availability of credit and improve the customer experience.

Finally, we noted some comments of concern regarding national bank charters and the possibility of creating a new type of charter for FinTech companies. Multiple speakers emphasized the “sanctity of the charter” and related agency expectations, expressing disapproval of banks acting as “rent-a-charters,” “booking agents,” or “flow-throughs,” which “have to stop.” If a new type of charter is created for FinTech companies, which seems unlikely, the OCC appears intent on making sure that there is nothing “light” about the regulatory expectations that would accompany such charters.

Agencies announce submission of diversity self-assessments to OMWIs can begin

Posted in Diversity and Inclusion

In a notice to be published in tomorrow’s Federal Register, the CFPB, OCC, Fed, FDIC, SEC, and NCUA announce that the Office of Management and Budget has approved the “information collection” contained in their “Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies.”  The Policy Statement, which implemented Dodd-Frank Section 342, became effective upon its publication in the Federal Register on June 10, 2015.  The notice informs regulated entities that they may now begin to submit self-assessments of their diversity policies and practices to the Director of the Office of Minority and Women Inclusion of their primary federal financial regulator.

The final standards envision that an entity will conduct an annual “self-assessment” of its diversity policies and practices in four areas: (1) organizational commitment to diversity and inclusion, (2) workforce and employment practices, (3) procurement and business practices, and (4) practices to promote the transparency of organizational diversity and inclusion.  The standards provide for “assessment factors” for each of these areas, encouraging entities to allocate time and resources to monitor and evaluate their performance under their diversity policies and practices on an ongoing basis.  The standards also contemplate that a regulated entity will disclose certain information relating to its diversity and inclusion efforts on its website or in other appropriate communications, and will provide to its primary federal financial regulator information relating to its self-assessment.

In conjunction with the issuance of the final standards, the agencies had published a 60-day notice requesting comments on the information collection process and parameters, and how this requirement might affect regulated entities.  The notice addressed the comments received during the 60-day comment period which included concerns about agency disclosure of confidential information contained in a self-assessment.  In response, the agencies offered no assurances that the information would remain confidential, stating simply, “To the extent that a submission includes confidential information, the Agencies will keep such information confidential to the extent allowed by law.”

Ballard Spahr’s Diversity Team is working with several clients on developing and implementing diversity programs.

 

 

GAO report shows continuing CFPB employee concerns related to fair treatment

Posted in CFPB General

A report last month issued by the Government Accountability Office (GAO)  found that a survey of nonexecutive CFPB employees revealed “heightened concerns related to fair treatment, trust that employees can raise concerns related to fair treatment, trust that employees can raise concerns without fear of reprisal, confidence in complaint processes, and other matters.”  The report, entitled “Additional Actions Needed to Support a Fair and Inclusive Workplace,” contains the results of a GAO review of personnel management and organizational culture issues at the CFPB that was conducted at the request of members of Congress.

The request followed a series of hearings held by the House Financial Services Committee that was triggered by news reports of a CFPB internal report indicating that CFPB staff evaluations showed a pattern of racial disparities.  Those hearings included testimony from CFPB employees who alleged they received discriminatory treatment.  In May 2015, the Office of Inspector General for the CFPB and Fed issued a report of its  findings following an audit assessing the CFPB’s human resources-related operations and other efforts for equal employment that was also conducted in response to a congressional request.

The GAO’s survey of nonexecutive employees had a 62 percent response rate.  The issues surveyed by the GAO included employee views on favoritism and discrimination, complaint processes, trust and perceptions of management retaliation, and management accountability and commitment to addressing concerns.  The GAO found that for several questions in these areas, more than 25 percent of respondents had unfavorable views and the proportion of unfavorable responses was about 35 percent in some CFPB offices and for some minority respondents, female respondents, respondents 40 years of age and over, and respondents who did not specify a race.

The report describes steps the CFPB has taken in the last two years to respond to concerns about favoritism or unfair employee treatment and promote diversity and inclusion.  The GAO stated that the CFPB’s efforts to address employee concerns about diversity, inclusion, fairness and culture represent a significant management initiative but found that the CFPB lacks a strategy for comprehensively reporting about its initiative.

The GAO also found that while the CFPB has strengthened its complaint processes, it does not have sufficient mechanisms for obtaining and addressing employee feedback about such processes.  In its conclusion, the GAO stated that “many of the CFPB’s initiatives [to improve personnel management and promote a more diverse, inclusive, and fair workplace] have been implemented only recently, and because changing employee perceptions and behaviors can take time, it is too soon to know the effectiveness of the CFPB’s efforts in these areas.”

The GAO’s report recommends that Director Cordray take two actions. First, he should develop and implement a strategy for comprehensively reporting on the CFPB’s implementation goals and progress on its initiatives related to promoting diversity, inclusion, fairness, and a stronger organization culture.  Second, in coordination with representatives of the CFPB’s employee union, he should develop tools to collect more comprehensive employee feedback on the complaint processes to understand and remedy factors that may reduce employee confidence in such processes.

The report includes Director Cordray’s response to the GAO’s draft report which states that the CFPB accepts the GAO’s recommendations and describes the CFPB’s work in connection with the recommendations.

 

 

House Financial Services Committee to hold hearing on marketplace lending

Posted in Marketplace Lending

Tomorrow, July 11, the House Financial Services Committee’s  Subcommittee on Financial Institutions and Consumer Credit will hold a hearing titled: “Examining the Opportunities and Challenges with Financial Technology (“FinTech”): The Development of Online Marketplace Lending.”  According to the Committee memorandum, the hearing “will give Committee members the opportunity to assess the development of the FinTech market, including how online lenders and banks interact.  Further, the hearing will evaluate the current regulatory structure and recent policy developments.”

In March 2016, the CFPB announced that it had begun to take complaints about marketplace lenders.

 

House approves FY 2017 appropriations bill containing curbs on CFPB authority

Posted in Arbitration

By a vote of 239-185, the House of Representatives has approved a fiscal year 2017 appropriations bill that contains various provisions intended to curb the CFPB’s authority.  Those provisions would fund the CFPB through the annual congressional appropriations process rather than through transfers from the Federal Reserve as currently provided by Dodd-Frank and change the CFPB’s leadership structure from a single Director to a five-member Board of Directors appointed by the President.

The bill also includes a provision that states none of the CFPB’s funding “may be used to regulate pre-dispute arbitration agreements…and any regulation finalized by the Bureau to regulate pre-dispute arbitration agreements shall have no legal force or effect until the requirements regarding pre-dispute arbitration specified in the report accompanying [the bill] under the heading “Bureau of Consumer Financial Protection” are fulfilled.”  On May 5, 2016, the CFPB issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

The “requirements regarding pre-dispute arbitration specified in the report accompanying [the bill]” include requirements related to  a further study that must be conducted by the CFPB.  The report lists various topics the CFPB must address in the study and mandates use of a research process “that includes peer review of the CFPB’s methodology and findings by a diverse group of individuals with relevant expertise in quantitative and qualitative research methods from the private and public sectors” but whose “expertise in research methods is unrelated to dispute resolution.”  The composition of the peer review panel is subject to rulemaking procedures, including notice and comment.  The CFPB must publish its tentative conclusions together with sufficient supporting and explanatory information, and solicit public comment.  In its report to Congress, the CFPB must explain its reason for disagreeing with significant comments. Concurrently with submitting its report to Congress, the CFPB must make a description of the peer review process publicly available.

The report also requires the CFPB to consider the costs and benefits to consumers in determining whether any final rule regulating pre-dispute arbitration rule is in the public interest and for the protection of consumers.  Such costs and benefits must include: (1) the practical effect on consumers’ access to low cost, fair, and efficient means of resolving claims for the types of injuries that consumers most often incur and that are less likely to be the subject of government enforcement actions; (2) the extent to which private class action proceedings on behalf of consumers regarding consumer financial products and services provide net benefits to consumers in light of the CFPB’s and other regulators’ enforcement and examination authority; (3) the practical effect of any regulation on the availability of pre-dispute arbitration; and (4) the impact of any regulation on the cost and availability of credit to consumers and small business.  The CFPB must find that the demonstrable benefits of any rule to consumers outweigh the costs to consumers, taking into account the foregoing factors and other relevant factors, and that the rule subjects pre-dispute arbitration to no more regulation than is necessary to serve the public interest and protect consumers.  The CFPB’s findings, together with its analysis and underlying data, must be published in the Federal Register.

The House Appropriations Committee had adopted an amendment to the appropriations bill that would block the CFPB from finalizing or enforcing a rule regulating payday lending until the CFPB submits a detailed report on the consumer impact to Congress and identifies existing credit products available to replace the current sources of short-term, small dollar credit.  However, because that amendment is not included in the version of the bill that is linked to the committee’s press release announcing the House’s approval of the bill, the status of the amendment is unclear.

 

CFPB and DOJ settle fair lending claims involving allegations of redlining, discretionary underwriting and pricing, and overt discrimination

Posted in CFPB Enforcement, Fair Lending

The CFPB and DOJ recently announced a proposed consent order with BancorpSouth Bank to settle charges that the bank’s mortgage lending practices violated the Fair Housing Act and the Equal Credit Opportunity Act.  In addition to allegations of redlining and discrimination resulting from discretionary underwriting and pricing, the agencies’ joint complaint filed in federal court in Mississippi includes allegations of overt discrimination that are based in part on what the CFPB has called its first use of testers or “mystery shoppers” posing as consumers to support discrimination charges.  While focused on mortgage lending, the settlement has significant fair lending implications for many types of non-mortgage credit.

On July 25, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Fair Lending Lessons That Go Beyond Mortgages: The BancorpSouth Bank Consent Order.”  The webinar registration form is available here.

For details about the allegations made in the complaint and the remedies imposed by the consent order, see our legal alert.

 

CFPB issues ninth Semi-Annual Report

Posted in CFPB General

The CFPB has issued its ninth Semi-Annual Report to the President and Congress covering the period from October 1, 2015 through March 31, 2016.

The 188-page report recycles information from previously-issued CFPB reports and reviews ongoing and past developments, which we have covered in previous blog posts.

By way of aggregate statistics, the report indicates that in the six-month period it covers, CFPB supervisory actions resulted in financial institutions providing more than $44 million in redress to over 177,000 consumers.  It also indicates that during that period, the CFPB announced orders in enforcement actions providing for approximately $200 million in total relief for consumers and over $70 million in civil money penalties.  (While the report’s executive summary states that orders in enforcement actions announced during the six-month period covered by the report totaled approximately $200 million, Director Cordray’s opening message indicates that such orders totaled approximately $82 million in consumer relief.)  According to the report, the CFPB had 1,536 employees as of March 31, 2016.

Even assuming the amount of consumer relief announced by the CFPB in the six-month period covered by the new report was $200 million rather than $82 million, that amount would still be substantially less than the $5.8 billion in consumer relief reported by the CFPB in its last Semi-Annual Report covering the period April 1, 2015 through September 30, 2015.

Consistent with past practice, we expect the House Financial Services and Senate Banking Committees to schedule hearings on the report at which Director Cordray will be questioned,

CFPB issues Summer 2016 Supervisory Highlights

Posted in CFPB Exams

In its Summer 2016 Supervisory Highlights, which covers supervision work generally completed between January and April 2016, the CFPB highlights violations found by its examiners involving automobile origination, debt collection, mortgage origination, small-dollar lending, and fair lending.

The report states that recent non-public supervisory actions have resulted in restitution of approximately $24.5 million to more than 257,000 consumers.  The report also indicates that the CFPB’s supervisory activities “have either led to or supported” a recent public enforcement action described in the report that resulted in approximately $5 million in consumer remediation and $3 million in civil money penalties.

The CFPB’s “supervisory observations” include the following:

  • Automobile origination.  The CFPB does not specify whether the “auto lenders” it examined were engaged in making loans directly to consumers or  in “indirect lending,” a term the CFPB uses to refer to persons who engage in the sales finance business of purchasing retail installment sale contracts from auto dealers.  CFPB examiners found that that one or more “lenders” had deceptively advertised the benefits of gap coverage products by creating the false impression that such products would fully cover the remaining loan balance in the event of a vehicle loss.  They also found that one or more “lenders” had engaged in a deceptive practice by using a telephone script that created the “false overall net impression” that the only effect of taking advantage of a loan deferral would be to extend the maturity date and accrue interest during the deferral.  Instead, the deferral could result in a consumer paying more in finance charges than the lender originally disclosed because subsequent payments would be applied to cover the interest earned on the unpaid amount from the date of the consumer’s last payment.  At one or more “institutions,” CFPB  examiners found various weakness in compliance management systems, such as the failure to raise compliance-related issues to the institution’s board of directors or follow the institution’s policies and procedures in daily practices.
  • Debt collection.  During one of more examinations, CFPB examiners found that debt sellers, as a result of “widespread coding errors,” sold thousand of debts that did not properly reflect that the accounts (1) were in bankruptcy, (2) had been determined by the debt sellers to be products of fraud, or (3) had been settled in full.  The CFPB determined that the debt sellers had engaged in unfair practices.  CFPB examiners found that one or more debt collectors had falsely represented to consumers that a down payment was necessary to establish a repayment arrangement or a checking account had to be used for repayment.
  • Mortgage origination.  CFPB examiners found that one or more institutions had violated Regulation Z by (1) miscalculating the amount financed and finance charge on loans with discount credits, or (2) failing to accurately disclose the interest payment on interest-only bridge loans.  They also found that one or more institutions had made improper referrals under RESPA Section 8 by requiring customers to use an affiliated provider of tax services and flood determination or had violated the FCRA by taking adverse action based on information in a consumer report without providing adverse action notices containing the required disclosures.  CFPB examiners concluded that one or more institutions had a weak compliance management system that allowed violations of Regulations V, X, and Z to occur, such as weak oversight of automated systems, including inadequate testing of codes that calculate the finance charge and amount financed when originating mortgage loans.
  • Small-dollar lending.  CFPB examiners found that one or more payday lenders had not complied with the Regulation E advance notice requirement for preauthorized electronic fund transfers (EFT) where the amount of a preauthorized EFT differs from the preceding EFT.  In lieu of providing advance notice, Regulation E allows the lender to give the consumer the option of receiving notice only when the preauthorized EFT amount falls outside a specified range or varies from the most recent EFT by more than a specified amount.  Examiners found that the installment loan agreements of one or more lenders failed to state an acceptable range of preauthorized EFTs in lieu of providing individual notice of EFTs of varying amounts.  For new loans, such lenders seeking to use the alternative of providing a range of EFTs were directed to revise their loan agreements to specify a range of EFT amounts that the consumer can reasonably anticipate.  For existing loans not governed by a revised agreement, examiners directed such entities, before initiating a new EFT, to notify borrowers of the amount of any new EFT that would vary from the amount of the previous EFT or from the preauthorized amount.
  • Fair lending.  During HMDA data integrity reviews, CFPB examiners found that after issuing a conditional approval subject to underwriting conditions, one or more institutions did not accurately report the action taken on the loans or applications.  The report also describes various ECOA/Regulation B special purpose credit programs reviewed by CFPB examiners.  Noting that special purpose credit program status depends on adherence to applicable ECOA/Regulation B requirements, the CFPB states that it “generally takes a favorable view of conscientious efforts that institutions may undertake to develop special purpose credit programs to promote extensions of credit to any class of persons who would otherwise be denied credit or would receive it on less favorable terms.”

 

 

 

CFPB Proposes Amendments to GLBA Rules to Permit Exemption from Annual Notice Requirement

Posted in CFPB Rulemaking, Privacy

On July 1st, the CFPB proposed to amend Regulation P under the Gramm-Leach-Bliley Act (GLBA) to implement the statutory changes made by the Fixing America’s Surface Transportation Act (see prior post) that provided financial institutions that meet certain conditions with an exemption from the GLBA requirement to deliver annual privacy notices to customers.  The proposed changes would also establish timing requirements to begin re-delivering the annual privacy notices if a financial institution no longer qualifies for the exception.  Companies considering making changes to their privacy policies or practices should carefully assess the impact of the proposed rules.

The proposed rules would provide that a financial institution is not required to deliver a GLBA annual privacy notice if the financial institution:

  • Provides nonpublic personal information to nonaffiliated third parties only under one of the GLBA exceptions to the notice and opt-out requirements (§ 1016.13, § 1016.14, or § 1016.15); and
    Has not changed its policies and practices with regard to disclosing nonpublic personal information from the policies and practices that were disclosed in the most recent privacy notice provided to the customer.
  • The proposed rule would not affect the collection or use of consumers’ nonpublic personal information by financial institutions.  Nor does the new exception affect the requirement to deliver an initial privacy notice, so all consumers will continue to receive such initial notices describing the privacy policies of any financial institutions with which they do business.  Furthermore, financial institutions that choose to take advantage of the annual notice exception must still provide any opt-out disclosures required under the Fair Credit Reporting Act, which can generally be provided in the initial notice.

The CFPB is also proposing to remove its 2014 rule (as described in our prior post) that established an alternative delivery method for GLBA annual privacy notices. Because financial institutions that meet the conditions in Regulation P to use the alternative delivery method also would meet the conditions for the new statutory exemption, the CFPB has concluded that the alternative delivery method is no longer necessary as the CFPB believes that a financial institution that has both options available to it would choose not to send the annual privacy notice at all, rather than to deliver it pursuant to the alternative delivery method.  However, the CFPB notes that financial institutions that qualify for the new exemption may still choose to post privacy notices on their websites or deliver privacy notices to consumers who request them.

While a positive step forward in regulatory reform, the CFPB could have done this years ago during its 2014 rulemaking process.  However, an act of Congress was required to push the CFPB into making this common-sense change.

CFPB Highlights Mortgage Servicing Examination Findings and Technology Issues

Posted in CFPB General, Mortgages

In an unmistakable warning shot to mortgage servicers, the CFPB recently issued a “Mortgage Servicing Special Edition” of its Supervisory Highlights. The CFPB also updated portions of its Mortgage Servicing Examination Procedures.

In the Bureau’s accompanying press release, and throughout the Supervisory Highlights, there is a particular focus on perceived technological failures. In the words of Director Cordray: “Mortgage servicers can’t hide behind their bad computer systems or outdated technology. There are no excuses for not following federal rules.” The clear takeaway is that the CFPB will not be persuaded by arguments that system limitations impair a servicer’s ability to comply with CFPB regulatory interpretations.

The Supervisory Highlights focus primarily on issues involving loss mitigation procedures and servicing transfers. Scrutiny in these areas should not be a surprise to the industry, due to the CFPB’s continued emphasis in the areas, the logistical difficulties involved, and the inherent potential impact on consumers.

On the topic of loss mitigation, the CFPB first addresses issues with loss mitigation acknowledgment notices under Regulation X. Findings include obvious issues, such as failing to send an acknowledgment notice due to system glitches, and failing to send the notice within the 5-day time frame. The report also highlights issues with requests for additional information in connection with incomplete loss mitigation applications. Notably, the findings cite failures to request necessary documents, requesting documentation that is not applicable to a particular borrower, and requesting documents that a borrower already submitted. As we have noted in response to past Supervisory Highlights, the CFPB expects that 5-day acknowledgement notices be tailored to the particular borrower and reflective of information already on file.

The CFPB also cites issues regarding loss mitigation offer letters. Noted issues include deceptive statements of the time at which fees, charges, and advances would be assessed. The document notes examples of servicers taking “unreasonable advantage of borrowers’ lack of understanding of the material risks of the loan modification” in terms of when certain charges would be assessed. These findings reinforce the importance of considering potential payment shock for borrowers through the life of a modified loan, and the clarity with which payment schedules are disclosed in modification agreements and accompanying materials.

The Supervisory Highlights provide several other examples of issues for loss mitigation offers. Such issues include the failure to disclose conditions of a permanent loan modification with the trial modification plan, and failure to timely convert completed trial modifications into permanent modifications. In the category of easily preventable issues, the report notes repeated findings of broad waivers of consumer rights in loss mitigation agreements. In our experience, such waiver-of-rights provisions are common in legacy loss mitigation agreement templates. If not done already, servicers should review all loss mitigation agreement templates to remove these types of broad waiver clauses.

Finally on the topic of loss mitigation, the Supervisory Highlights note issues pertaining to denial notices. Cited issues include incorrect statements of the reason for denial, and failing to correctly state the borrower’s right to appeal the denial.

Regarding servicing transfers, the CFPB notes that incompatibilities between servicer platforms have, in part, caused issues related to in-process loss mitigation. Examples of issues include a transferee servicer failing to honor the terms of loss mitigation agreements already in place at the time of transfer, and delays converting trial loan modifications to permanent loan modifications.

Notably, this section of the Supervisory Highlights includes some limited positive feedback. The CFPB states that one or more transferee servicers began to use certain tools available to the industry, such as Fannie’s HomeSaver Solutions Network and the HAMP Reporting Tool, to reconcile loan data during transfer and better identify in-flight modifications.

As noted above, the CFPB also revised its Mortgage Servicing Examination Procedures. On the topic of complaint handling, the revised module focuses on a servicer’s procedures for expedited evaluation of complaints and information requests for borrowers in foreclosure. The CFPB also notes that it will be conducting targeted reviews of fair lending issues for mortgage servicers.

The Mortgage Servicing Special Edition of the CFPB’s Supervisory Highlights can be found here, and the updated Mortgage Servicing Examination Procedures can be found here.