Regulations and Guidance Update

CFPB Proposes First in a Series of "Larger Participants" Rules: Debt Collectors and Credit Reporting Agencies

As reported in the February 16, 2012 CFPB Alert,the Consumer Financial Protection Bureau (CFPB or Bureau) has issued the first in what it anticipates will be a series of proposed rules defining "larger participants" for purposes of establishing CFPB supervisory jurisdiction over nonbanks. The proposed rule, which was published in the Federal Register on February 17, 2012, proposes parameters for determining whether a consumer reporting agency or a debt collector are "larger participants" subject to CFPB regulation. Comments on the proposed rule are due April 17, 2012.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB is given jurisdiction over nonbanks that offer or provide consumers with services related to residential mortgage loans, private education loans and payday loans, as well as other nonbanks that are "larger participants" offering financial products or services. The CFPB is authorized by the Dodd-Frank Act to define a category of "larger participants" that will be subject to its supervision. This proposed rule addresses consumer reporting agencies and debt collectors. The CFPB has indicated that proposed rules defining "larger participants" in other areas of financial services will be issued shortly. Final rules defining "larger participants" are required by July 21, 2012.

Under the proposed rule, a nonbank covered person that offers or provides consumer debt collection services will be considered a "larger participant" if its annual receipts resulting from consumer debt collection are more than $10 million. The rule would apply to persons engaged in offering or providing such services, as well as their affiliates if the affiliate acts as a service provider to such persons. "Consumer debt collection" would include third party debt collection as well as debt buying activities. The CFPB indicates that the entities typically engaged in consumer debt collection are third party debt collectors, debt buyers, collection attorneys and law firms. The larger participant threshold for consumer reporting agencies would be $7 million in annual receipts. According to the CFPB, the proposed threshold will result in approximately 175 larger participants in the consumer debt collection market (approximately 4 percent of all collection firms) and 30 larger participants in the consumer reporting market (approximately 7.5 percent of all consumer reporting agencies).

The proposed rule sets forth a formula for determining the amount of a nonbank covered person’s annual receipts. The proposed rule also provides a mechanism for a nonbank covered person to appeal the CFPB's determination that it met the definition of "larger participant." Once a person qualifies as a "larger participant," the designation will remain in place until two years after the first day of the tax year in which the person last met the annual receipt threshold.

The proposed rule has raised concerns among entities that comprise the covered industries. While the proposed rule seeks to define who will be regulated, it does not provide guidance on how such entities will be regulated. As is the case with nonbank mortgage lenders, payday lenders and private education lenders, debt collectors and consumer reporting agencies worry that they will be examined in the same manner, and held to the same expectations as, large depository institutions that have been subject to federal regulation for years. Clarity with respect to requirements and expectations appears at the top of consumer reporting agencies’ and debt collectors’ wish lists. Other concerns are that the final rule will not fully take into account comments from industry members, resulting in a rule that will impair the ability of industry members to conduct their debt collection businesses in a lawful, non-abusive manner. Many worry that unintended consequences could result from a well-intentioned rulemaking.

Not all responses to the proposed rule have been as leery. Some collection agencies see the potential for regulation as an effective means to ferret out bad actors who have given the industry a bad name through abusive or illegal collection practices. Consumer interest organizations are hopeful that CFPB regulation will serve to shine a light on the manner in which consumer reporting agencies use and analyze consumer information, and deter debt collectors from engaging in practices harmful to consumers. 

CFPB Launches New Streamlined Feedback Tool

On February 16, 2012, the CFPB launched its newest initiative, the Streamlining Regulations Feedback Web Tool. This new tool will enable the public and financial institutions to more easily submit suggestions for streamlining regulation inherited by the CFPB from seven other Federal agencies.

The CFPB is asking consumers to identify provisions of the regulations that the Bureau should make the highest priority for "updating, modifying, or eliminating because they are outdated, unduly burdensome, or unnecessary." The purpose of the tool is to create a means by which the CFPB can consider ways to reduce the burdens imposed on financial institutions by existing regulations without reducing financial protections for consumers.

The new feedback tool is intended as a single easy-to-use portal that will accept comments on any regulation for which the Bureau is responsible. The tool is accessible and user-friendly, offering simple drop-down menus and links to regulation text that will allow visitors to the CFPB website to find regulations and specific sections within those regulations more readily. Additionally, the tool offers multiple comment boxes for visitors to provide specific, targeted feedback, including describing recommended changes, explaining those changes, and discussing how the changes would affect both consumers and financial institutions.

While many see this new initiative as the natural next step in the CFPB’s continuing campaign for transparency and dialogue with the public, some have voiced concerns that the feedback tool is an invitation for members of the financial industry to "declare war on existing regulations via the ruse of ‘streamlining." While the feedback tool may have the benefit of lowering the cost to comment on regulations, some worry that the Bureau has put itself in the position of having to respond to whatever topics commenters raise, rather than setting its own agenda.

The CFPB remains dedicated to protecting vulnerable consumers, however, and is not bound by the comments and suggestions received via the feedback tool. Thus far, the Bureau has committed only to using the public input to determine its priorities and identify practical measures to be taken to promote or remove obstacles to responsible innovation in consumer financial services markets.

CFPB Releases Final Rounds of Loan Estimate and Settlement Disclosure Prototypes

On February 19, 2012, the CFPB released the final round of both the loan estimate and settlement disclosure prototypes. The release of the prototypes is part of CFPB’s Know Before You Owe initiative, which seeks to integrate the two mortgage loan disclosure forms—under the Truth in Lending Act and the Real Estate Settlement Procedures Act--into a single more simpler form. By combining these federally mandated disclosure forms, the CFPB hopes to make the costs and risks of the loan clearer for borrowers while also reducing the burdens on lenders. 

Based on the February 19, 2012, CFPB release, a consumer would receive something akin to the loan estimate prototype when applying for a loan and the settlement disclosure prototype at closing. The prototypes include information such as the loan amount, the monthly principal and interest rates, projected payments (and actual payment) at closing.  Some new proposed features included in the prototypes are comparisons of interest rates with other loans and the total payments a consumer would make over the term of the loan. In addition, the contact information of the lender, mortgage broker, real estate broker, and settlement agent are all clearly listed in the settlement prototype. Both the loan estimate and settlement prototype provide the above-mentioned information in 3-5 short and clearly labeled pages. The prototypes can be found on the CFPB website by clicking here.  The CFPB is asking for the feedback on the prototype based on the following questions:

• Can you easily find key loan terms?
• Are you able to identify changes to the loan terms or costs?
• Do you know who to contact to discuss your loan or changes to your loan?
• Do you have the information you would need to feel comfortable closing on the loan?
• Are the disclosures easy for lenders and settlement agents to use and explain to consumers?

Feedback, questions or other comments can be made to the CFPB by going to the following website: http://www.consumerfinance.gov/knowbeforeyouowe/.

CFPB Adjusts HMDA Asset Size Exemption

The Home Mortgage Disclosure Act (HMDA) requires financial institutions that meet certain thresholds to collect and report home mortgage-related data for loans originated and purchased in a given calendar year. Whether or not a depository institution is subject to the HMDA data collection and reporting requirements is based, in part, on the depository institution’s assets. HMDA requires an annual adjustment to the asset size threshold based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Based on the increase in the CPI-W in 2011, the CFPB has published a final rule increasing the asset size trigger for 2012. Depository institutions with assets of $41 million or less as of December 31, 2011 will not be required to collect HMDA data in calendar year 2012. A depository institution that was required to collect 2011 HMDA data is still required to report the 2011 HMDA data even if it is not required to collect HMDA data in 2012. 

Examinations/Enforcement Here and Now

Legislation Protecting Confidentiality of Information Provided to the Bureau Gains Bi-Partisan Support

Congress is acting quickly to ensure the confidentiality of documents that financial institutions provide to the CFPB in the course of examinations and investigations. Legislation remedying an unintended omission in the Dodd-Frank Act will protect confidential information provided to the Bureau by both depository and non-depository institutions.

The House Financial Services Committee on February 16, 2012 passed H.R. 4014. The bill, introduced by U.S. Representative Bill Huizenga (R-MI), amends the Federal Deposit Insurance Act, 12 U.S.C. 1811, to specifically state that materials that financial institutions provide to the Bureau remain privileged under both the attorney-client and work product privileges. Federal law already provides such protection for information that financial institutions provide to other federal banking agencies. The Dodd-Frank Act, which created the Bureau, contained no such provision.

Financial industry members were concerned that, absent this protection, third parties would argue that an institution waived privilege in responding to Bureau inquiries, thus making privileged documents discoverable in lawsuits against an institution. Current law provides that a bank does not waive confidentiality and risk disclosure to a third party, potentially involved in litigation with the bank, by providing information to its banking regulator. Once this legislation is passed, those entities supervised by the Bureau will have the same protection when releasing information to the new agency.

The legislation has bi-partisan support and is considered non-controversial, so much so that it passed the House Financial Services Committee unanimously on a voice vote. Senate Banking Committee Chairman Tim Johnson (D-SD) and Committee Ranking Minority Member Richard Shelby (R-AL) have introduced a companion bill in the United States Senate, S. 2099. Bureau Director Richard Cordray has said that the Obama Administration would support legislation to ensure the confidentiality of documents provided to his agency.

The text of H.R. 4014 is available at http://financialservices.house.gov/UploadedFiles/BILLS-112-HR4014ih.pdf.

News from the Bureau

CFPB To Evaluate Overdraft Practices of Financial Institutions

On February 22, 2012, the CFPB launched an inquiry into checking account overdraft programs with a view toward their impact on consumers. Among other issues, the CFPB is exploring whether a "penalty fee box" should be included on each consumer’s checking account statement. That "penalty fee box" would highlight the amount overdrawn, if any, and any overdraft fees charged by the consumer’s financial institution. 

Concurrent with its announcement, the CFPB made a data request to various financial institutions and a Notice and Request for Information from the public that the CFPB anticipates will provide insight into overdraft practices. Expanding on the efforts other federal regulators have made in the past couple of years, the Bureau’s inquiry focuses on four principal areas: (1) whether financial institutions re-order financial transactions and process the largest transactions first, so as to maximize the number of transactions that may trigger an overdraft fee; (2) whether consumers are capable of avoiding overdraft fees and whether overdraft terms are structured in an understandable and coherent manner to allow consumers to evaluate whether alternative means of covering overdraft transactions are appropriate; (3) whether financial institutions are disseminating potentially misleading marketing materials regarding overdrafts; and (4) whether overdraft charges disproportionately impact low-income and young consumers. The CFPB also announced that it is launching a "What’s your overdraft status?" campaign, with the goals of encouraging consumers to know whether or not they have opted in to overdraft fees on certain transactions and educating consumers about their options to avoid penalty fees. 

In explaining overdraft fees, Director Cordray’s February 22, 2012 prepared remarks at the CFPB Roundtable on Overdraft Practices in New York City suggested that in many instances, consumers are not even aware that it was possible for them to overdraw their account and have a substantial fee levied upon their account due to the overdraft. While applauding changes in overdraft policies in recent years, Mr. Cordray suggested that consumers may not have understood the risks and ramifications of overdraft protection or that one-sided advertising may have "bur[ied] information about the costs." This certainly confirms the CFPB’s suspicious attitude with respect to overdraft fees and suggests a pre-ordained skepticism of the business practice. Consequently, financial institutions that offer overdraft protection may wish to take a closer look at compliance with applicable requirements regarding overdraft practices, including the requirements of Section 1005.17 of Regulation E and the guidance issued by the other banking regulators. In particular, financial institutions may wish to review their marketing materials to ensure that those materials are consistent with industry practices and that they clearly and correctly identify what services are provided relating to overdraft protection and their respective costs. 

Miscellany

CFPB Releases Proposed Budget for 2013

The CFPB’s proposed 2013 budget was released in mid-February, totaling $448 million (a 32% increase over 2012). The 2013 increase is a result of the Bureau's projected staffing increases and overall expansion in operations, with plans to hire more than 400 employees in 2013, bringing its estimated total number of employees to 1,359 in fiscal 2013.

The projected budget increase raised the eyebrows of many Republicans who have argued the Bureau should be subject to the Congressional appropriations process. However, the Bureau, which was created by the Dodd-Frank Act, is specifically designed to evade such oversight because it receives its funding outside the appropriations process through a mandatory transfer of funds from the Federal Reserve. By law, the Federal Reserve is required to transfer to the Bureau whatever funds are requested by its director up to a certain percentage of the Federal Reserve's yearly operating expenses. For 2013, the percentage amount equals $597 million.

Representative Randy Neugebauer, the Chairman of the House Oversight and Investigations Subcommittee, said "The decision to fund the CFPB outside the appropriations process deprived Congress of a major tool for overseeing its operations." Testifying before a House panel on February 15, Bureau Director Richard Cordray said the Bureau intends to provide more detail to Congress and the public on its spending plans going forward. Cordray also pointed to the clean bills of health the Bureau received during two audits - one by the Government Accountability Office and another by an independent third-party auditor. Democrat Barney Frank, the House Financial Services Committee's top Democrat, also came to Cordray's defense by emphasizing that Congress still has significant authority to oversee the Bureau's activities. Frank pointed to the fact that the February 15th hearing was the sixth oversight hearing Congress has held on the Bureau since it began operations in July, 2011.

Representative Neugebauer also attacked the Bureau's lack of justification for its expenditures, stating "When I look at what you're producing and what other agencies have to produce, it appears to me you all could use some beefing up in your budget planning performance." Neugebauer also asked Cordray to explain why the Bureau sent only a one page letter to the Federal Reserve in 2011 when it needed an additional $94 million with virtually no explanation. Neugebauer suggested the Bureau publish such requests 48 hours before it asks for funds from the Federal Reserve, with a detailed justification for why the funds are needed. Cordray countered by saying the actual transfer of funds is just a formality, and that explanations for the Bureau's spending is readily available through other means. However, Cordray agreed greater detail is needed in the future, stating "I think there is more we can provide, more we intend to provide and we will continue to ramp that up."

Democrats also noted that the 2013 budget is well under what the Bureau could request, as it is authorized to receive $597 million in 2013 and beyond, plus an additional $200 million in appropriations from Congress if necessary. Democratic Rep. Stephen Lynch noted the Bureau's budget is significantly less than that of the FDIC and the Federal Reserve, and amounts to roughly $2 per taxpayer. In Lynch's estimation, "less than $2 per year is a small price to pay for the protection they will provide."

Regulatory Scorecard

Please click here to access a printable version of the Dykema Regulatory Scorecard, our up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.

Contacts and Caveats

For more information about Dykema’s Financial Services Regulatory and Compliance practice, please contact group leader, Don Lampe at 704-335-2736, Arthur B. Axelson at 202-906-8607, or any of the listed attorneys. 

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_{As part of our service to you, we regularly compile short reports on new and interesting developments in our business services program. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this newsletter, or any Dykema publication, are always welcome. © 2012 Dykema Gossett PLLC.}