Consumer Financial Protection Bureau Alert—Vol. 1, No. 3
Legal Alerts
10.04.11
Regulations and Guidance Update
CFPB Proposed Regulations
The rulemaking authority of the Consumer Financial Protection Bureau (CFPB or Bureau) kicked in on July 21, 2011, and the CFPB is wasting no time in addressing the variety of financial regulatory issues facing consumers. Raj Date, the current head of the CFPB while Congress debates the appointment of Richard Cordray, recently stated that he believes in the free market system, but that free markets need sensible rules and proper oversight to function. He added that three basic principles are necessary for a properly functioning market: transparency, aligned incentives and fair competition. According to Date, one of the goals of the CFPB will be to establish a mortgage market “where risk and return go hand in hand.” The CFPB has begun to look at areas of the financial sector that it believes need stronger consumer protections to affect these underlying policies.
QRMs—One of the most anticipated regulations concerns what constitutes a “Qualified Residential Mortgage,” or QRM. Loans that qualify as QRMs would not be subject to the 5 percent retention rule, which requires lenders to retain at least 5 percent of the credit risk for loans they sell. The QRM standard could include a 20 percent down payment requirement as well as other restrictive provisions.Many feel this would cripple an already frail property market, but any proposed regulation will not be announced until early next year.
Ability to Repay—Another area of reform requires lenders to ensure that prospective borrowers have the ability to repay their mortgages, as required under the Dodd-Frank Act. The rule was first proposed by the Federal Reserve earlier this year, but the CFPB has recently taken on the task of reviewing the public comments. The rule will require minimum underwriting standards as required under the Dodd-Frank Act. The Bureau plans to issue a rule in early 2012, but there are still outstanding questions related to what legal protections would be offered to lenders who offer Qualified Mortgages. The industry is pressing for a safe harbor when it originates a Qualified Mortgage, while consumer groups only want lenders to receive a rebuttable presumption of compliance with the ability-to-repay rules.
Combined TILA/RESPA Disclosure—The CFPB, under the Dodd-Frank mandate, is also looking at mortgage disclosure forms and how to make them more useful to consumers. Through the program termed “Know Before You Owe,” the CFPB has been seeking feedback on its plan to streamline the current TILA/RESPA up-front disclosures into a single form. The current system has long confused home buyers, and the CFPB believes a single form will not only clarify loan terms to consumers, but also reduce costs for lenders. The Bureau is about to wrap up its consumer testing of the model disclosure. As soon as that is complete, the Bureau will begin drafting regulations to reflect and support the new simplified disclosure form. The CFPB plans
on publishing proposed forms and regulations by July 21, 2012.
Overdraft Fees—The CFPB is also focusing on checking account overdraft fees. Date has noted that banks entice consumers to open accounts with the idea of “free checking,” but gouge them later with exorbitant overdraft fees. Despite the amendment to Regulation E last year, the Bureau is expected to review the structure of overdraft fees, including automatic enrollment in overdraft protection, and determine what works best for consumers. If more action is needed, Date said the CFPB will act.
Credits Cards—With respect to credit cards, Date acknowledged that the CARD Act has made progress in addressing transparency concerns and issues with fairness. However, the Bureau does not believe these changes are sufficient, and it will be looking at the creation of a credible and effective supervision rogram. The Bureau will also be reviewing ways to monitor the variety of products aimed at consumers in need of short-term loans. It will review recent regulations to determine their effectiveness and whether additional protections are warranted.
Student Loans—Student loan practices will also be subject to the CFPB’s scrutiny. The CFPB will begin collaborating with the Department of Education this fall (2011) on a comprehensive study of the private student loan market. The Bureau will be looking at problems such as lenders offering loans they know the average student will not be able to pay and for-profit institutions pushing their own high-cost alternatives. While the CFPB is taking strides to fulfill its mandate to protect consumers in the financial industry and is moving on several different fronts simultaneously, it does not expect to issue any rules until early next year. The Bureau also needs an approved director in place in order to assume its full authority, and the current impasse in Congress does not seem to be letting up anytime soon.
National Servicing Standards Under Development
The mortgage servicing industry is also at the front of the line for new regulations, according to the CFPB. Raj Date recently stated that the incentives for ervicers are not aligned with borrowers’ interests. Accordingly, Date announced that the CFPB and other federal agencies are collaborating to develop “commonsense national servicing standards.” Date did not provide details about the forthcoming servicing standards, but did share his thoughts on two “structural features” that make mortgage servicing “especially prone to consumer harm.”
The first problem he identified was that consumers were not able to choose their mortgage servicer, while mortgage servicers could freely buy and sell servicing rights. Thus, “a servicer can, in a sense, ‘fire’ a borrower; but a borrower can’t ‘fire’ a servicer.” Date stated that this arrangement “reduces the incentive for servicers to treat borrowers properly.” Date’s second problem was that “[t]he current structure of servicing fees creates a strong incentive to under-invest in adequate technology, people, and processes to handle unusual spikes in delinquency.” This problem, according to Date, stems from fixed servicing fees that incentivize foreclosing on delinquent loans rather than incurring the high costs of servicing them. Date stated that “[p]oor servicing practices have inflicted hardships on borrowers, investors, and the economy as a whole.” Remedying the problem will require “[a] comprehensive approach to servicing that protects consumers, investors, the financial sector, and the housing market,” which can be accomplished through “the coordinated action of many federal regulators." Date did not provide a projected date for the unveiling of the new servicing standards.
CFPB Announces Proposed Information Collection and Requests Generic Clearance From OMB
In a September 26, 2011 Federal Register Notice (76 Fed. Reg. 59379), the CFPB announced its intention to conduct various types of research in connection with the development of model form disclosures and that it is requesting a generic clearance approval for such research from the Office of Management and Budget (OMB). It also requested comments on certain aspects of its information gathering.
Specifically, the Bureau announced that the development of the integrated Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) disclosure will require qualitative testing of the disclosures required by TILA and RESPA during the shopping, application, and origination process. In addition, the CFPB may perform qualitative testing of other model disclosures or materials related to the integrated disclosure—such as instructions for loan originators, tools to assist consumers in understanding the disclosures and loan products and features, and other mortgage-related disclosures—and of industry usability.
The CFPB plans on collecting qualitative data through a variety of collection methods, including interviews, focus groups, and the Internet. It has indicated that the gathered information will “inform the disclosure form’s design and content, using an iterative process to improve the draft form to make it easier for consumers to use the document to identify the terms of the loan, compare among different loan products, and understand the final terms and costs of the loan transaction.”
The Bureau has requested comment on the following issues: whether the collection of information will have practical utility; the accuracy of the Bureau’s estimate of the burden of the collection of information (including hours and costs); ways to enhance the quality, utility, and clarity of the information to be collected; and ways to minimize the burden of the collection of information on respondents. Comments are due on or before October 26, 2011.
FRB Postpones ECOA Requirement for Auto Dealers to Collect Data on Women- and Minority-Owned Businesses
On September 27, the Federal Reserve Board (FRB) issueda final rule amending Regulation B to provide that motor vehicle dealers are not required to comply with new data collection requirements in the Dodd-Frank Act until the FRB issues final regulations to implement the statutory requirements. The final rule temporarily relieves motor vehicle dealers from the statutory obligations under ECOA Section 704B and will take effect upon publication in the Federal Register, which is expected shortly. Although the Bureau has the authority to issue rules to implement ECOA Section 704B for most entities, the FRB retains authority to issue rules for certain motor vehicle dealers.
The Dodd-Frank Act amended the ECOA to require creditors to collect information about credit applications made by women- or minority-owned businesses and small businesses. The purpose of Section 704B is to facilitate enforcement of fair lending laws and to enable communities, governmental entities, and creditors to identify business and community development needs and opportunities for women- and minority-owned businesses as well as small businesses. The FRB believes this purpose is better served if detailed rules prescribe the method for data collection and reporting under Section704B, as such rules would ensure that the data is collected and reported by motor vehicle dealers in a consistent and standardized way. To achieve some level of consistency, the implementing rules would provide motor vehicle dealers with uniform definitions and standards they can follow in collecting and reporting data. The FRB believes collection of data in a uniform manner under a final regulation will enhance data analysis and enforcement capabilities to ensure that the purpose behind Section 704B is better served. However, until the final regulation is enacted and collection parameters are more clearly defined, motor vehicle dealers are exempt from the data collection requirements of Section 704B.
The Bureau is required to implement the same rule for all creditors except certain motor vehicle dealers that are subject to the FRB’s jurisdiction. The CFPB previously announced that creditors are not obligated to comply with the data collection requirements until it issues regulations to implement the statutory change.
Examinations/Enforcement Here and Now
Financial Institutions Concerned About CFPB Information SharingWith State Regulators
Banks and other financial institutions are worried about the CFPB’s sharing of information with state regulators and are urging the Bureau to limit such activity. While several sections of the Dodd-Frank Act require the cooperation and joint enforcement of consumer credit laws by the Bureau and the states, banks fear that such information sharing will interfere with the traditional relationship between banks and their federal regulators. The banks’ concerns center on the confidential nature of the examination process, under which examiners have traditionally alerted financial institutions to correct any errors and make necessary changes, all without alerting the public or state regulators. The banks fear that if the state attorneys general are notified of certain information, they could file lawsuits or subpoena additional data.
The banks’ concerns are not unfounded. In April, the Bureau signed a cooperation agreement with the states, which included a commitment to share information to aid in determining enforcement policies and priorities. The Bureau has already begun sharing information collected from its consumer complaint system with some state attorneys general. The Dodd-Frank Act permits, but does not require, the Bureau to share information with the states. The financial institution trade groups are hoping to work with the Bureau to limit this information sharing.
News From the Bureau
Date Focuses on Causes of the Financial Crisis
Raj Date spoke in Philadelphia about how the CFPB will help resolve the issues that caused the financial crisis in 2008. Date began by discussing the Lehman Brothers bankruptcy, which had been filed three years prior, and reminded those in attendance how close the nation was to financial collapse. He then noted that while most banks have returned to profitability, American families are still feeling the pain. With this pain in mind, Date emphasized the importance of the Dodd-Frank Act for creating the CFPB, the first agency with the range of tools and authority to oversee the whole consumer finance market. Date noted that the CFPB will use tools “from supervision, to rulemaking, to research, to financial education, to enforcement, to the ability to handle consumer complaints” to rebuild the economy and promote a better financial future for all Americans.
The first task Date and the CFPB will address is the mortgage meltdown. Date stated that the mortgage market, which, at $10.4 trillion, is ten times larger than the next largest consumer lending market, was the epicenter of the global financial crisis. To start, the CFPB is working to streamline mortgage forms to help consumers understand what they are signing. The “Know Before You Owe” project has already received more than 22,000 comments regarding CFPB’s draft forms, and the project has recently begun a fourth round of public testing, which is focused on comparison shopping. Second, Date commented that the CFPB will be working with other federal agencies to develop basic standards for mortgage servicing. Date feels that this will help “establish some commonsense safeguards to prevent bad practices from harming consumers.” Finally, Date emphasized that supervision and enforcement of mortgage regulations must be applied across the board,whether the lender is a bank, credit union, or finance company, and that the broad authority given to the CFPB has made this possible.
Date then highlighted some of the other areas the CFPB will be considering to provide a level playing field for all consumers. First, while noting the importance of the recently enacted CARD Act, Date stated that credit cards are still complicated and consumers have difficulty understanding and comparing different offers. As such, the CFPB will study the impact of credit card regulations, make sure they are being followed, and take whatever action is necessary to resolve the remaining gaps in regulation. Second, Date recognized the current issues with student lending, including the rising costs of student loans and the difficulty American families have in understanding how to navigate through this market. The CFPB plans to adopt new disclosure requirements and undertake a comprehensive study of the private student loan market beginning this fall. Finally, the Bureau will take on so-called “free checking” accounts and the problems associated with overdraft fees.
In tackling these issues, Date emphasized that the CFPB is committed to using research and data analysis to make “fact-based, pragmatic, and deliberative” decisions. After understanding the problem and its causes, the CFPB will be able to use the variety of tools at the Bureau’s disposalto “use the right policy levers to address” the problem. Lastly, Date made clear that the Bureau will take on its mission with the understanding that it alone is responsible for its success.
CFPB Sets Its Sights on For-Profit Colleges
Educating military families about the pitfalls of expensive, low-quality, for-profit colleges is a priority for the CFPB, according to Holly K. Patraeus, Assistant Director of the CFPB’s Office of Servicemember Affairs. In testimony before the Senate Subcommittee on Federal Financial Management, Government Information, Federal Services and International Security, Patraeus explained, “There are an increasing number of for-profit colleges eager to enroll” active-duty military members and veterans as students.
For-profit colleges’ increased interest in military students relates to the “90-10 rule” of the Higher Education Act. That rule requires for-profit colleges to obtain a minimum of 10% of their funding from sources other than Title VI education funds. For-profit colleges are targeting military families, according to Patraeus, because servicemembers and veterans receive education funds from the Military Tuition Assistance program and the GI Bill, neither of which is a Title VI federal education fund. Thus, for-profit colleges may meet their 10% non-Title-VI funding quota by recruiting students who qualify for Military Tuition Assistance or the GI Bill.
Patraeus worries that “[t]his has given some for-profit colleges an incentive to see servicemembers as nothing more than dollar signs in uniform, and to use some very unscrupulous marketing techniques to draw them in.” Some of these colleges have “questionable academic credentials” as well as “low graduation rates and a poor gainful employment history.” In addition, they have above-average student loan default rates.
Some for-profit colleges also lure servicemembers by falsely promising that Military Tuition Assistance or the GI Bill will pay costs, according to Patraeus. Then the paperwork arrives, and “[b]efore the student knows it, he or she not only has used up military education benefits, but also is locked into a private loan that may not be the best deal—or make sense at all—for that individual.” In sum, Patraeus believes that “military communities are once again under siege by a group that sees big money to be made off the military: for-profit colleges.” To that end, “the CFPB and the Office of Servicemember Affairs are already working hard to ensure that servicemembers, who devote their lives to protecting our nation, will have a strong advocate to protect them and their families from financial threats.”
Regulatory Scorecard
Below is Dykema's up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.
Consumer Financial Protection Bureau Pending Rulemakings, Final Rulemakings and Other Initiatives under Dodd-Frank Act (DFA) as of October 4, 2011
Description |
Date of Proposal/ |
Summary of Contents |
Key Dates |
|
Proposed Federal Reserve Board Comprehensive Regulation Z Proposals |
August 26, 2009 |
Two proposals issued in August of 2009 contained revisions to disclosures for closed-end mortgage loans and HELOCs. |
On February 1, 2011, Fed elected not to finalize proposals, recognizing CFPB’s impending authority |
|
Proposed Federal Reserve Board Comprehensive Regulation Z Proposal |
September 24, 2010 |
Proposed rule to: (1) expand the right to rescind to additional loan types, (2) amend disclosures to explain the right to rescind, (3) clarify lender’s responsibilities upon rescission, (4) mandate disclosures for loan modifications, (5) change reserve mortgage disclosures, and (6) place restrictions on certain advertising and sales practices for reverse mortgages. |
On February 1, 2011, Fed elected not to finalize proposals, recognizing CFPB’s impending authority |
|
Department of Treasury Privacy Act System of Records |
January 10, 2011 |
In accordance with the Privacy Act of 1974, as amended, Department of Treasury provided notice of the establishment of a Privacy Act System of Records. |
Written comments due on or before February 9, 2011 |
|
Proposed Federal Reserve Board Regulation Z: Escrow Requirements |
March 2, 2011 |
Proposed rule to: (1) extend the minimum period an escrow account must be maintained for first lien, higherpriced mortgage loans from one to five years, (2) provide an exemption from the mandatory escrow for certain loans, (3) exempt from the mandatory escrow requirement creditors that operate primarily in “rural or "undeserved” counties, and (4) require new disclosure explaining how the escrow account works or what the effects would be of not having an escrow account at all. |
Written comments due on or before May 2, 2011 |
|
CFPB and JAGs Partnership |
July 6, 2011 |
CFPB and Judge Advocate Generals will work together to identify potential violations of consumer law involving service members and their families. |
|
|
OCC, FED, FDIC, SEC, FHFA, and HUD Risk Retention/Qualified Residential Mortgage (QRM) |
April 29, 2011 |
DFA §941 requires sponsors of assetbacked securities (ABSs) to retain at least 5% of the credit risk of assets underlying the securities; proposal includes loan-level requirements such as minimum down payment. |
Written comments due on or before August 1, 2011 |
|
Federal Reserve Board Increase in Regulations Z & M Coverage Thresholds |
April 4, 2011 |
Consumer credit transactions and consumer leases with transaction amounts up to $50,000 will be covered by Regulation Z and Regulation M. Beginning the end of this year (December 31, 2011), the threshold will be adjusted annually based upon the Consumer Price Index (CPI) for Urban Wage Earners and Clerical Workers. |
Effective July 21, 2011 |
|
CFPB Data Collection under ECOA |
April 11, 2011 |
DFA §1071 amended ECOA to require financial institutions to collect and report credit application information for women- or minority-owned businesses and small businesses. CFPB issued guidance to financial institutions clarifying that DFA §1071 does not take effect until the CFPB issues necessary implementing regulations. |
|
|
Federal Reserve Board Ability to Repay/Qualified Mortgage (QM) |
April 19, 2011 |
DFA §1411 requires creditors, when making loans covered by TILA, to determine the consumer’s ability to repay before making a loan and also to establish minimum mortgage underwriting standards; proposal includes alternatives for final regulation. |
Written comments due on or before July 22, 2011 |
|
Federal Reserve Board Foreign Remittance Transfers under Regulation. E |
May 23, 2011 |
DFA §1073 amended the EFT Act, adding a new section to require providers of “remittance transfers” to provide disclosures about such transfers, including exchange rate, applicable fees and taxes, and the amount to be received by the “designated recipient.” |
Written comments due on or before July 22, 2011 |
|
Federal Reserve Board Collection Data at Motor Vehicle Dealers under Regulation. B |
June 20, 2011 |
Proposed rule to clarify that motor vehicle dealers temporarily are not required to comply with certain data collection requirements in the DFA until the board issues final regulations to implement the statutory requirements. |
Written comments due on or before July 29, 2011 |
|
CFPB “Single Integrated Disclosure” Proposal (in advance of proposed rule) under DFA §1032 |
May – June, 2011 |
CFPB posted “sample” forms on its website and sought public feedback; U.S. Treasury has solicited comments “concerning a proposed generic information collection for development and evaluation of integrated loan disclosures” (combining Regulation. Z mortgage disclosure and the RESPA Good Faith Estimate (GFE) into a single, integrated disclosure form). |
Treasury requests comments on or before September 19, 2011; DFA requires final rule no later than July 21, 2012 |
|
CFPB “Larger Participant” Definition |
June 29, 2011 |
DFA §1024 provides that CFPB may supervise covered persons in the residential mortgage, private education lending and payday lending markets. For other markets for consumer financial products or services, CFPB’s supervision program will apply only to a “larger participant” of these markets, as defined by rule. |
Written comments due on or before August 15, 2011 |
|
CFPB Identification of Enforceable Rules and Orders |
July 21, 2011 |
CFPB published consumer financial protection authorities that would be transferred from seven federal agencies and that it would enforce after the Transfer Date. |
Effective Date: July 21, 2011 |
|
CFPB Alternative Mortgage Transaction Parity (Regulation D) |
July 22, 2011 |
CFPB published interim final rule establishing Regulation D pursuant to the Alternative Mortgage Transaction Parity Act and the Truth in Lending Act. |
Effective for state housing creditors July 22, 2011 |
|
FTC Statement of General Policy or Interpretation; Commentary on the Fair |
Credit Reporting Act |
FTC is rescinding its Statements of General Policy or Interpretations under the FCRA. |
Effective Date: July 26, 2011 |
|
Disclosure of Records and Information |
July 28, 2011 |
Interim Final Rule establishes procedures for the public to obtain information from the CFPB under the Freedom of Information Act (FOIA). CFPB also established its rules regarding the confidential treatment of information it obtains in connection with the exercise of its authority. |
Effective Date: July 28, 2011 |
|
Rules of Practice of Adjudication Proceedings |
July 28, 2011 |
Interim Final Rule establishes procedures regarding the conduct of adjudication proceedings under §1053 of the Dodd-Frank Act, used to enforce compliance with the Dodd-Frank Act or any laws for which it has enforcement authority. |
Effective Date: July 28, 2011 |
|
State Official Notification Rules |
July 28, 2011 |
Interim Final Rule establishes procedures to be used by state officials to notify the CFPB of their actions or proceedings in enforcing the Dodd-Frank Act or its regulations. |
Effective Date: July 28, 2011 |
|
Rules Relating to Investigations |
July 28, 2011 |
Interim Final Rule describing the CFPB’s procedures for investigations regarding compliance with the federal consumer financial laws. |
Effective Date: July 28, 2011 |
|
Notice of Proposed Privacy Act System of Records |
August 1, 2011 |
Notice of new records system to collect process, log, track and respond to all FOIA- and Privacy Act-related requests. |
Written comments due on or before August 31, 2011 |
|
Policy on Ex Parte Presentations in Rulemaking Proceedings
|
August 16, 2011 |
Policy requiring public disclosure of ex parte presentations made to the CFPB staff concerning a pending rulemaking.
|
August 16, 2011
|
|
Notice and Request for Information on Consumer Financial Products and Services for Servicemembers
|
September 6, 2011
|
Request for input regarding consumer financial products and services tailored to servicemembers and their families.
|
Written comments due on or before September 20, 2011
|
|
Proposed Information Collection; Comment Requests; Generic Clearance for Research in Development of Disclosure Forms |
September 26, 2011 |
Generic Clearance Request regarding information collection to OMB in connection with research in the development of disclosure forms and request for comments on the collection of information and the estimated burden on respondents. |
Written comments due to OMB reviewer and to Treasury Department Clearance Officer on or before October 26, 2011. |
|
FRB Final Rule Amending Regulation B to Postpone Auto Dealer Collection of Information on Minority and Women Owned Businesses and Small Businesses
|
September 20, 2011
|
Provides that motor vehicle dealers are not required to comply with Dodd-Frank’s data collection requirements on credit applications by women- and minority-owned businesses until the FRB issues final regulations to implement the statutory requirement.
|
ective upon publication in the Federal Register
|
Contacts and Caveats
For more information, please contact one of the attorneys listed, or a member of Dykema relationship attorney.
As part of our service to you, we regularly compile short reports on new and interesting developments regarding the Consumer Financial Protection Bureau. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Readers should seek specific legal advice before acting with regard to the subjects mentioned here. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this Alert or any Dykema publication are always welcome. ©2011 Dykema Gossett PLLC.
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