Regulations and Guidance Update

CFPB Issues Final Rules Relating To Its Investigative Authority And Procedures

On June 2, 2012, the CFPB issued its final rule for the “Rules Relating to Investigations,” (Final Rule) which describes the Bureau’s policies and procedures for conducting investigations authorized under the Dodd-Frank Act. The Final Rule primarily sets forth: (1) the CFPB’s authority to conduct investigations, (2) procedures for issuing civil investigative demands (CIDs), and (3) the rights of the parties who are being compelled by the CFPB to produce information. According to the CFPB, the Final Rule “lays out an efficient and fair process for conducting CFPB investigations.” 

In the Final Rule, the CFPB claims that it is authorized under Dodd-Frank “to conduct investigations to ascertain whether any person is or has been engaged in conduct that, if proved, would constitute a violation of any provision of Federal consumer financial law.” Under the Final Rule, the Director, the Assistant Director of the Office of Enforcement, and the Deputy Assistant Directors of the Office of Enforcement are authorized to issue CIDs for documentary material, tangible things, written reports, answers to questions, or oral testimony. The Final Rule also authorizes the CFPB’s investigators to conduct investigations and hold investigational hearings pursuant to those CIDs.

The Final Rule also establishes the rights of those parties who receive CIDs and are being compelled by the CFPB to produce information. Those rights include: (1) notification of the purpose of the Bureau’s investigation, (2) access to documents or testimony provided in response to CIDs, and (3) representation by counsel at investigational hearings. 

Also contained in the Final Rule are the procedures for contesting a CID by filing a petition for an order modifying or setting aside a CID. The Final Rule, however, anoints the Director, and not an independent judicial body, with the authority to rule on these petitions. This smacks of a serious conflict of interest to have the CFPB policing itself, not to mention the fact that the Director may be asked to rule on a petition challenging a CID that he personally issued. Moreover, the Final Rule only grants a party 20 days to file its petition and “disfavors” requests for extensions of time. This posturing by the CFPB not only hastens the process unnecessarily, but can severely limit the chances of cooperative resolution of any disputes over the CIDs. Instead of exploring compromise with the CFPB, companies faced with a potentially broad CID will be burdened with assessing the scope of the requests and its objections in a very limited time period and may be forced to file a petition to set aside a CID to avoid waiving its right to later object to the CID.

The Final Rule does provide some protection for parties receiving a CID. Recipients of a CID have the right to withhold certain documents under the claim of privilege. The recipient, however, is required to produce a signed schedule of the items withheld identifying each document, including: (1) the document’s specific subject matter, (2) the names, addresses, positions, and organizations of all authors and recipients of the item, and (3) the specific grounds for claiming that the item is privileged. The Final Rule provides that inadvertent disclosure of privileged or protected information or communications will not automatically operate as a waiver.

The Final Rule will take effect immediately upon publication in the Federal Register.

Bureau Finalizes Rules of Practice for Adjudicative Proceedings

On June 6, 2012, the Bureau released its final rule regarding the rules of practice related to most administrative hearings before the Bureau. The rule will become effective upon publication in the Federal Register. 

The comprehensive practice rules apply to administrative proceedings related to enforcement of Title X of the Dodd-Frank Act, the rules issued pursuant to Title X and other federal laws and regulations the Bureau is authorized to enforce. The Final Rule addresses these proceedings from initial appearances, to the filing of papers, discovery, hearings, evidence, and decision and appeals. The Bureau will promulgate rules governing proceedings related to the issuance of temporary orders to cease and desist pursuant to Section 1053(c) of the Dodd-Frank Act in a separate rulemaking.

The stated goal of the Bureau in creating the procedural rules was to “create an adjudicatory process that provides for the expeditious resolution of claims while ensuring that parties who appear before the Bureau receive a fair hearing.” To that end, the rules provide for filing and decision making timeframes that will be extended “only in rare circumstances.” For example, when the Bureau serves a notice of charges, the respondent will have 14 days to file an answer, and within 20 days of service, the parties must appear for a scheduling conference. The hearing officer must issue a recommended decision within 300 days from service of the notice of charges or 90 days after briefing is complete. Parties have 10 days after service of the hearing officer’s decision recommendation to file a notice of appeal with the Director. The Director of the Bureau must issue a final decision on any appeal of the hearing officer’s recommended decision within 90 days.

The procedures set forth an affirmative disclosure approach to discovery pursuant to which any party in an adjudication proceeding may inspect and copy certain documents obtained by the Office of Enforcement from persons not employed by the Bureau with respect to the investigation that resulted in the institution of the proceedings. Additionally, certain documents created by the Bureau are available for inspection and copying if they are not privileged or otherwise protected from disclosure. Any documents that are located exclusively in the files of divisions of the Bureau other than the Office of Enforcement are not subject to affirmative disclosure, and the Office of Enforcement may make an exception to the disclosure of information it obtained from other government agencies if such information was provided on the condition that it not be disclosed. The rules also set forth procedures for parties filing documents in connection with adjudicative proceedings to request confidential treatment of the material.

CFPB Issues Final Rule on Notifications on Actions by State Officials

On June 6, 2012, the Bureau issued its final rule on notification requirements for state officials that take certain actions to enforce Title X of the Dodd-Frank Act. The CFPB issued an Interim State Notification Rule on July 28, 2011 and thereafter solicited comments. Comments were received until September 26, 2011. Upon review of the submitted comments, the final State Official Notification Rule (Final Rule) was issued and sent to the Federal Register for publication.  

The Final Rule requires state officials to notify the CFPB of any action to be taken under Title X of the Dodd-Frank Act at least 10 days prior thereto, unless there are exigent circumstances. Under Section 1042 of the Dodd-Frank Act, state attorneys general or regulators may bring actions to enforce Title X of the Dodd-Frank Act. The CFPB describes an action requiring notification as “any adjudicative proceeding before a court or an administrative or regulatory body to determine whether a violation of any provision of Title X of the Dodd-Frank Act or any regulation prescribed thereunder has occurred.” For emergency actions, states are exempted from the 10-day requirement “in order to protect the public interest or prevent irreparable and imminent harm….” However, the Final Rule requires state officials to notify the CFPB no later than 48 hours after the commencement of an action. The Final Rule was designed to keep the CFPB abreast of state level actions taken pursuant to Title X of the Dodd-Frank Act. According to the CFPB, states officials’ proper notification of pending actions helps ensure that the law is enforced consistently.     

State attorneys general or regulators must include the following information in their notifications to the CFPB: (1) the court or body in which the action is to be initiated, (2) the identity of the parties to the action, (3) the nature of the action to be initiated, (4) the anticipated date of the initiating action, (5) the alleged facts underlying the action, and (6) an unredacted copy of the complaint, motion for relief or similar document that is the subject of the notice.

Separate and apart from keeping the CFPB informed of pending state level actions, the Final Rule also allows the CFPB to anticipate and support state agencies’ litigation needs when enforcing Title X of the Dodd-Frank Act. Along those lines, the Final Rule permits the CFPB to intervene in a state action as a party, remove the action to federal court and appeal judgments. Confidentiality of information disclosed to the CFPB in the notice if the state so requests is provided for in the Final Rule. Lastly, the Final Rule also provides that disclosure of information in a notice shall not be deemed a waiver of any applicable privilege.

CFPB Delays QM Rule, Seeks Further Comment on Ability to Repay Rule

On May 31, 2012, the CFPB announced a further comment period for the ability-to-repay mortgage rule, providing the public until July 9, 2012, to comment. The Dodd-Frank Act requires the CFPB to establish a rule for lenders to assess a consumer’s ability to repay their mortgage. As part of the ability-to-repay rule, the Dodd-Frank Act also directed the CFPB to define qualified mortgages (QMs), which would be considered structurally safe and thus presumed to meet the ability-to-repay rule. While the CFPB had previously announced intentions to finalize the QM rule by the end of June, it now appears that the CFPB does not intend to finalize the rule until the end of the year. Under the Dodd-Frank Act, the CFPB has until January 21, 2013 to finalize the rule.

Sections 1411, 1412, and 1414 of the Dodd-Frank Act established the ability-to-repay requirements under section 129C of the Truth in Lending Act. The ability-to-repay requirements obligate lenders to evaluate a borrower’s ability to afford the underlying mortgage.  If a mortgage is a QM, compliance with the ability-to-repay requirements is presumed. The Director of the CFPB, Richard Cordray, explained that the ability-to-repay requirements are designed to “ensure that consumers are not set up to fail with mortgages they cannot afford....” 

The CFPB reopened comments on the QM rule to allow the public to address two narrow issues. The first involves the FHFA mortgage loan data that tracks a random sample of Fannie Mae and Freddie Mac loans from 1997 to 2011, showing loan performance by year and debt-to-income (DTI) ratio. The CFPB seeks comment on whether DTI should be included in the QM rule and how the QM rule should address other forms of income or asset reserves. Consumer advocates have suggested that a pure DTI analysis could inadvertently adversely affect groups with access to assets but no income, or groups with non-standard forms of income. The CFPB also requests further data analysis on the dataset received by the FHFA as well as similar analysis of loans not covered by the FHFA data. 

Second, the CFPB seeks comment regarding litigation costs and liability risk estimates related to compliance with the QM rule. The potential litigation costs associated with violating the QM rule sit at the center of a debate between mortgage industry groups and consumer advocates about whether the QM rule should include a safe harbor or merely a rebuttable presumption of compliance. Mortgage industry groups have called for a legal safe harbor that would protect lenders that make qualified mortgages in order to stem potentially severe litigation costs. Consumer advocates prefer a rebuttable presumption provision that would give borrowers greater ability to bring lawsuits. The CFPB seeks further comment before making a final decision on the safe harbor/rebuttable presumption debate.

Industry observers have indicated that the delay in publishing a final QM rule is preferable to a rule that does not take all potential consequences into account. Don Lampe of Dykema, speaking to American Banker, stated, “You can’t overstate how important this rule is. This rule represents housing policy in the United States because how available credit will be will have a big impact on the housing recovery.  And that’s another reason why CFPB is having to be very careful here and wants to look at more available data.”

Specifically, the Bureau has made the following requests for comment:

Loan Data:

• Comment on the dataset received from the FHFA and commercially available data on mortgage securitized into private label securities;
• Data or tabulations for loans excluded form the FHFA data (i.e., Federal Housing Administration, Department of Veterans Affairs, the Department of Agriculture and the Rural Housing Service, and privately securitized loans);
• Comment and data on loan performance and the relationship to a consumer’s DTI ratio;
• Comment and data on measures of residential income, the use of residential income measures in loan underwriting, the relationship of the measures to loan performance and consumer expenditures;
• Comment and data regarding the amount of liquid financial reserves available to meet mortgage or other current obligations; the use of liquid financial reserves in loan underwriting, and the relationship of liquid financial reserves to delinquency; and
• Comment and data regarding any measures of stable income and timely housing payments; the use of such measures in loan underwriting; and, the relationship of those measures to loan performance.

The CFPB is aware of the likelihood of litigation arising from the ability-to-repay requirements. As a result, the CFPB is requesting comment and data regarding litigation costs and liability risks associated with lawsuits alleging violation of ability-to-repay requirements. In particular, the CFPB is requesting the following information:

Litigation Costs:

• Appropriate measures of delinquency for purposes of calculating costs associated with foreclosure related ability-to-repay litigation;
• Comment on estimates of the potential number of ability-to-repay lawsuits;
• Comment or data regarding how the potential ability-to-repay lawsuits would vary with respect to whether a borrower concedes the loan was not a “qualified mortgage” or where a loan is claimed to be a “qualified mortgage”;
• Comment on the likely outcome of the ability-to-repay lawsuits (i.e., dismissal, summary judgment, settlement, judgment after trial, and costs);
• Comment or data regarding how the outcome of the ability-to-repay lawsuits would vary with respect to whether a borrower concedes the loan was not a “qualified mortgage” or claims the loan to be a “qualified mortgage”;
• Comment or data on assumptions about a loan (i.e., interest rate, purchase price, finance charges, and fees) required to calculate average damages awarded in TILA cases;
• Comment and data on the impact of other damages (i.e., attorneys’ fees and litigation costs);
• Comment and data regarding whether additional factors should be considered in assessing ability-to-repay litigation costs; and
• Comment and data regarding other potential ability-to-repay litigation costs (i.e., costs arising from sending a loan back to the originator; and, extended foreclosure timelines).

Examinations/Enforcement Here and Now

Agencies Sign Memorandum of Understanding on Supervisory Coordination

Five federal supervisory agencies, including the CFPB, released a Memorandum of Understanding (MOU) on June 4, 2012. The MOU was signed on behalf of the CFPB and the other agencies on various dates in early and mid-May 2012, and it became effective on May 16, 2012. The MOU clarifies how agencies will coordinate their supervisory activities, consistent with the Dodd-Frank Act. These coordination undertakings should lead to greater uniformity and efficiency, and help minimize the regulatory burden on covered depository institutions.

Section 1025 of the Dodd-Frank Act requires that the CFPB and the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency (collectively, the “Prudential Regulators”) coordinate important aspects of their supervision of insured depository institutions with more than $10 billion in assets and their affiliates. This coordination includes scheduling examinations, conducting simultaneous examinations of covered depository institutions unless an institution requests separate examinations, and sharing draft reports of examination for comment. The CFPB and the Federal Reserve Board plan to enter into a separate agreement with respect to holding companies and their subsidiaries.

The MOU is intended to establish arrangements for coordination and cooperation between the CFPB and the Prudential Regulators, minimize unnecessary regulatory burden, avoid unnecessary duplication of effort, and decrease the risk of conflicting supervisory directives. Under the MOU, the agencies will coordinate examinations and other supervisory activities and share certain material supervisory information concerning (1) compliance with federal consumer financial laws and certain other federal laws that regulate consumer financial products and services; (2) consumer compliance risk management programs; (3) activities such as underwriting, sales, marketing, servicing, collections, if they are related to consumer financial products or services; and (4) other related matters that the agencies may mutually agree on.

Pursuant to the MOU, the CFPB and each Prudential Regulator will designate a point of contact for each covered institution. Those points of contact will consult regarding the scheduling, and any material changes in timing, of regularly scheduled examinations of each covered institution, and will agree to a reasonable timetable for sharing scheduling information for the coming year or supervisory cycle.

News from the Bureau

CFPB Rethinking CARD Act Rule

The Bureau continues to reconsider a CARD Act rule it inherited from the Federal Reserve Board that would prohibit individuals from submitting household income when applying for credit cards.  The current version of the rule requires individuals to report only personal income. Stay-at-home parents, especially mothers, have voiced concern that the rule would prevent them from obtaining credit cards without relying on their spouses’ income. According to Frank Keating, president of the American Bankers Association, the rule “mak[es] it difficult for stay-at-home spouses to get credit in their own names or build a credit history.”

Pressure on the Bureau for a regulatory change is mounting as demonstrated at a Congressional hearing on the matter held on June 6. Testifying before Congress, Gail Hillebrand, Associate Director of the Bureau, stated that the inherited rule “misinterpreted congressional intent in the area of a consumer’s ability to repay their credit obligation.” Hillebrand pointed out that “income becomes an asset when put in a checking or savings account, and many families use joint checking and savings accounts. Once the income goes into a joint account, it is legally available to both account holders, and it may be considered in determining the ability of either one of them to repay a loan.” She reported that the CFPB is currently reviewing comments regarding the proposed rule, and will focus on three areas: (1) “promoting access to credit on a fair, equitable, and non-discriminatory basis”; (2) “ensuring that lenders make only loans they reasonably believe consumers can afford to repay”; and (3) “addressing the balance between the goals of access and ability to pay,” and basing decisions on “the best available evidence on the actual impact of particular rules.”

The CFPB is “looking closely at the regulation and the related Commentary...to see if [it] can provide further clarity to mitigate the risk that stay at home spouses might be denied credit that they can, in fact, afford to pay,” says Hillebrand. She anticipates a prompt determination of this issue, and noted that the Bureau “intend[s] to move forward, as appropriate, during the course of this summer.”

Miscellany

CFPB Asked To Investigate College Student Debit Card Fees

Two prominent Democrats, U.S. Senator Dick Durbin and U.S. Representative George Miller, sent a letter to CFPB Director Richard Cordray on June 7 urging the CFPB to carefully examine debit card agreements between financial institutions and universities. The particular concern is over fees and hidden transaction costs incurred by students for routine transactions such as balance inquiries, reloading and account closures.

There are more than 900 partnership agreements between colleges and financial institutions, which permit students to use campus-based debit cards to access portions of their financial aid that can be used to buy books or for other educational expenses beyond tuition. Durbin and Miller note that "at a time when total U.S. student loan debt is reaching the $1 trillion mark, we should not allow costly and inappropriate debit card fees to add to that debt." A recent report by the U.S. Public Interest Research Group found that as many as 900 colleges are pushing students into using campus debit cards that carry numerous unnecessary, costly and unknown bank fees. Sometimes these fees can affect students’ access to their financial aid. Some of the fees highlighted by the report include:

• PIN debit fees: Students are assessed a fee each time they enter their PIN number to make a debit card purchase. This results in steering students to less-secure signature debit transactions.
• Balance inquiry fees: Students are assessed a fee when they check their balance at an ATM. One financial institution charges students 60 cents per inquiry, even those initiated on mobile devices. This does not include charges potentially assessed by the ATM owner.
• Abandoned account fees: These fees are charged after the card has not been used for a certain period of time. One financial institution charges students $19 per month after nine months of inactivity and will soon charge $10 per month after six months, which is well shorter than an academic year. An abandoned account could eventually be closed, resulting in more fees.
• Account closure fees: These fees are assessed when an account is closed. For example, after 18 months of inactivity one financial institution charges the account $25, and any leftover funds revert to the institution, not the student.
• Reloading fees: Students using prepaid debit cards can be charged for reloading or depositing money on the cards at ATMs. At one school, the reloading fee is $4.95.

Durbin and Miller also asked the CFPB to look into other issues, including whether there is a conflict of interest for the colleges that enter into the agreements with the financial institutions. The two members of Congress also sent separate letters to Education Secretary Arne Duncan and Department of Education Inspector General, Kathleen Tighe, stating that the Department of Education should stop and deter unscrupulous student financial aid practices.

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 t 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.}