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Consumer Financial Protection Bureau Alert—Vol. 2, No. 5

By the Authors of PLI's Consumer Financial Services Answer Book 2011 and Edited by Arthur B. Axelson

March 15, 2012

Regulations and Guidance Update

Bureau Proposes Rule Clarifying Non-Waiver of Privilege for Information Submitted to the Bureau

On March 12, 2012, the CFPB issued proposed amendments to 12 CFR part 1070, subpart D (rules relating to the confidential treatment of information), by which it intends to clarify that submitting information to the Bureau does not result in the waiver of any privilege. Proposed section 1070.48 provides that submitting information to the CFPB "in the course of any supervisory or regulatory process . . . shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim" regarding that information. The Bureau intends for the rule to govern past and future submission of information, and to apply in both federal and state forums. As previously reported in Dykema's CFPB Alert (Vol. 2, No. 4), Congress is also acting on legislation that would protect the confidentiality of information provided to the Bureau. 

The CFPB has stated that the rule is intended "to provide greater assurances" to the entities it supervises. Even without the rule, the Bureau believes that "supervised entities do not waive any applicable privilege with respect to third parties by providing privileged information to the Bureau." Indeed, on January 4, 2012, the CFPB's General Counsel issued CFPB Bulletin 12-01, which states that submission of information to the Bureau following regulatory requests does not waive any privilege because such submissions are not voluntary disclosures.

The Bureau has also proposed a rule clarifying that no privilege is waived when the Bureau shares information with other government agencies. Specifically, section 1070.47 provides, "[t]he CFPB shall not be deemed to have waived any privilege applicable to any information by transferring that information to, or permitting that information to be used by, and Federal or State agency."

According to CFPB Director Richard Cordray, the rule changes "will allow [the Bureau] to further protect consumers by facilitating the flow of information between the Bureau and its supervised entities." Mr. Cordray believes the rule changes are "common sense" and "consistent with [the Bureau's] practice of guarding the confidentiality of the information of the institutions we supervise."

Written comments must be received on or before April 16, 2012.

CFPB Plans to Merge RESPA and TILA Rules Prior to Finalizing GFE Disclosure

Since last summer, the CFPB has been focused on creating more user-friendly good-faith estimate (GFE) disclosures in an effort to make them more useful to consumers, mainly through numerous rounds of consumer testing and public comment. However, there was uncertainty on how to evaluate the proposed GFE prototypes because the CFPB had not yet provided much information on its planned direction for merging the Real Estate Settlement Procedures Act (RESPA) and Truth In Lending Act (TILA) rules. The Bureau had planned on finalizing the GFE disclosure prior to merging the TILA and RESPA rules, which would implement the new disclosure form.

Anne Canfield, the Executive Director of the Consumer Mortgage Coalition, indicated that it is important to figure out the "basic rules of the road" so lenders can fully evaluate the prototype disclosure forms. Thus, Ms. Canfield and others in the lending industry are pleased that the CFPB has decided to focus on merging the Regulation X (RESPA) and Regulation Z (TILA) requirements before finalizing the GFE disclosure form.

The Bureau also wants to tighten the early cost estimates provided to loan applicants, and may incorporate this policy into the new rules. Under the current scheme, there is a 10% tolerance on cost estimates when a lender recommends an independent settlement service provider to the borrower or requires the use of a certain provider. If the final cost exceeds the cost initially disclosed by more than 10%, the lender must absorb the cost difference. The CFPB wants to shift to a zero-tolerance level. In a statement regarding the business review panel, the CFPB indicated the zero-tolerance is "intended to make the loan estimate more reliable for consumers." However, the zero-tolerance proposal would create greater risk for lenders. In permitting the 10% tolerance, the Department of Housing and Urban Development (which had regulatory jurisdiction over RESPA prior to July 21, 2011) assumed a lender would be familiar with the provider's standard charge, yet understood that lenders have no control over final costs. It, therefore, seemed reasonable to provide them a margin of error. The idea of zero-tolerance is agitating many lenders. As Canfield has stated, zero-tolerance "is not a tenable situation since the lender has no control over the final costs."

The CFPB also is considering merging the TILA disclosure that borrowers receive three days before closing with the HUD-1 settlement sheet. The lender's TILA disclosure contains the final loan terms and costs; however, some costs on the HUD-1 form are not finalized by the settlement agent until the day of the closing. Therefore, there is some consideration being given to having the lender complete the TILA disclosures and the settlement agent complete the RESPA disclosures, although the Bureau's rule would have to address the timing of completion of the form. According to the Bureau, it is considering a proposal that would generally require delivery of the integrated settlement disclosure three days before closing to reduce the risk consumers will face unexpectedly higher closing costs at the last minute.

There is concern it will be difficult to differentiate the TILA and RESPA requirements under the new regime, since the CFPB is blending the two forms into one. Thus, many argue the Bureau should develop rules governing the specific duties of both the settlement agent and the lender to ensure the disclosure is completed on time.

Examinations/Enforcement Here and Now

CFPB Issues SAFE Act Guidance for Depository Institutions

Earlier this month, the CFPB issued guidance regarding SAFE Act compliance and requirements for federally registered individuals and their employers, as well as the Bureau's related examination procedures. In a number of instances, the guidance simply reconfirms information included in the final rule promulgated by the various federal banking regulatory agencies during 2010. For example, the document: (1) sets forth key definitions; (2) addresses de minimis exemptions; (3) discusses steps and procedures that must be maintained in order to obtain and maintain a federal registration; and (4) discusses the SAFE Act policies and procedures that must be maintained by covered financial institutions, regardless of whether they have registered mortgage loan originators or its employees exclusively rely upon a de minimis exemption. 

Importantly, the CFPB's guidance includes information pertaining to the Bureau's examination objectives and procedures. According to the Bureau, its objectives in examining institutions will be: (1) to determine whether written policies and procedures have been adopted to assure compliance with the SAFE Act and applicable regulations; (2) to determine whether the annual independent testing of the institution's policies and procedures regarding compliance with the SAFE Act and applicable regulations has been conducted; and (3) to evaluate whether any deficiencies identified during independent testing have been corrected and measures have been put into place to ensure that deficiencies do not recur. The CFPB's guidance outlines specific examination procedures that its examiners will follow in order to meet these states objectives. 

The CFPB's Examination Procedures are available at: http://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Procedures.pdf

Cordray Highlights Information Sharing and Coordination with State Attorneys General

In his March 6 remarks to the National Association of Attorneys General (NAAG) in Washington, D.C., CFPB Director Richard Cordray highlighted the continued cooperation between the two groups as they tackle a number of financial industry topics. Cordray noted that his staff and that of the NAAG already coordinate via a number of working groups on mutual areas of interest, including payday lending, auto loans, and collection abuses. Cordray also highlighted goals to coordinate federal and state efforts in the future. 

Memorandum of Understanding-A general framework for information sharing

Cordray stated that soon he would be sending the state attorneys general a Memorandum of Understanding that would "establish a general framework to share information on consumer financial protection issues." He noted that the CFPB could provide an influx of new resources to analyze and supervise shared information between the states and the federal government. 

At the heart of Cordray's Memorandum of Understanding are growing questions regarding privilege. The financial industry is concerned that information given to the CFPB as regulator could be shared with third parties - particularly state attorneys general - to use in investigations or prosecutions of the industry. Generally, when financial institutions give information to other federal supervisory agencies (such as the FDIC), that information is construed not to waive privilege by statute. The purpose of the protection is to ensure that financial institutions are fully transparent with their regulators. However, the Dodd-Frank Act failed to add the CFPB to the list of federal agencies covered by the statute that creates this construction (12 U.S.C. 1821(t)). As a result, the industry has continued to question whether attorney-privileged or work-product-privileged materials could be shared with the states' attorneys general or used in enforcement actions or litigation. Congress has taken up a bill to correct the oversight, but Cordray's remarks indicate that he may not wait for a legislative solution before acting directly with the attorneys general. While Cordray has previously spoken openly about protecting privileged materials obtained through the CFPB's supervisory function, we will not know if privilege has been addressed until the contents of the Memorandum of Understanding goes public. 

Anticipated Mortgage Rules

Cordray also addressed some new mortgage rules the CFPB intended to put into place over the upcoming year. Specifically, he mentioned rules intended to (1) clarify mortgage billing statements, (2) limit force-placed insurance requirements by banks, and (3) revamp the rules for hybrid adjustable-rate mortgages. These goals are consistent with statements made by Cordray over the past couple months as well as early actions from the CFPB to collect information in these areas. 

Debt Collection

Cordray emphasized that a partnership between the CFPB and the states attorneys general could be particularly helpful in combating abuses in debt collection, stating, "we intend to forge a strategic partnership with you and with our federal government colleagues in this arena." He noted that illegal debt collection activities were becoming a growing concern in the aftermath of the financial crisis and a continued complaint heard from consumers. Cordray stressed that the Larger Participant Rule, a CFPB proposal that would allow the CFPB to supervise debt collectors with more than $10 million in annual receipts, would allow the CFPB to monitor debt collection practices more closely by giving the CFPB the ability to examine their internal operations before enforcement actions would need to be taken. Again, Cordray's statements in this area are consistent with other recent statements and with the CFPB's larger goals to expand federal oversight to unregulated financial industries or those currently regulated at the state level.

News from the Bureau

CFPB Expands Complaint Portal to Include Student Loans and Bank Accounts

Earlier this month, the CFPB continued the expansion of its consumer response system to accept complaints from students and their families on private student loans and to accept complaints from consumers on bank accounts. The CFPB has been expanding its complaint operation by product category. The Bureau is now taking formal complaints in regard to the following financial products: credit cards, mortgages and other home loans, private student loans, and bank accounts. 

Recognizing that student loans have now surpassed credit cards as the largest source of unsecured consumer debt, the CFPB is accepting complaints from borrowers having difficulties with private student loans. Until recently, private student lenders were regulated only by a patchwork of state and federal authorities, and there was no federal supervisory program over nonbanks that issued student loans. The CFPB now has that supervisory and regulatory authority, and as CFPB Director Richard Cordray declared, "The CFPB is now the one-stop federal agency where all private student loan borrowers can ask questions, get information and file a complaint about this important market." 

One of the Bureau's reforms, as required by the Dodd-Frank Act, is the designation of a private student loan ombudsman, Rohit Chopra, who is responsible for assisting borrowers with private student loan complaints as well as examining complaints in order to develop recommendations to Congress and other federal government agencies. The Bureau anticipates complaints regarding difficulties making full payment, confusing advertising or marketing terms, billing disputes, deferment and forbearance issues, and debt collection and credit reporting problems. While the CFPB only manages private student loan complaints, the CFPB will route complaints having to do with federal student loans to the Department of Education.

CFPB Director Richard Cordray also recognized the need for oversight of bank accounts, explaining that "[d]eposit accounts play a critical role in the lives of most Americans, but these products and the laws governing them are complicated." The Bureau, which will accept complaints about checking accounts, savings accounts, and certificates of deposit, anticipates receiving complaints in five general categories: account opening, closing, and management; deposits and withdrawals; using a debit or ATM card; making or receiving payments and sending money to others; and problems related to low account funds.

The CFPB has also quietly begun beta testing to accept complaints on auto loans and other consumer installment loans. While the addition of new categories of financial products is not surprising, industry observers said that the speed with which the CFPB is expanding its complaint portal shows that significant resources are being dedicated to hearing directly from consumers. 

As of February 22, 2012, the CFPB had already received over 20,000 complaints, including nearly 7,000 on mortgages and almost 12,000 on credit cards. Consumers can file a complaint with the CFPB using the Bureau's website, or by mail, fax, or telephone. Consumers are given a tracking number after submitting a complaint and can then log on to the CFPB website to check the status of their case. The Bureau expects financial service providers to respond to complaints within 15 days, and seeks to resolve all complaints within 60 days. Each complaint will be processed individually and consumers will have the option to dispute a financial service provider's resolution.

Bureau to Set New Restrictions on Force-Placed Insurance

The CFPB plans to set new restrictions on force-placed insurance procedures. CFPB director, Richard Cordray, has indicated that the CFPB will issue mortgage servicing rules this year that will include prohibitions on servicers charging for force-placed insurance unless they have "a reasonable basis to believe that borrowers have failed to maintain their own insurance."

Force-placed insurance, whereby mortgage loan servicers buy insurance for uninsured borrowers and add the costs of that insurance onto their mortgages, has been a target of much regulatory scrutiny in recent months. Insurance coverage in these instances is often more costly than coverage bought by homeowners, and these plans "often include commissions and other administrative costs," according to Fannie Mae. 

Cordray stated that fixing the mortgage market is an "urgent priority." To that end, Cordray is using the authority granted to the CFPB by the Dodd-Frank Act to supervise mortgage lenders of all sizes and input measures such as the proposed restrictions on force-placed insurance products. Moreover, the National Consumer Law Center is urging the CFPB to adopt the position that loan servicers should be required to continue making premium payments on the homeowner's policy, whether or not an escrow for such premiums has been established. It is not clear under what authority the CFPB could impose such a requirement, although it might exert authority under its power to prevent unfair, deceptive, or abusive acts or practices. 

Specifically, §1463(a) of the Dodd-Frank Act amends RESPA, and requires the CFPB to issue regulations prohibiting the imposition of a charge for force-placed insurance "unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract's requirements to maintain property insurance." In addition, section 1463(a) prohibits the imposition of a charge for force-placed insurance unless the servicer: (1) sends a written notice to the borrower by first-class mail; (2) sends by first-class mail a second written notice at least 30 days after mailing the first notice; and (3) has not received from the borrower proof of hazard insurance for the property by the end of the 15-day period after mailing the second notice (RESPA Sec. 6(1)(1), as added by Sec. 1463(a) of the Dodd-Frank Act).

Banks have also been hit with a number of class-action lawsuits concerning force-placed insurance. Currently, at least 10 force-placed cases are pending against Bank of America, Wells Fargo & Co., JP Morgan Chase & Co., RBS Citizens Bancorp, and US Bancorp. 

Cordray has provided no specific date as to when the CFPB will release the proposed rule, however, it is slated for release this year.

Miscellany

Bureau Participates in Justice's New Consumer Protection Working Group

The United States Department of Justice has introduced another player into the regulatory realm of consumer financial services: the Consumer Protection Working Group (the "CPWG"), which is a unit within the financial Fraud Enforcement Task force that was created in 2009. The CPWG will fight consumer fraud across federal and state law enforcement and regulatory agencies.

The United States Department of Justice advised that the CPWG will collaborate with federal law enforcement and regulatory agencies as well as state and local partners to combat consumer-related fraud. Attorney General, Eric Holder, stated that the CPWG "will strengthen our collective efforts, enhance civil and criminal enforcement of consumer fraud and educate the public in an effort to prevent consumers from being victimized in the first place." In particular, the CPWG will focus on payday lending, high-pressure telemarketing or Internet scams, business opportunity schemes, for-profit schools engaging in fraud or misrepresentation, and fraudulent third party payment processors. In addition, the CPWG plans to establish a best-practices tool kit, legislative, regulatory and policy initiatives, and an information sharing structure, and to use consumer outreach and education to protect consumers from fraud.

The CPWG is made up of members from a vast array of regulatory entities, including representatives from the FTC, the CFPB, Treasury, FBI, IRS, FDIC, FinCEN, Department of Education, National Association of Attorneys General, OCC, FRB, NCUA and the U.S. Postal Inspection Service, as well as certain state attorneys general. It is anticipated that the CFPB, the FTC and the states' attorneys general, which are actively investigating potential violations of consumer protection laws, will take the lead in setting the CPWG's agenda.

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, or Arthur B. Axelson at 202-906-8607, or any of the listed attorneys. 


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.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. 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 are always welcome. © 2018 Dykema Gossett PLLC.