Consumer Financial Protection Bureau Alert—Vol. 2, No. 9

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

May 31, 2012

Regulations and Guidance Update

The CFPB Seeks to Extend its Reach Over Nonbanks With New Supervision Rules

Following up on his promise earlier this month to expand the CFPB's supervision over nonbanks, Richard Cordray announced the release of the CFPB's proposed rule detailing the procedures for subjecting a nonbank to the Bureau’s supervisory authority. Under 12 U.S.C. 5514, the CFPB has conditional authority to supervise a nonbank that the Bureau has "reasonable cause" to believe "is engaging, or has engaged, in conduct that poses risks to consumers." In releasing the proposed rule, Richard Cordray remarked, "[t]his is an important step in the development of our nonbank supervision program." Cordray also confirmed that the proposed rule would extend the CFPB's reach to those nonbanks, "that [the CFPB] would not otherwise supervise."

According to the CFPB, a nonbank "is a company that offers or provides consumer financial products or services but does not have a bank, thrift, or credit union charter. Nonbanks include companies such as mortgage lenders, mortgage servicers, payday lenders, consumer reporting agencies, debt collectors, and money services companies." Under Dodd-Frank, the CFPB already has the authority to supervise nonbanks that offer or provide to consumers: (1) certain mortgage related services (origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services); (2) private education loans; and (3) payday loans, as well as nonbanks defined as “larger participants.” The proposed rule establishes the process by which the CFPB would extend its reach over other nonbanks it is not currently supervising.

Under the terms of the proposed rule, the CFPB would provide a nonbank with notice stating that the Bureau may have reasonable cause to conclude that the nonbank is engaging, or has engaged, in conduct that poses risks to consumers, including a description of the basis for the Bureau's determination. The nonbank would then be provided with two opportunities to respond—first in writing and then, if requested by the nonbank, a supplemental oral response. In an attempt to circumvent judicial review of these proceedings, the CFPB claims that the proceedings will be "informal," and not constitute an adjudicatory proceeding under section 554 of the Administrative Procedure Act. Under this "informal process," "no discovery would be permitted, a supplemental oral response would not constitute a hearing on the record, and no witnesses would be permitted to be called as part of a supplemental oral response." Not surprisingly, the Bureau's Director Richard Cordray will have the final say in determining whether the nonbank would be subject to the Bureau's supervisory authority.

The Bureau claims, "[a]lthough the Dodd-Frank Act does not require that the CFPB issue this rule, the Bureau is issuing it to be transparent in its authorities and procedures." The Bureau also asserts that "the procedures established by this Proposed Rule would provide a recipient of a Notice (respondent) with a more robust process than required by [Dodd-Frank]." While the mechanics of the proposed rule are subject to debate, what cannot be questioned is that this proposed rule underscores the CFPB's commitment to expanding its regulatory authority.

Comments on the proposed rule are due by July 24, 2012 and can be submitted here.

Consumer Financial Protection Bureau Considers New Rules on Prepaid Cards

On May 23 the CFPB took the first step in providing consumer protections for the fast-growing prepaid card market by promulgating an Advance Notice of Proposed Rulemaking. In advance of a proposed rule that would expand Regulation E’s consumer protections for general purpose reloadable prepaid cards, the CFPB is seeking information about the product. CFPB Director Richard Cordray explained that the program is being launched because the people who use prepaid cards are often among the most vulnerable consumers, and yet, “right now prepaid cards have far fewer regulatory protections than bank accounts or debit or credit cards.”

Although some protections already apply to certain prepaid cards, such as gift or payroll cards, the CFPB’s rulemaking proposes extending the rules to general purpose reloadable prepaid cards, which allow consumers to load the cards with money up front and use them as debit cards. According to a 2009 FDIC study, 9.7% of all households use prepaid cards. Mercator Advisory Group reports that the prepaid market totals $57 billion and is expected to grow at a rate of 42% per year from 2010 to 2014. Much of the growth in the prepaid market comes from consumers using the prepaid card as an alternative to a checking account, as many prepaid card users are either unbanked or under-banked. Despite its growth, the prepaid market is still largely unregulated at the federal level. Indeed, many banks were drawn to the prepaid card market, the terrain of less traditional financial firms until recently, because prepaid cards were largely untouched by the Dodd-Frank regulatory overhaul and other recent regulatory crackdowns.

The CFPB said its goals are to ensure that consistent minimum standards apply across similar financial products, that fees are transparent, and that risks of fraud or loss are appropriately allocated. To that end, the Bureau is seeking information on, and plans to evaluate, several issues, including how fees and terms for prepaid cards should be disclosed, the costs and benefits of requiring providers to protect consumers from unauthorized transactions, and the issues related to special card protect features. Prepaid cards often involve fees associated with everything from calling customer service to using an ATM. Fees can add up quickly and in many cases are not disclosed to the consumer before purchasing the card. Additionally, consumers are often responsible for unauthorized transactions that occur when a prepaid card is lost or stolen.

Consumer advocates support the proposed regulations, arguing that regulators need to rein in egregious fees and mandate a transparency to allow consumers to make informed decisions on which card is best for them. Representatives of the prepaid card industry explained that they do not oppose regulation, but the CFPB should not get involved with the fees they charge, especially because, they assert, competition is pushing fees lower anyway.

The CFPB seeks input on how to ensure that consumers’ funds on prepaid cards are safe and that card terms and fees are transparent. The public has 60 days to comment on the Advance Notice of Proposed Rulemaking. Comments are due by July 22, 2012.

The Bureau also launched Ask CFPB: Prepaid Cards, which is a searchable online tool with easy-to-understand answers to more than 80 frequently asked questions covering a range of topics about prepaid cards.

CFPB Outlines Future Rule to be Proposed to Simplify Mortgage Points and Fees

The CFPB announced that it is considering rules that would simplify mortgage points and fees to preserve consumers’ mortgage loan choices while increasing transparency. According to CFPB Director Richard Cordray, “Mortgages today often come with so many different types of fees and points that it can be hard to compare offers. We want to bring greater transparency to the market so consumers can clearly see their options and choose the loan that is right for them.”

Under the proposal, the CFPB would require:

An Interest-Rate Reduction When Consumers Elect Discount Point Payments. The CFPB has expressed concern that lenders have previously charged discount points without actually lowering interest rates. Under the proposed rule, the CFPB would require that any discount point be “bona fide,” meaning consumers would receive at least a minimum interest rate deduction when electing to pay a point.

A No-Discount-Point Loan Option. In order to increase transparency and allow borrowers to more easily compare loan offers from competing sources, the CFPB has proposed a rule that would require lenders to offer consumers a no-discount-point loan option. The rule is intended to allow borrowers to compare competing loan offers without having to analyze a different combination of points, fees, and interest rates on each.

A Ban on Origination Charges that Vary with the Size of the Loan. Under this rule, the CFPB would only allow brokers and creditors to charge flat origination fees. This proposal is consistent with Dodd-Frank Act requirements that limit broker fees based on the size of a loan.

The CFPB also indicated that it will be releasing proposals to set qualification and screening standards for all mortgage loan originators, including those that work for banks, thrifts, mortgage brokers, or nonprofit organizations. Additionally, the Bureau intends to build on and clarify a Federal Reserve rule instituted in 2010 that would prohibit mortgage loan originators from steering borrowers to higher-priced loans.

Banking industry groups are concerned that the CFPB rules will be inconsistent with those promulgated by the Federal Reserve, creating confusion in the industry. “They are adding a whole new set of additional rules and regulations onto what we already have,” stated American Bankers Association vice president Rod Alba. “It is this rapid succession of rule-making after rule-making that is so worrisome to banks.”

The mortgage points and fee rules are expected to be taken up by a panel of small business experts in the upcoming weeks before a formal proposal of the rules, expected sometime this summer. The CFPB hopes to finalize the rules by January 2013.

Examinations/Enforcement Here and Now

CFPB Joins in Amicus Brief Supporting Constitutionality of the FCRA

The CFPB previously announced its commitment to filing amicus briefs in cases involving consumer financial protections laws, and this month it joined the Department of Justice and Federal Trade Commission in filing a memorandum in support of the constitutionality of the Fair Credit Reporting Act.

The constitutionality issue arose in a consumer class action claiming General Information Services, Inc. (GIS) willfully violated the Fair Credit Reporting Act. According to Shamara King, who brought the suit, "GIS adopted and maintained a policy and practice of knowingly, intentionally, recklessly and willfully reporting outdated adverse information that is required to be excluded from the consumer reports it sells." The suit claims GIS' behavior adversely impacted employment applicants throughout the country. GIS moved to dismiss the case, claiming the Fair Credit Reporting Act is unconstitutional, citing to the Supreme Court's decision in Sorrell v. IMS Health.

GIS claims Sorrell marks a dramatic shift in the protection afforded to content-based restrictions on truthful commercial information, specifically pointing to the dissent in Sorrell, which claimed the holding has sweeping effects on other laws restricting disclosure of commercial information, including the Fair Credit Reporting Act. In GIS' view, because a prohibition on disclosure of truthful information regarding an individual's criminal record falls squarely within Sorrell's holding, the Fair Credit Reporting Act is unconstitutional.

It remains to be seen whether the U.S. District Court for the Eastern District of Pennsylvania will buy GIS' defense.

News from the Bureau

Bureau to Revisit CARD Act’s Non-Working-Spouse Rule

Following a meeting with a group of stay-at-home mothers affiliated with grassroots organization MomsRising, CFPB Director Richard Cordray announced that the Bureau will revisit the CARD Act rule that restricts consumers over 21 years old from applying for credit by using household income. The rule, which the Federal Reserve implemented over a year ago, requires such consumers to use only personal income when seeking credit.

The rule was implemented to prevent college students from using their parents’ income to obtain credit. The rule has also made it more difficult for stay-at-home parents to obtain credit cards. This is especially true for women, who stay at home at a rate 30 times higher than men. “Denying someone a credit card because that person is a stay-at-home parent devalues the work of raising and caring for children and that person’s worth as a partner,” stated Kristin Rowe-Finkbeiner, Executive Director of MomsRising. Holly McCall, a homemaker from Vienna, Virginia, presented Cordray with a petition containing 45,000 signatures. She believes the rule “is demeaning and flat out unfair.”

Cordray promised to review the CARD Act rule and work with McCall to come up with a solution. The Bureau will offer a formal response within 30 days. McCall praised Cordray for meeting personally with her and the representatives of MomsRising, stating, “It’s clear the Consumer Financial Protection Bureau listened to the 45,000 voices asking them to change this rule which unfairly penalizes hard-working moms and dads. I look forward to working with Director Cordray to fix this glaring issue.”


CFPB Confidentiality Bill Currently on Hold

H.R. 4014, a new bill passed by the House of Representatives that will protect the confidentiality and privilege of documents and information shared with the CFPB, is being blocked in the Senate, principally by Senator Bob Corker of Tennessee. Banks have been hesitant to disclose information to the CFPB as they fear attorneys and other third parties could use the documents disclosed against them in litigation. The bipartisan bill would assure banks that documents shared with the CFPB would remain confidential and is intended to assuage banks’ fears about sharing sensitive documents with the CFPB.

The bill provides that the submission of any documents or information to the Bureau for any purpose in the course of any supervisory or regulatory process will not be construed as waiving, destroying, or otherwise affecting any privilege that the submitting entity may claim with respect to the submitted information under Federal or State law as to any person or entity other than the Bureau. The bill, as currently proposed, also stipulates that the 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 (A) any other covered agency, in any capacity; or (B) any other agency of the Federal Government.” The purpose of H.R. 4014 is to clarify that institutions regulated by the Bureau have not risked and will not waive applicable legal privileges as to third parties when they have shared or will provide information to the CFPB. The bill also makes clear that the CFPB can share such information with other Federal agencies without impacting a regulated institution’s attorney-client privilege or work-product immunity as it applies to third parties. This statutory change will ensure that privileged information remains privileged. Specifically, H.R. 4014 amends Section 11(t)(2)(A) of the Federal Deposit Insurance Act (the Act) by adding the CFPB to the list of covered agencies that may share information with other covered or Federal agencies without waiving any privilege applicable to the information.

Ironically, Corker supports the idea behind the legislation. However, Corker and another senator opposing the bill want amendments to the Dodd-Frank Act before they approve H.R. 4014. While Corker is not the only lawmaker blocking the proposed legislation, he is seen as the primary barrier to its passage. Others believe the larger piece of legislation regarding changes to the Dodd-Frank Act will take a while to work through, as there is not a consensus as to what changes should be made, and they want to rush this protective legislation through as quickly as possible.

Despite Corker’s block of the bipartisan measure, his actions have not garnered total criticism. Paul Merski, executive vice president and chief economist at the Independent Community Bankers of America noted, “I don’t have any concerns with a senator using his Senate powers to bring attention to his other concerns. That’s part of the Senate process. It’s a very deliberate body.”

As the current bill remains on hold, new proposals to the bill have now made their way to the House Financial Services Committee. This new proposal would extend the protections given to financial institutions that share information with the CFPB, and contains protective coverage for confidential information that the Bureau shares with state regulators. Thus far, financial industry groups like the American Financial Services Association and the National Association of Mortgage Brokers support the broader protections included in the new proposal.

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.

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. © 2021 Dykema Gossett PLLC.