Developments at the Consumer Financial Protection Bureau: January 29, 2015 – March 10, 2015

Julius L. (“Jerry”) Loeser

  1. On January 29, the CFPB proposed amendments to its mortgage rules to facilitate lending by small firms in rural and underserved areas.  Currently, the CFPB’s ability-to-repay rule provides favorable treatment to creditors that originate less than 500 first-lien loans a year; the proposal would increase that to 2,000 and would exclude loans held in portfolio by the creditor or its affiliates.  Going the other way, the CFPB currently reserves small creditor status for firms with total assets of $2 billion or less and now proposes to include the assets of affiliates in that calculation.  The definition of what constitutes a “rural” area  would be expanded to include any census tract not in an urban area as defined by the Census Bureau.
  2. On February 3, the American Banker published an op-ed piece by Wayne Abernathy of the American Bankers Association commenting on the CFPB’s Safe Student Banking initiative, which encourages plain vanilla (e.g. no overdrafts) and free features (e.g. if the account is card-based and electronic and two free money orders per month).  The initiative encourages these features by setting them forth in a “tool” that the CFPB recommends colleges and universities use in establishing “partnerships” with banks.  Banks are to explain why if their student bank account product differs from what the tool recommends.  The op-ed piece suggests that the  plan would encourage product uniformity and deprive students of the benefits of developing technological innovation.
  3. On February 8, The New York Times reported that the CFPB would soon release proposed payday loan rules expected to impose ability-to-repay requirements and limits on rollovers.  However, a study entitled “Do Defaults on Payday Loans Matter” by Ronald Mann, a Columbia Law School professor, found that payday loan defaults do not materially affect credit scores because the credit scores of payday borrowers previously had dropped and any further drop is often offset by subsequent increases in the scores.  Thus, the default does not appear to cause harm to the borrower, and imposition of an ability to repay requirement is not needed, he believes.  Another study, “Payday Loan Rollovers and Consumer Welfare” by Professor Jennifer Lewis Priestley of Kennesaw State University, finds that borrowers with a higher number of rollovers experience more improvements in their credit scores than do borrowers with fewer rollovers.  It is also anticipated that the CFPB may follow a recommendation of the Pew Charitable Trusts that a payday loan should be presumed unaffordable and thus be unlawful if it requires a borrower to pay more than five percent of pretax income.  However, another study, this by Peter Toth, a candidate for a Ph. D. in Economics at the University of Texas, “Measures of Reduced Form Relationship Between the Payment-Income Ratio and the Default Probability” analyzed 87 million payday loans made over five years by five payday lenders.  The study found no correlation between defaults and any particular ratio of payments to income.
  4. On February 10, the Office of the Inspector General of the Federal Reserve Board and CFPB released a Work Plan that presents the audits the Office is conducting.  It describes ten ongoing projects, including audits of the CFPB’s contract management process, diversity and inclusion processes, headquarters renovation costs, public consumer database, space planning activities, data security controls, and distribution of funds from the civil penalty fund.  In addition, the I-G is currently evaluating the CFPB’s hiring process, coordination with other regulatory agencies, and the effectiveness of its examination workpaper documentation.  Planned projects include audit of the CFPB’s pay and compensation program, as well as evaluation of its enforcement office’s processes for protecting confidential information and its compliance with requirements for issuing civil investigative demands.
  5. Also on February 10, the CFPB’s Office for Older Americans released a “Snapshot of Reverse Mortgage Complaints, December 2011 – December 2014.”  The largest volume of complaints concerned requests for changes to loan terms, e.g. to add additional borrowers in order to extend the life of the loan or for reduced interest rates; most of these complaints resulted from confusion over loan terms.  Many complaints dealt with unresponsiveness of servicers.  Other complaints included surviving spouses losing their homes upon the deaths of borrowing spouses and foreclosure due to nonpayment of property taxes or homeowners insurance.  Since December, 2011, the Department of Housing and Urban Development has issued ten policy changes to its reverse mortgage program which, the CFPB believes, should reduce the number of complaints about new reverse mortgages.  However, that will not help in the case of older reverse mortgages.
  6. Also on February 10, the CFPB released a February 5 letter from the Federal Trade Commission (FTC) to CFPB Director Cordray describing the FTC’s efforts during the past year in the debt collection area.  The letter calls the CFPB a “valuable partner” and anticipates that the partnership will become stronger.  The letter cites two join amicus briefs filed with the CFPB and their co-hosting of an October 14 day-long roundtable in Long Beach, California on collection of debts from Latino consumers.  One of those briefs was characterized as “well-reasoned” by the Seventh Circuit U. S. Court of Appeals in an opinion in which the court held that a time-limited settlement demand in a consumer dunning letter could violate the Fair Debt Collection Practices Act (FDCPA) even absent an explicit threat of litigation.[1]  In their joint brief, the CFPB and FTC argued that a debt collector who sues or threatens suit on a debt barred by the statute of limitations violates the FDCPA.  The Seventh Circuit expressly deferred to the “empirical research and expertise” of the CFPB and FTC.  The CFPB and FTC filed a similar joint amicus brief on the same issue in the Sixth Circuit, which also agreed with their arguments.[2]  The CFPB and FTC have filed a joint amicus brief in another case, this in the Ninth Circuit, on the issue of what constitutes an “initial communication” with a debtor that triggers the obligation to provide the debtor a so-called “validation notice” with details of the debt and explanation of some of the debtor’s rights, but no decision has been made in that case yet.
  7. Also on February 10, the CFPB sued NewDay Financial for deceptive advertising and kickbacks, imposing a $2 million civil money penalty.  NewDay originates mortgage refinance loans and markets its services by direct mail.  The CFPB alleged that NewDay falsely claimed an endorsement by a veterans’ organization, paying “lead generation fees” to the organization, which NewDay did not disclose to consumers.  The CFPB asserted that failure to disclose was unfair and deceptive.
  8. On February 12, , the CFPB, working with the FTC, charged three mortgage companies with misleading consumers by falsely advertising that their loans were approved by the government.  The CFPB and FTC apparently reviewed 800 randomly selected mortgage ads in newspapers, the Internet, and direct mail solicitations.  Two of the three lenders, Flagship Financial Group and American Preferred Lending, settled and paid penalties of $225,000 and $85,000 respectively.  The third, a reverse mortgage lender, All Financial Services, is disputing the charges in a case pending in the U. S. District Court for the District of Maryland.  Allegedly it sent mailers that had an eagle resembling the Great Seal of the United States and also contained the words “Government Lending Division” and “Housing and Recovery Act of 2008 Eligibility Notice.”
  9. On February 13, the FDIC announced release of the third in a series of technical assistance videos on the CFPB’s mortgage servicing rules.  The videos are intended to help bank compliance officers.
  10. On February 16, the Huffington Post published criticism of the CFPB’s new mortgage rate tool.  The criticism was by a Professor of Finance Emeritus from the Wharton School at the University of Pennsylvania, Jack M. Guttenberg.  The professor advises consumers to “ignore” the CFPB tool as it is “completely useless.”  The tool he notes shows a distribution of rates providing no guidance on how to decide which rate a lender should match or better.  The distribution comes from a mix of large banks, regional banks, and credit unions and does not reflect competitiveness of the market.  Also, the CFPB tool is refreshed every evening reflecting rates set that morning, and, thus, is always stale as rates usually change overnight.  He also notes that the tool only quotes rates and does not take into account fixed lender fees which affect the total cost to the consumer.  Finally he points out that the tool does not apply to many types of residential mortgage transactions, e.g. loans for condos, refis in which the borrower takes some cash or with 30 or 45 day rate locks, loans for investment properties and second homes, and deals that do not contemplate a tax and insurance escrow, but the CFPB website does not disclose this limitation.
  11. On February 17, The Hill newspaper reported that Congressmen Steve Stivers (R-OH) and Tim Walz (D-MN) introduced a bill that would establish a separate inspector-general for the CFPB.
  12. On February 18, Wards Auto reported that a coalition of auto lenders (including the American Financial Services Association (“AFSA”), the American Bankers Association, the Consumer Bankers Association, the Financial Services Roundtable, and the U. S. Chamber of Commerce) had written to the CFPB asking the CFPB to consider a study commissioned by the AFSA that concluded that the CFPB’s proxy methodology for identifying racial discrimination in indirect auto lending is seriously flawed.  (The CFPB’s methodology uses a borrower’s surname and address as a proxy for race.)
  13. On February 19, CFPB Director Cordray addressed the CFPB’s Consumer Advisory Board meeting in Washington, D.C.  He discussed credit reporting and lauded credit card issuers who have begun making credit scores available to consumers.  He said that the CFPB is prompting credit reporting agencies (CRAs) to pass along  to data furnishers all of the  relevant information that consumers provide when disputing an item  rather than reducing the matter to a bare dispute code with no factual support.  He mentioned that the CFPB will require CRAs to provide the CFPB with regular, standardized accuracy reports that will specify the number of times consumers dispute information in a given period and to list furnishers with the most disputes.  He also asserted that a 95% level of accuracy of information, as high as that might sound, unfairly harms more than ten million consumers.  Finally, he said that credit scoring models are re-evaluating medical debt to avoid overly penalizing for such debts because a single medical incident can result in multiple  bills from multiple providers, each of which may or may not be covered by insurance, causing enormous consumer confusion as to which bills for which they are responsible.
  14. Also on February 19, the CFPB released a report “Consumer Voices on Credit Reports and Scores.”  The report concludes that consumers are confused about credit reports and scores and that greater consumer engagement and education is needed.  (The CFPB hired a research firm, Abt Associates, to organize focus groups with 308 consumers.)  Consumers were puzzled when they encountered differences in information across their various reports, felt that their credit scores were not completely within their control, and were unclear as to which of multiple credit scores lenders use and how.
  15. Also on February 19, the CFPB proposed a regulation  to suspend temporarily for one year a requirement that credit card issuers send their card agreements to the CFPB every quarter for the CFPB to post on its website.  (This would not affect an ongoing requirement that card issuers post such agreements on their own websites.)  The CFPB apparently is concerned about the administrative burden on its staff to review manually, catalog, and upload e-mailed new and revised agreements and remove old agreements.   During the one-year suspension, the CFPB will work on a way for issuers to upload agreements directly to the CFPB’s website.
  16. On February 23, the CFPB announced that it would hold a field hearing on March 10 in Newark, New Jersey on arbitration.  Often CFPB field hearings are accompanied by new pertinent regulatory announcements, and, thus, it is expected that the long-awaited CFPB study on arbitration which, by statute, will trigger rulemaking to implement its proposals, may be released on that date.
  17. Also on February 23, CFPB Director Cordray addressed the National Association of Attorneys General.  He talked about “the four Ds” that interfere with justice and dignity for consumers: deceptive marketing (including by law firms that purport to help consumers resolve their debts), debt traps (payday loans), dead ends (debt collection), and discrimination in indirect auto lending.  In discussing deceptive marketing, he asserted that consumer financial contracts have become too  long and complicated.  He also mentioned that the CFPB has given 22 state AGs and 28 state bank regulators real time access to the CFPB’s consumer complaint database.
  18. On February 25, the CFPB announced  that it was accepting job applications for the position of Regulatory Implementation and Guidance Specialists, experienced professionals to join it to facilitate implementation of new rules and provide guidance and support. The application process closed on the earlier of its receipt of the 400th application or March 4.
  19. Also on February 25, Bloomberg View published an article by Ramesh Ponnuru criticizing the CFPB’s approach to fair lending issues in the indirect auto lending market.  First, evidence of widespread harm is thin as it is based on using surname and address as proxies for race and ethnicity.  Second, the CFPB’s legal authority is not clear as auto dealers are exempt from the CFPB’s jurisdiction.  Third, the National Automobile Dealers Association has offered an alternative way of reducing discrimination, a program modeled on earlier Department of Justice consent decrees that antedate the CFPB.  The article also mentions that last year 149 Congressmen, including many liberal Democrats, co-sponsored a bill to stop the CFPB from regulating  in this area, and that bill is expected to be re-introduced this year.
  20. On March 2, the U.S. District Court for the Southern District of Florida, at the behest of the CFPB, issued a preliminary injunction against a law firm (The Hoffman Law Group) and four affiliated firms (Nationwide Management Solutions LLC, Legal Intake Solutions LLC, BM Marketing Group LLC, and File Intake Solutions LLC).  The defendants are all now in receivership.  The defendants allegedly collected more than $5 million in fees persuading homeowners to join “mass-joinder” suits against mortgage lenders.  They allegedly charged each of approximately 1,200 consumers $6,000 upfront to join litigation intended to induce mortgage lenders to grant mortgage loan modifications or foreclosure relief and then a $495  monthly fee even though the firm allegedly sometimes delayed for more than a year before filing.  The litigation usually was unsuccessful.  The preliminary injunction closes down the websites of the defendants.  The case was originally filed in July, 2014, but the defendants did not appear.  The CFPB has indicated it will eventually seek a default judgment, but asked for the preliminary injunction in the interim.
  21. On March 3, CFPB Director Cordray testified to the House Committee on Financial Services about the CFPB’s sixth Semi-Annual Report to Congress.  In that report he provided an overview of the CFPB’s work.  On the regulatory front, he explained that the CFPB initially gave priority to mortgage market rules: ability-to-repay, mortgage servicing, and streamlined disclosure, and now is  trying to encourage more mortgage lending by smaller creditors such as community banks and credit unions.  The ability-to-repay rule is sometime called the “qualified mortgage rule” and  Committee Chairman Jeb Hensarling (R-TX) referred to that rule as the “quitting mortgage” rule as it reportedly has caused some lenders to stop making residential mortgage loans.  Chairman Hensarling asked Chairman Cordray to explain a Federal Reserve study that found that one in five consumers no longer qualifies for a mortgage loan under the CFPB rule.  Chairman Cordray responded that the Federal Reserve study was based on an earlier version of the rule which has since been broadened and that, in any event, someone who does not qualify for a mortgage under the CFPB rule may look to help from FNMA and FHLMC.  Most recently,  Chairman Cordray also explained, the CFPB has revised its remittance rule, is considering revisions to its Home Mortgage Disclosure Act regulation that would exempt 25 percent of banks and credit unions from reporting, and amended its privacy rule to reduce the burden of mailing privacy notices which may save industry $17 million a year.  On the enforcement front, he claimed that the CFPB has delivered $5.3 billion in relief to more than 15 million consumers, and that includes $1.6 billion secured in the last six months.  He also mentioned that the CFPB has received more than 540,000 consumer complaints.  House Financial Services Committee Ranking Member Maxine Waters (D-CA) issued a press release praising the accomplishments of the CFPB and criticizing  “the many ways Republicans have worked to harm” the CFPB.  At the hearing, Republicans urged the CFPB to stop limiting the way banks charge overdraft fees, which the CFPB equates to charging 17,000% interest based on an average overdraft fee of $34 and a usual transaction of $24 or less.  The CFPB has already proposed regulations to treat overdrafts on prepaid cards as extensions of credit and is considering further regulation of overdrafts.  Ranking Member Waters calls for a total ban on overdrafts, but Republicans caution that their constituents want to be able to use overdrafts especially in emergencies and they urge that the CFPB not interfere with that.
  22. Also on March 3, Congresswoman Maxine Waters (D-CA), the Ranking Member of the House Committee on Financial Services, wrote to Committee Chairman Jeb Hensarling (R-TX) expressing concern about a new subpoena policy adopted by the Chairman.  The new policy gives the CFPB two weeks to respond to requests for information before facing the threat of an automatic Congressional subpoena.  Under the new policy, the Chairman has the authority to issue such subpoenas.  Congresswoman Waters suggested that such subpoenas ought only to be issued after thoughtful deliberation and as a tool of last resort.  She said that Republican requests, consisting of 30 inquiries and at least 73 requests, have drained CFPB staff time and resources and produced more than 5,600 pages of documents.  Apparently, the new policy is one adopted by 15 House Committee Chairs.
  23. Also on March 3, The Hill reported that Representative Randy Neugebauer (R-TX)  announced plans to introduce legislation that would replace the CFPB director position with a bipartisan five-member commission appointed by the President.  Congressman Neugebauer asserted that Senator Elizabeth Warren (D-MA), the chief architect of the CFPB, and President Obama originally favored the commission structure.  A spokesperson for Senator Warren responded that she favors  the single director model.  House Financial Services Committee Ranking Member Maxine Waters (D-CA) commented that a commission structure would weaken the CFPB’s ability to respond quickly to concerns of both industry and consumers.
  24. On March 4, the Chairs of the Congressional Progressive, Hispanic, Black, and Asian Pacific Caucuses wrote to CFPB Director Cordray urging him to implement rules that would prohibit abusive and fraudulent payday loans.  Specifically, the letter asks that the CFPB implement rules that would require payday lenders to determine ability to repay, not sanction any series of repeat loans, establish an outer limit on length of indebtedness as short as 90 days in a twelve-month period, and bar lenders from using post-dated checks or electronic access to a borrower’s checking account as evidence of ability to repay.
  25. Also on March 4, during a House Appropriations Subcommittee on Financial Services and General Government hearing on President Obama’s 2016 budget request for the Treasury Department, Representative Sanford Bishop (D-GA) asked Treasury Secretary Lew whether the CFPB has conducted a cost-benefit analysis of its 870-page notice of proposed rulemaking on prepaid cards.  Congressman Bishop called the proposed rule “long and overwhelming” and said it was proposed without “any indication or forewarning” of its length.  He was concerned that the CFPB denied a request from members of Congress that the 90-day comment period be extended by 60 days.   The Congressman’s focus is the effect of the proposal on government cards used to pay benefits which is one tenth the cost of using paper checks.  Secretary Lew did not know whether the CFPB had performed a cost-benefit analysis, but said that no one is proposing the elimination of prepaid cards.  Congressman Bishop responded that the costs of complying with an 870-page rule would reduce the cost advantage that prepaid cards have over paper checks.
 

[1] Delgado v. Capital Mgmt. Servs. LP, No. 12-2030.

[2] Buchanan v. Northland Group, Inc. No. 13-2523.