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The CFPB: Regulatory Past, Present and Future Saltmarsh, Cleaveland & Gund September 25, 2014 1 Presented by: Colgate Selden Alston & Bird LLP
The CFPB: Regulatory Past,
Present and Future
Saltmarsh, Cleaveland & Gund
September 25, 2014
1
Presented by:
Colgate Selden
Alston & Bird LLP
Overview of Topics
I. The Consumer Financial Protection Bureau
II. Ability-to-Repay Rule and Qualified Mortgages
III. Loan Originator Compensation
IV. UDAAP & Other Consumer Protections
V. TILA-RESPA Integrated Disclosure
VI. Vendor Management
VII.Enforcement Actions
VIII.Future CFPB Rulemaking
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The Consumer Financial Protection Bureau
Background & Insights
The U.S. Department of the Treasury formed the CFPB
Implementation Team soon after July 21, 2010
The Consumer Financial Protection Bureau (CFPB) officially
opened on July 21, 2011 (the Designated Transfer Date)
Established by Congress pursuant to The Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (Dodd-
Frank)
Elizabeth Warren
o Special Assistant to the President
o Special Advisor to Secretary of the Treasury for the CFPB
(from September 2010 – August 2011)
Raj Date: Special Advisor to Secretary until Recess Appointment
Richard Cordray: first Director of the CFPB
3
The Consumer Financial Protection Bureau
Specific Duties
Write rules, supervise companies, and enforce federal consumer
financial protection laws
Restrict unfair, deceptive, or abusive acts or practices
Take consumer complaints
Promote financial education
Research consumer behavior
Monitor financial markets for new risks to consumers
Enforce laws that outlaw discrimination and other unfair
treatment in consumer finance
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The Consumer Financial Protection Bureau
The CFPB is organized into six divisions:
1. Supervision, Enforcement and Fair Lending
2. Research, Markets and Regulations
3. Consumer Education and Engagement
4. Legal Division
5. External Affairs
6. Operations
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The Consumer Financial Protection Bureau
Outreach and Information Gathering
Associate Director of External Affairs
Public outreach and events
listening sessions
field hearings in different parts of the country to collect information
and give remarks on topics such as mortgage policy, financial
education, debt collection, credit reporting
Field hearings feature remarks by CFPB director and testimony
from consumer groups, academics, industry representatives
Financial Education Programs: Your Money, Your Goals
programs have been held in at least 21 states
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Ability-to-Repay
Under the Ability-To-Repay (ATR) rule, a creditor must
make a reasonable, good-faith determination that the
consumer has a reasonable ability to repay the loan.
What is a reasonable, good-faith determination?
Courts would likely consider:
o Underwriting standards
o Consumer payment history
o Inconsistency in applying underwriting standards
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Ability-to-Repay
A creditor must consider 8 specific underwriting factors:
1. Currently or reasonably expected income or assets
other than the value of the dwelling that secures the
loan;
2. Current employment status if employment income is
relied on in determining repayment ability;
3. Monthly payment on the covered transaction;
4. Monthly payment on any simultaneous loan;
5. Monthly payment for mortgage-related obligations;
6. Current debt obligations, alimony, and child support;
7. Monthly debt-to-income ratio or residual income; and
8. Credit history.
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Ability-to-Repay
Liability Under the ATR Rule
Consumers can bring claims against lenders based on
their failure to comply with the ATR rule
If the consumer is successful such a claim, a lender
could be liable for:
o Up to 3 years of finance charges and fees the consumer paid,
and
o The consumer’s legal fees
3-year statute of limitations on ATR claims brought as
affirmative cases
After 3 years, ATR claims may still be brought as a
defense to foreclosure
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Qualified Mortgages
A creditor that originates Qualified Mortgages (QMs) is
presumed to have complied with the ATR requirement.
If a loan is not higher-priced and satisfies the QM
criteria, a court will conclusively presume that the lender
complied with the ATR rule (safe harbor).
If a higher-priced loan satisfies the QM criteria, a court
will presume it complies with the ATR requirements, but
the consumer may rebut the presumption.
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Qualified Mortgages
There are four general types of QMs:
1) General
2) Special (Transitional or the “Patch”)
3) Small Creditor Portfolio
4) Balloon Payment
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Qualified Mortgages for Small Creditors
What is a Small Creditor?
A “small creditor” is one that:
Has less than $2 billion in assets, and
Makes 500 or fewer first-lien mortgages subject to the ATR
requirements.
Two types of QMs can be originated by small creditors
only:
Small Creditor QM (§1026.43(e)(5))
Balloon-Payment QM (§1026.43(e)(6))
Small Creditors can also originate General and Temporary
QMs
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Qualified Mortgages for Small Creditors
There is a different threshold for “higher priced” QMs for
small creditors –
o Generally, QMs are higher priced if they have an APR that
exceeds the APOR by 1.5% or more and 3.5% or more for
subordinate-lien loans
o Small Creditor QMs are considered higher-priced if they have an
APR that exceeds 3.5% or more for both first-lien and
subordinate-lien loans
Small Creditor QMs that are not higher-priced are
conclusively presumed to comply with the ATR rule.
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Qualified Mortgages for Small Creditors
Small Creditor QM (§1026.43(e)(5)
• Underwrite based on a fully-amortizing schedule using the
maximum rate permitted during the first five years after the date
of the first periodic payment;
• Loan not subject to a forward commitment;
• Consider and verify consumer’s income or assets;
• Consider the consumer’s debt-to-income ratio or residual
income, although there is no specific threshold for DTI or
residual income [unlike the General QM Rule]
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Qualified Mortgages for Small Creditors
Balloon-Payment QM (§1026.43(e)(6))
On or before January 10, 2016
o Only need to satisfy asset size and number of originations
requirements.
o QMs originated in this period will retain their QM status after January
10, 2016.
After January 10, 2016
o Must operate predominately in rural or underserved areas;
o Must have a fixed interest rate and periodic payment that would fully
amortize the loan over 30 years or less;
o Loan must have a term of 5 years or more;
o Loan must not be subject to a forward commitment;
o Must determine the consumer will be able to make the scheduled
periodic payments other than the balloon payment;
o Consider and verify the consumer’s income or assets, and debts,
alimony and child support; and
o Consider the consumer’s debt-to income ratio or residual income.
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Qualified Mortgages
Common requirements for all QMs:
Prohibition on negative amortization or interest-only
payments;
Prohibition on loan terms in excess of 30 years; and
Limitations on points and fees (generally 3 percent of the
loan balance, but larger amounts are allowed for loans
under $100,000)
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ATR-QM Comparison Chart
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ATR-QM Comparison Chart
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Loan Originator Compensation
On January 20, 2013 the CFPB issued a final rule on LO
Comp under TILA, as amended by Dodd-Frank. Revised
the Federal Reserve Board’s LO Comp Rule.
LO defined as: “a person who takes an application, offers, arranges,
a assists a consumer in obtaining or applying to obtain, negotiates,
or otherwise obtains or makes an extension of consumer credit for
another person.”
o Excludes persons who perform administrative or clerical tasks
o Teller/Receptionist: not an LO as long as this person does not
discuss credit terms that may be available to that person
selected based on the person’s financial characteristics and
does not refer the consumer, based on the LO’s assessment of
the consumer’s financial characteristics, to a particular LO
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Loan Originator Compensation
The rules prohibit:
Compensating a LO based on a term of a transaction or a
“proxy” for a term of a transaction
Proxy for a term: (i) consistently varies with a factor or term over a
significant number of transactions, and (ii) the LO has the ability to
manipulate the factor.
Examples from the final rule on what a proxy is
Dual Compensation: a LO receives compensation from the
consumer and an additional party
“Steering,” or directing a consumer to execute a transaction
based on the fact that doing so will result in higher compensation
for the LO from the creditor
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Loan Originator Compensation
Exception to term of transaction prohibition
• Compensation under a non-deferred profits-based
compensation plan is permitted IF:
o The compensation paid does not exceed 10% of the LO’s total
compensation, or
o The LO served in that role for ten or fewer transactions during
the 12-month period preceding the date of compensation
determination.
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Loan Originator Qualifications
LOs must comply with licensing, registration and other
provisions of the Secure and Fair Enforcement of Mortgage
Licensing Act (SAFE Act).
Pursuant to Dodd-Frank, for employees not covered by the
SAFE Act or state implementing laws, loan originator
organizations must:
o Obtain a state and national criminal background check
o Obtain a credit report
o Obtain information from the National Mortgage Licensing System
and Registry
The rule establishes standards for determining employee
qualification that are mostly consistent with those in the SAFE
Act.
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Consumer Protections
Pursuant to Dodd-Frank, it is unlawful for any provider of
consumer financial products or services or a service
provider to engage in any unfair, deceptive or abusive act
or practice (UDAAP).
Examples of UDAAPs:
• Collecting fees not expressly authorized by the agreement
creating the debt or permitted by law
• Falsely representing the character, amount, or legal status of
the debt
• Misrepresenting to consumers that their debts would be
waived or forgiven if they accepted a settlement offer
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Consumer Protections
UDAAP Prohibition – Deceptive Acts
An act is likely to be considered deceptive if:
o It misleads or is likely to mislead the consumer;
oThe consumer’s interpretation is reasonable under
the
circumstances; and
oThe misleading act is material.
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Consumer Protections
UDAAP Prohibition – Unfair Acts
An act is likely to be considered unfair if:
o It causes or is likely to cause substantial injury;
oWhich cannot reasonably be avoided by
consumers themselves; and
o Is not outweighed by countervailing benefits to
consumers or to competition.
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Consumer Protections
UDAAP Prohibition – Abusive Acts
An act is likely to be considered abusive if it:
o Materially interferes with the ability of a consumer to
understand a term or condition of a consumer financial
product or service; or
o Takes unreasonable advantage of a consumer’s –
• lack of understanding of the material risks, costs or
conditions of the product or service;
• inability to protect his or her interests in selecting or using
a consumer financial product or service; or
• reasonable reliance on a covered person to act in his or
her interests.
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Consumer Protections
FTC Credit Practices Rule
Prohibits use of certain provisions in consumer credit
contracts
Prohibits misrepresentation of the nature or extent of cosigner
liability
Prohibits pyramiding of late fees
Although not issued by the CFPB, this rule can be enforced
by the CFPB to the extent it applies to creditors within the
CFPB’s enforcement authority. (Interagency Guidance
Regarding Unfair or Deceptive Credit Practices, August 22,
2014)
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Consumer Protections
Anti-Discrimination Rules
Equal Credit Opportunity Act (ECOA)
Fair Housing Act (FH Act)
Together, ECOA and the FH Act prohibit discrimination
on the basis of: race, color, religion, national origin, sex,
age, marital status, familial status, disability, and receipt
of income from a public assistance program.
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Consumer Protections
Anti-Discrimination Rules
ECOA and the FH Act prohibits the following actions:
o Selectively discouraging or selectively encouraging credit
applicants
o Varying the terms of the credit offered
o Treating a borrower differently in servicing a loan or invoking
default remedies
The prohibition applies to any aspect of a credit
transaction
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TILA-RESPA Integrated Disclosure First Look
TILA-RESPA Integrated Disclosure Rule – First Look
Final rule issued November 20, 2013; effective August 1,
2015.
Dodd-Frank required the CFPB to issue rules that
combine TIL & GFE disclosures.
Applies to most closed-end consumer mortgages.
Does not apply to home-equity lines of credit, reverse mortgages
Does not apply to creditors that make five or fewer mortgages a
year
Very important: Rule is under TILA and Reg. Z instead of
RESPA and Reg. X
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TILA-RESPA Integrated Disclosure First Look
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These forms will “_______”
TILA-RESPA Integrated Disclosure First Look
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TILA-RESPA Integrated Disclosure First Look
Loan Estimate
• Designed to provide consumers with good faith estimate
of the costs and terms of the transaction.
• Loan terms
• Projected payments
• Closing costs
• Must be provided to consumers no later than 3 days
after they submit loan application.
• Must be in writing and contain the information prescribed
by §1026.37, as shown on the CFPB’s model form H-24.
• Tolerances/services you can and cannot shop for
• Revised Estimates
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TILA-RESPA Integrated Disclosure First Look
Closing Disclosure
• Reflects the actual terms and costs of the transaction.
• Integrates and replaces the existing HUD-1 and final TIL
disclosure.
• Must be provided to consumers 3 business days before
they close on the loan.
• Must be in writing and contain the information prescribed
by §1026.38, as shown on the CFPB’s model form H-25.
• If actual terms or costs change after CD provided but
prior to consummation, the creditor must provide a
corrected disclosure—new 3-day waiting period for
certain changes.
• Cures
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Vendor Management
Deceptive Practices in the Marketing of Credit Card Add-on
Purchases
CFPB Bulletin 2012-06
Deceptive practices include:
o Failing to adequately disclose important product terms and
conditions
o Enrolling consumers in programs without their affirmative
consent
o Billing consumers for services that were not performed or
activated
Vendor Oversight
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Vendor Management
Steps to limit potential for violations and harm:
Marketing materials should be accurate and not
misleading.
Employee compensation plans should not create
incentives to provide inaccurate information and should
require adherence to institution-specific guidelines.
Scripts and manuals should:
o Direct the telemarketers to provide accurate information
o Require clear affirmative and informed consent from consumers
o Make clear to consumers that the purchase of add-on products is
not required as a condition of obtaining credit, unless there is
such a requirement
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Enforcement Actions
First Investors Financial Services Group, Inc. (August 20,
2014 order)
First Investors offers loans directly to consumers to finance the
purchase of automobiles and indirectly to consumers by going
through auto dealers.
First Investors discovered flaws in a computer system that was
providing inaccurate information to credit reporting agencies in
April 20 and notified the third-party vendor but did nothing more
to correct the problem.
There was no actual harm to consumers, but the CFPB treated
First Investors as the vendor for purposes of compliance and
fined them $2.75 million.
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Enforcement Actions
ACE Cash Express (July 10, 2014 order)
Ordered to provide $5 million in consumer refunds and pay a $5
million penalty for violations.
CFPB found ACE used illegal debt collection practices, including
harassment, false threats of lawsuits or criminal prosecution, to
pressure borrowers into taking out additional loans they could
not afford
Consent order does not specify the number of frequency of
problematic phone calls; ACE states in its press release that an
independent expert found problems with only 4% of the calls it
randomly sampled.
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Enforcement Actions
Stonebridge Title Services Inc. (June 12, 2014 order)
Ordered to pay $30,000 for paying illegal kickbacks or
referrals in violation of Section 8 of RESPA, which
prohibits kickbacks and payment of unearned fees in
residential real estate transactions
CFPB charged that Stonebridge paid commissions to
more than 20 independent sales people who referred
title insurance business to Stonebridge.
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Enforcement Actions
Bank of America (April 9, 2014 order)
Bank of America was ordered to provide an estimated $727
million in relief to consumers and $20 million civil monetary
penalty to CFPB for deceptive marketing practices and unfair
billing practices.
Deceptive marketing practices related to misleading consumers
about credit card payment protection products
Unfair billing practices related to identity protection add-on
products.
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Enforcement Actions
Castle & Cooke Mortgage, LLC
Originated about $1.3 billion in loans in 2012.
CFPB filed a complaint against the company and two of its
officers (President and Sr. V.P. of Secondary Markets) for
allegedly paying illegal bonuses to LOs who steered consumers
into mortgages with higher interest rates.
CFPB Estimated that more than 1,100 illegal quarterly bonuses
paid to over 215 LOs.
Settlement:
Equitable Monetary redress, joint and severally, of $9.2 million
Civil money penalty, jointly and severally, of $4 million
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Future CFPB Rulemaking
CFPB Rulemaking Agenda (updated Spring 2014)
Final Rule Stage
Restatement of Federal Consumer Financial Law Regulation
Rules of Practice for Issuance of Temporary Cease-and-Desist
Orders
Proposed Rule Stage
Requirements for Prepaid Cards (Regulation E)
Home Mortgage Disclosure Act (Regulation C)
Further Amendments to 2013 Mortgage Rules
Pre-rule stage
Payday Loans and Deposit Advance Products
Debt Collection Rule
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Future CFPB Rulemaking
Proposed Changes to Mortgage Rules (April 30, 2014)
Points and fees: proposal would allow lender that discovers it
exceeded points and fees cap to refund excess under certain
circumstances and still be a QM
o Generally points and fees cannot exceed 3% of principal
o Refund must occur within 120 days after the loan is made
Changes to the small servicer definition
Nonprofit ATR exemption amendment
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Future CFPB Rulemaking
Rule to Improve Information about Access to Credit in the
Mortgage Market
Proposed rule issued on July 24, 2014
Would update the Home Mortgage Disclosure Act (HMDA), as
mandated by Dodd-Frank
Would require lenders to make additional disclosures that that
would be helpful to better understand aspects of the mortgage
market
Would simplify reporting requirements
Small institutions with lower than 25 mortgages a year would not
have to report
Open for public comment through October 29, 2014
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Future CFPB Rulemaking
Consumer Protection Rules on Debt Collection Practices
CFPB issued an Advance Notice of Proposed Rulemaking in
November 2013.
In March 2014, the CFPB issued a report on the more than
30,000 consumer complaints it has received about the debt
collection market since July 2013.
The CFPB is collecting information to determine whether new
rules can improve practices regarding:
o Accuracy and completeness of information transferred from
creditor to third parties
o Adequacy and clarity of information provided to consumers
o Communication tactics used by debt collectors
Creditors to be subject to debt collection rules?
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Future CFPB Rulemaking
Rules on Payday Lending
• The CFPB is in the “late stages” of writing rules on short-
term lending.
• A CFPB study on payday loans concluded that about
20% of such loans result in a loan sequence that
involves seven or more loans.
• Over 80% of payday loans are rolled over or followed by
another loan within 14 days.
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