Transcript Deposit Score

Preparing for the CFPB in 2012
Presented by
Andrew Campbell
Ober|Kaler
© Copyright 2012. Sheshunoff Consulting + Solutions. All rights reserved.
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Central Mission
“The central mission of the Consumer Financial
Protection Bureau (CFPB) is to make markets for
consumer financial products and services work for
Americans — whether they are applying for a mortgage,
choosing among credit cards, or using any number of
other consumer financial products.” -- CFPB Website
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AGENCY HISTORY
• Created by Title X of the Dodd-Frank Act, the Consumer Financial
Protection Act of 2010, to address “widespread failures in consumer
protection and rapid growth in irresponsible lending practices.”
• Agency formed to:
– focus directly on consumers, rather than on bank safety and soundness
or on monetary policy
– heighten government accountability by consolidating in one place
responsibilities that had been scattered across government
– Exercise responsibility for supervision and enforcement of consumer
protection laws and providers of consumer financial products and
services that escaped regular Federal oversight
– protect families from unfair, deceptive, and abusive financial practices
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Inherited Laws
Laws inherited to the CFPB:
• Electronic Fund Transfer Act (except with respect to Section 920)
• Equal Credit Opportunity Act
• Fair Credit Reporting Act (except with respect to red flag rules and
proper disposal of records
• the Fair Debt Collection Practices Act
• Consumer Privacy
• the Truth in Savings Act
• Section 626 of the Omnibus Appropriations Act, 2009 (mortgage
advertising; foreclosure and modification scams)
• Supervision of non-insured depository institutions
• Consumer Leasing Act
• the Interstate Land Sales Full Disclosure Act.
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Inherited laws continued
Mortgage Related Laws
• the Truth in Lending Act (“TILA”)
• the Home Mortgage Disclosure Act (“HMDA”)
• the Real Estate Settlement Procedures Act (“RESPA”)
• the S.A.F.E. Mortgage Licensing Act
• Alternative Mortgage Transaction Parity Act of 1982
• the Home Owners Protection Act of 1998 (“HOPA”)
• the Home Ownership and Equity Protection Act of 1994 (“HOEPA”)
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Agency Jurisdiction
“A senior agency official said the bureau potentially could be
responsible for tens of thousands or even 100,000 firms. To help cull
the list, the agency is considering requiring certain firms to register
with the bureau to help it determine which companies should fall
under its supervision.”
Solomon, Deborah and Jackson Randall, Maya, “Agency Outlines Role,” The Wall
Street Journal, June 24, 2011
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Firms covered by CFPB jurisdiction
• Large depositories (more than $10 billion in assets)
• Lenders and loan services, including payday lenders, automobile
lenders, mortgage-related businesses, and private student loan
providers
• Loan acquirers, purchasers, sellers, and brokers
• Sellers, providers, and issuers of stored-value instruments
• Those engaged in check cashing, collecting, and guaranty services
• Payment processors
• Providers of credit counseling, debt management, and debt
settlement services
• Consumer reporting services
• Debt collectors
• Service providers to any of the above persons
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Smaller Depository Institutions
• CFPB will not generally have examination authority over
banks and credit unions with under $10 billion in assets
• CFPB may require reports of these entities to support its
exams of other depository institutions or assess risks to
consumers and markets
• “Ride along” provision - CFPB may include examiners on
a “sampling” basis on exams of smaller banks and credit
unions
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Exempt Persons
• Attorneys
• Merchants, retailers, and other sellers of non-financial goods or
services
• Realtors
• Manufactured and modular home retailers (who do not offer
consumer financial products or services)
• Tax preparers
• Persons regulated by state insurance or state securities regulators
• Persons regulated by the SEC, CFTC, and Farm Credit
Administration
• Auto dealers
• Employee benefit and compensation plans
• Activities related to charitable contributions
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Two Types of Authority
• SUPERVISORY AUTHORITY, which includes the power to examine
and require reports from the persons that it supervises to:
– Assess compliance with Federal consumer financial law
– obtain information about such persons’ activities and compliance
systems or procedures
– detect and assess risks to consumers and to the consumer
financial markets
• ENFORCEMENT AUTHORITY, which allows it to bring to bear its
arsenal of enforcement powers against an entity that has violated
one of its inherited areas of jurisdiction or committed an unfair,
deceptive, or abusive act or practice (UDAAP)
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Supervisory Authority
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Dodd-Frank gave the CFPB supervisory authority, which is the
power to examine and require reporting (think bank regulator), over
Very large banks (over $10 billion), thrifts, and credit unions, and
their affiliates, and
Nonbank covered persons of all sizes engaged in the following
activities
– Origination, brokerage, or servicing of residential mortgage loans
secured by real estate, and related mortgage loan modification or
foreclosure relief services, mortgage servicers are subject to
examination
– private education lending, and
– payday lending markets
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Supervisory Authority continued
• The CFPB also has the authority to supervise nonbank ‘‘larger
participant[s]’’ in markets for other consumer financial products or
services.
• The Bureau must define such ‘‘larger participants’’ by rule to be
issued by July 21, 2012.
• February 17 proposal, the Bureau proposed to define larger
participants in two markets:
– consumer debt collection and
– consumer reporting.
• The Bureau intends that this proposal and subsequent initial rule will
be followed by a series of rulemakings covering additional markets
for consumer financial products and services.
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Enforcement Authority
• Nonbank entities are subject to the CFPB’s regulatory
and enforcement authority regardless of size or whether
they are subject to the Bureau’s supervisory authority;
i.e., everybody is subject to enforcement action
• The CFPB is in the position of drafting rules that interpret
the inherited laws and is able to enforce compliance with
those rules
• The CFPB also has a catch-all authority to address
unfair, deceptive or abusive acts and practices (UDAAP)
and is able to include a UDAAP and in some cases a fair
lending component to its rules, thereby giving itself
additional enforcement jurisdiction
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Agency Structure – Core Functions
• Rule-making
• Supervision, and Enforcement
• Restrict unfair, deceptive, or abusive acts or practices
(UDAAP)
• Process 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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Enforcement as THE Core Function
• Aggressive statements from Director Cordray and other
agency staff
• Large Enforcement staff dwarfs other agencies
• Enforcement attorneys will accompany examiners
• Fair lending staff member assigned to each supervisory
exam for banks and nonbanks
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Sources of Enforcement Action
• Supervisory Exams
• Consumer Complaints – “State of the Art” call center and information
handling systems
• Agency statement on whistleblowers – being given top priority
• Cross-referrals from and joint initiatives with the FTC and other
federal agencies
• Cross-referrals from and joint initiatives with the FTC and other
federal agencies
• Market Data Research
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Structure of Investigations
• Based on FTC/SEC models
– Civil Investigative Demands
– Privilege issues
– Objections to the Bureau Director; waives confidentiality
– Enforcement actions may be initiated in Federal or State court
• Early Warning Notices
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Enforcement Remedies
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Rescission or reformation of contracts
Refund of money or return of real property
Restitution
Disgorgement or compensation for unjust enrichment
Payment of damages or other monetary relief
Public notification regarding the violation
Limits on the activities or functions of the person against whom the action is
brought
Civil Money Penalties
– up to $5,000 per day for the violation of a rule imposed by the CFPB
– up to $25,000 per day for the reckless violation of a federal consumer
protection law, and
– up to $1,000,000 per day for a knowing violation of a federal consumer
financial law.
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UDAAP
• UDAAP = Unfair, Deceptive, or Abusive Acts or Practices
• In addition to the authority to enforce the laws that it has inherited,
the Dodd-Frank Act gave the CFPB “catch-all” authority to go after
UDAAP cases
• Creation of a new acronym and potentially a new standard with
addition of the term “abusive”
• Previously UDAP standard was established by FTC Act and State
“UDAP” statutes, but adds the term “abusive”
• CFPB considers “unfair”, “deceptive,” and “abusive” as three
separate terms, each with its own meaning to be determined
• Congress and Industry concerns that standard will be interpreted
subjectively
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Traditional UDAP Standard
Section 5 of the FTC Act:
• “Unfair” – an act or practice is unfair if it :
– Causes or is likely to cause substantial injury to consumers
– Cannot be reasonably avoided by consumers; or
– Is not outweighed by countervailing benefits to consumers or to
competition
Public Policy may be considered with all other evidence
• “Deceptive” – an act or practice is deceptive where:
– A representation, omission, or practice misleads or is likely to
mislead the consumer
– A consumer's interpretation of the representation, omission, or
practice is considered reasonable under the circumstances
– The misleading representation, omission, or practice is material"
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New Term: “Abusive”
Under Dodd-Frank, CFPB may not declare an act or practice
abusive in connection with the provision of a consumer financial
product or service, unless the act or practice—
• materially interferes with the ability of a consumer to understand a
term or condition of a consumer financial product or service; or
• takes unreasonable advantage of—
– a lack of understanding on the part of the consumer of the material
risks, costs, or conditions of the product or service;
– the inability of the consumer to protect the interests of the consumer in
selecting or using a consumer financial product or service; or
– the reasonable reliance by the consumer on a covered person to act in
the interests of the consumer
CFPB will likely define by enforcement action, will take the “you’ll
know it when you see it” approach”
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Potential Applications of UDAAP Standard
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Truth in Lending/RESPA disclosures
Risk-based pricing notices
Mortgage Loan Originator compensation
Mortgage loan products and pricing
Credit card programs and pricing
Overdraft protection programs
Debit card practices and pricing.
Fees of any kind
Information reporting and sharing: FCRA to Reg P
Practices in industries that provide financing to consumers:
– Payday
– Automobile financing
– Student loans
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Fair Lending
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Mortgage Related Initiatives
• Know Before You Owe (KBYO) – integrated disclosure
of TILA and RESPA Disclosures
• Mortgage Originator Compensation
• Verification of the Borrower’s ability to pay – the
Qualified Residential Mortgage (QRM) and Qualified
Mortgage (QM) standards
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National Servicing Standards
CFPB to issue new mortgage servicing rules January 2013
• Theme is “No Surprises”
• Clear monthly mortgage statements
• Warning before interest rate adjustments
• Options for avoiding Forced-Place insurance
• Early information and options for avoiding foreclosure
• Payments immediately credited
• Records kept up-to-date and accessible
• Errors corrected quickly
• Direct and ongoing access to servicer’s foreclosure
prevention team
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Fair Lending
One of CFPB’s primary responsibilities and emphasis
• CFPB’s fair lending unit has begun planning several rulemakings
mandated by the Dodd-Frank Act, including those regarding
– collection and reporting of small, minority- and women-owned business
loan data under ECOA and
– reporting of additional data fields for all companies required to report
under HMDA.
• CFPB’s Fair Lending and Enforcement offices have “begun
investigating fair lending matters, including those transferred from
the prudential regulators. In addition, the offices are engaging in
early-stage research to identify new investigations. Further detail
regarding these and other ongoing investigations will not be made
public by the Bureau until such time that a public enforcement action
is filed.”
Semi-Annual Report of The Consumer Financial Protection Bureau July 21 December 31, 2011 (January 30, 2012)
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Fair Lending continued
According to Patrice Ficklin, CFPB Assistant Director for Fair Lending:
• CFPB has authority to enforce the Equal Credit Opportunity Act and
the Home Mortgage Disclosure Act while banking regulators
continue to enforce the Fair Housing Act and the Community
Reinvestment Act
• CFPB has independent litigating authority and may bring fair lending
cases against banks and non-banks in federal court
• CFPB may also hold adjudication proceedings before its own
administrative law judges, which can issue cease and desist orders
and penalties, and provide equitable relief for borrowers
• CFPB must still refer fair lending violations to the Justice
Department when there is evidence of a "pattern or practice" of
discrimination
Davidson, Kate, “CFPB's Fair Lending Chief Outlines Enforcement, Rulemaking
Priorities”, American Banker (April 19, 2012)
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Fair Lending continued
• CFPB is considering an amendment to Regulation Z that would
address fair lending as a UDAAP issue
• Disparate Impact Analysis in Fair lending Cases
– CFPB Bulletin 2012-04 (Fair Lending) (April 18, 2012)
– Fully embraces the use of disparate impact analysis in lending
discrimination cases
• CFPB has likely initiated research into market data to find instances
of disparate impact
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Interaction State Attorneys General
• Memorandum of Understanding and Information Sharing
Agreements
• Development of a national strategic plan to address common issues
• Working groups meeting regularly to discuss payday loans,
foreclosure scams, auto loans, and debt collection
• Joint initiatives in areas of shared jurisdiction
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Other Issues
• Memoranda of understanding with FTC
• Confidential treatment of privileged information in CFPB
investigations
• Overdraft fees
• Pre-dispute arbitration agreements
• Credit card fees