Alston & Bird Consumer Finance Blog

Banking Regulatory

QM Patch Update: CFPB Proposes to Let Patch Expire

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A&B Abstract

The CFPB has issued an Advance Notice of Proposed Rulemaking regarding the fate of the “QM Patch,” indicating that it will not extend the “QM Patch” permanently.

Advanced Notice of Proposed Rulemaking

In a surprise development, on July 25, 2019, the Consumer Financial Protection Bureau (“CFPB”) issued an advance notice of proposed rulemaking (“ANPR”) seeking public comment regarding the fate of the “QM Patch,” which is scheduled to expire no later than January 10, 2021.   The comment period is short, reflecting the urgency of promulgating a final rulemaking before the impeding “QM Patch” termination.  Comments must be received by the CFPB within 45 days after publication of the ANPR in the Federal Register.

Background

The CFPB created the “QM Patch” as a temporary provision of the qualified mortgage (“QM”)/ability-to-repay (“ATR”) regulations adopted pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income (“DTI”) ratios not exceeding 43% in accordance with the exacting standards of Appendix Q to Regulation Z if the loans otherwise meet the definition of a QM and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

The CFPB’s Proposal

In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.  This shocking pronouncement has potentially profound ramifications for the residential mortgage lending markets.  A substantial proportion of the markets have relied extensively on the “QM Patch” in underwriting qualified mortgages, not to mention significantly reducing the role of the GSEs in these markets.  For years, GSE critics have complained about Fannie Mae’s and Freddie Mac’s dominance of the residential lending markets.  Yet the January 2021 “QM Patch” expiration would raise critical questions:  Will the private markets be able to absorb the GSE’s large share of qualified mortgage lending?  If not, what are the possible detrimental impacts on consumers, especially those in distressed communities?

Other QM Changes?

In the ANPR, the CFPB indicates that it may make other significant changes to the qualified mortgage regulations, based in part on the public comments it receives.  For example, the CFPB is considering whether the general QM definition should retain a direct measure of a consumer’s personal finances, such as DTI or residual income and how that measure should be structured. The CFPB is also seeking comment on whether the definition should: (1) include an alternative method for assessing financial capacity, or (2) be limited to the express statutory criteria.  Under one approach that seems to be attracting the CFPB’s interest, bright-line pricing delineation would replace the DTI criteria altogether.   Under such an approach, loans with APRs exceeding the average prime offer rate by certain thresholds would be deemed rebuttable presumption QM loans or non-QM loans, as the case may be.  Loans not exceeding certain thresholds would receive safe harbor QM status.   Under such a bright line pricing delineation method, the loans would have to comply with other statutory criteria in order to retain QM status.

Takeaway

The 45-day deadline for comments seems rushed, especially considering the dramatic effect that changes to the qualified mortgage rules could have on the residential mortgage finance and housing markets.  Further, in an ideal world, the CFPB should be considering amendments of the qualified mortgage/ability-to-repay rules in tandem with the federal high cost mortgage, the residential mortgage risk retention, and the loan originator compensation rules as a holistic approach rather than in isolation.

A Closer Look at the CFPB’s Proposed Debt Collection Rules – Part One

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A&B Abstract:

On May 7, 2019, the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) issued a proposed rule that would significantly amend Regulation F (the “Proposed Rule”), which implements the Fair Debt Collection Practices Act (“FDCPA”), to prescribe rules governing the activities of debt collectors that are subject to the FDCPA.  The Bureau recently extended the comment period from August 19, 2019 to September 18, 2019.

Overview of Blog Series

This blog post is part one of a five-part series that will take a deeper dive into the topics covered by the Proposed Rule as well as those issues the Bureau has chosen not to address.  This five-part series will cover the following topics:

  • Part one will provide a brief history of the FDCPA and the Proposed Rule and provide a high-level overview of the Proposed Rule’s coverage and scope of applicability and a summary of the Proposed Rule’s most impactful provisions.
  • Part two will discuss the Proposed Rule’s communication requirements, including (i) time and place restrictions, (ii) restrictions on telephone call volume, (iii) text and email communications, and (iv) resolution of the “voicemail paradox” through the use of limited-content messages.  In addition, this part will focus on the operational challenges created by the Proposed Rule and what debt collectors should be thinking about when considering whether to submit comments to the Bureau.
  • Part three will address the Proposed Rule’s disclosure requirements, including (i) expanded requirements for Validation of Debt notices, (ii) a safe harbor for use of the Bureau’s new proposed model Validation of Debt form, and (iii) requirements for the provision of electronic disclosures.
  • Part four will discuss the Proposed Rule’s conduct provisions, including provisions addressing (i) decedent debt, (ii) time-barred debt, (iii) credit reporting restrictions, and (iv) transfers of debt.
  • Finally, part five will discuss several issues that are not addressed by the Proposed Rule, whether the provisions of the Proposed Rule could be applied to first-party collection activities based on UDAAP principles, and the potential interplay between the Proposed Rule and state debt collection laws.

History of the FDCPA and the Proposed Rule

For decades the FDCPA was enforced by the Federal Trade Commission (“FTC”).  However, prior to the Dodd-Frank Act, no federal regulator had rulemaking authority under the FDCPA.  As a result, the FDCPA was the subject of countless, and often times inconsistent, interpretations fashioned by the courts and federal regulators.

When the Dodd-Frank Act transferred the FDCPA from the FTC to the CFPB, it also empowered the Bureau with rulemaking authority to prescribe regulations with respect to the collection of debts by debt collectors, as defined by the FDCPA.  The Bureau began this process in 2013 by issuing an Advanced Notice of Proposed Rulemaking (“ANPR”).  Following the ANPR, the Bureau, in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy, convened a Small Business Regulatory Enforcement Fairness Act panel in 2016 to consult with representatives of small businesses that might be affected by the rulemaking.

With its issuance of the Proposed Rule, the Bureau has taken the first step in providing industry with clearer rules of the road in applying the provisions of the FDCPA to modern debt collection practices.

Below we provide a high-level overview of the Propose Rule’s most significant provisions.

Overview of Proposed Rule

The provisions of the Proposed Rule can be broken into the following categories:

  • Coverage and Scope of Applicability
    • Proposed Covered Persons
      • Who is a “Debt Collector”?  The Proposed Rule’s proposed definition of “debt collector” generally restates the FDCPA’s definition of “debt collector,” including the exceptions, with only minor wording and organizational changes for clarity.
      • Who is a “Consumer”?  Similarly, the Proposed Rule would largely restate the FDCPA’s definition of “consumer.”  However, the Bureau proposes to interpret the term to include a deceased natural person who is obligated or allegedly obligated to pay a debt.  Similarly, for purposes of certain communications provisions, the Proposed Rule interprets the term “consumer” to include a confirmed successor-in-interest and the personal representative of a deceased consumer’s estate.
    • Proposed Covered Products
      • Consumer Financial Product or Service Debt:  While the Proposed Rule generally restates the FDCPA’s definition of “debt,” with only minor wording and organizational changes, certain parts of the Proposed Rule would only apply when a debt collector covered by the FDCPA is collecting debt related to a “consumer financial product or service” as defined in the Dodd-Frank Act.
  • Conduct and Communication Provisions:  The Proposed Rule would:
    • Electronic Communications Generally: Identify safe harbor procedures for debt collectors who unintentionally communicate with an unauthorized third party about a consumer’s debt when trying to communicate with the consumer by email or text message.
    • Option to Opt-Out: Require a debt collector to include, in emails, text messages, and other electronic communications, an option for the consumer to opt-out from such future communications.
    • Communication Media Restrictions: Prohibit a debt collector from communicating or attempting to communicate with a consumer through a medium of communication that the consumer has requested the debt collector not use, such as a specific telephone number or email address.
    • Time and Place Restrictions for Electronic Communications: Clarify that calls to mobile telephones and electronic communications, such as texts and emails, are subject to the FDCPA’s prohibition on communicating at unusual and inconvenient times and places.
    • Use of Workplace Email Addresses: Unless an exception applies, prohibit a debt collector from contacting a consumer using an email address that the debt collector knows or should know is provided by the consumer’s employer.
    • Social Media Platforms: Prohibit debt collectors from contacting consumers through social media platforms, unless such contact is made through the platform’s private messaging function.
    • Limited-Content Message: Define, and provide example language for, a “Limited-Content Message” that a debt collector could send by, for example, voicemail or text. The content of a Limited-Content Message would not be considered a “communication.” Thus, if a Limited-Content Message is heard or observed by a third party, it would not constitute a prohibited third-party disclosure.
    • Telephone Call Frequency Limits: Prohibit a debt collector from calling a consumer about a particular debt more than seven times within a seven-day period, subject to certain limited exceptions. The proposal would also prohibit a debt collector from engaging in more than one telephone conversation with a consumer about a particular debt within a seven-day period. As a result, a debt collector who stays within the proposed limits would not be found to have engaged in repeated or continuous telephone calls or conversations with the intent to harass, as prohibited by the FDCPA.
    • Decedent Debt:  Clarify how and with whom a debt collector can communicate about a deceased consumer’s debt, as well as how the requirements regarding validation notices and disputes apply after a consumer passes away.
    • Time-Barred Debt: Prohibit a debt collector from suing or threatening to sue on time-barred debt if the debt collector knows or should know that the applicable statute of limitations has expired.
    • Communicating Before Credit Reporting: Prohibit a debt collector from reporting collection items to consumer reporting agencies unless the debt collector has already communicated with the consumer.
    • Transfers of Debt: Unless an exception applies, prohibit a debt collector from transferring a debt to another debt collector if the debt collector knows or should know that the debt has been paid or settled, the debt has been discharged in bankruptcy, or an identity theft report has been filed with respect to the debt.
  • Disclosure Requirements:  The Proposed Rule would:
    • Provision of Electronic Disclosures: Generally, require a debt collector to provide required disclosures in a manner that is reasonably expected to provide actual notice, and in a form that the consumer may keep and access later. Debt collectors who provide the required disclosures electronically would need to either comply with the E-SIGN Act or a set of alternative procedures. The Proposed Rule would also impose certain requirements related to the delivery and format of required electronic disclosures.
    • Validation Notice: Require a debt collector to include in the validation of debt notice certain information about the debt, including (i) the account number and an itemization of the debt, (ii) certain information about consumer protections, such as information about the right to dispute a debt, and (iii) a consumer response form that consumers could use to take certain actions, such as submitting a dispute or requesting the original creditor’s information.  In addition, the Proposed Rule would permit a debt collector to (i) include statements in the validation of debt notice informing consumers how they may request the notice in Spanish, if the collector chooses to provide a Spanish-language translation, and (ii) provide a validation notice translated into any language, if the debt collector also sends an English-language validation notice in the same communication or if the debt collector previously sent an English-language validation notice.
    • Model Validation Notice: Permit a debt collector to comply with FDCPA’s validation of debt provisions and the Proposed Rule’s disclosure requirements by using proposed Model Form B-3.

Takeaway

The issuance of the Proposed Rule clearly reflects the investment of significant time and consideration by the Bureau. As the Proposed Rule is significant in scope, we expect the Bureau will engage in a similar undertaking as it considers comments submitted by debt collectors and other industry stakeholders.

House Committee Holds Hearing on “Ending Debt Traps in the Payday and Small Dollar Credit Industry”

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On April 30, 2019, the House Committee on Financial Services held a hearing on “Ending Debt Traps in the Payday and Small Dollar Credit Industry,” which focused on three potential bills.

Discussion Draft of Protecting Consumers from Debt Traps and Unreasonable Rates Act

This draft, based on legislation sponsored by Senators Durbin and Merkley and Representatives Cartwright and Cohen in prior Congresses, would impose a 36 percent usury APR cap for all open-end and closed-end consumer credit transactions, including mortgages, car loans, overdraft loans, car title loans, and payday loans. The bill would permit initial application fees and the recovery of ongoing lender costs, such as insufficient funds fees and late fees. The proposal would not preempt stricter state laws, and it would create specific penalties for violations of the cap and allow for enforcement through civil courts and by state Attorneys General.

H.R.1285, the Improving Access to Traditional Banking Act of 2019

Introduced by Rep. David Scott, this bill would establish the Consumer Bureau the Office for Under-Banked, Un-Banked, and Underserved Consumers. This office would, in part, periodically study and report on barriers for individuals and families that do not participate in the traditional banking system, coordinate with other agencies, and develop strategies to increase participation in the traditional banking system.

Fund Small Dollar Loan Program

Subcommittee Chairman Meeks led a letter to the Appropriations Committee requesting $10 million to fund Dodd-Frank’s Small Dollar Loan Program, which is administered by the Community Development Financial Institutions Fund (CDFI Fund). Joined by several other Members, this letter promotes the prioritization of Section 1206 of the Dodd-Frank Act, which authorized the CDFI Fund to provide financial assistance for the creation of loan loss reserves to support small dollar loan offerings among CDFIs, including certified banks and credit unions. The program has never been funded but would help individuals build credit, access affordable capital and enter the mainstream financial system.

A&B Takeaway

Though each of the three bills were mentioned during the hearing, the majority of the discussion focused on the first bill and attempting to reach consensus on the 36% percent usury cap, which is the rate currently applied nationwide with respect to loans made to military personnel.  Various witnesses and Congressmen testified about the perils and advantages of payday lending, but consensus appeared to exist regarding a few points: (1) many unbanked and underbanked individuals need access to some form of credit like payday loans; (2) some payday lenders make predatory loans that trap consumers in a debt cycle; and (3) online payday lending is more likely to be predatory or create a debt trap.  Additionally, most witnesses and Congressmen appeared to agree that the 36% usury rate cap is a potentially viable compromise.  Lastly, there was some discussion of the CFPB’s plan to rescind the Payday Rule.  Many witnesses and Congressmen expressed the view that this regulation was a long-time coming and that rescinding the Rule would be a huge missed opportunity for consumers.

In all, the key takeaway from this hearing is that discussions are taking place in the legislature with the goal of implementing national usury caps (be that with respect to individual products like small-dollar loans or across the entire lending industry).  Yet another example is the bill introduced by Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez, just over a week after this hearing, proposing a national consumer credit interest rate cap at 15%.  While this bill hasn’t necessarily gained traction, it made quite a splash in the media and is helping drive the discussion over how to best regulate interest rates nationwide.