Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

Key Takeaways from Chopra’s Nomination Hearing

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A&B ABstract:

On Tuesday, March 2, the Senate Committee on Banking, Housing, and Urban Affairs convened a remote hearing to consider the nominations of Rohit Chopra to be Director of the Bureau of Consumer Financial Protection (CFPB or Bureau) and Gary Gensler to be Chairman of the Securities and Exchange Commission. Mr. Gensler received the bulk of questioning by the Senators during the roughly three-hour hearing.  What follows are key take-aways from the hearing relating to the CFPB:

There were no fireworks.

Given the polarizing history of the CFPB, some media reports in advance of the hearing anticipated testy questioning from Republican Senators. However, questioning was cordial, perhaps owing in part to the limitations of asking questions of nominees in a remote environment rather than in the Committee’s hearing room, but also owing in part to the fact that Mr. Chopra performed well and made no significant missteps.

Barring any unforeseen complications and the satisfactory completion of questions for the record (QFRs) submitted by Senators, the absence of discord at the hearing strongly suggests that Mr. Chopra has a reasonably assured path forward to confirmation, even with the Senate evenly split at 50-50. While no date has been set for the Committee’s vote on Mr. Chopra’s nomination, Chairman Sherrod Brown indicated that he wanted to move quickly.

“Tough but fair.”

in testimony delivered to the Committee, Mr. Chopra sought to present himself as a tough but fair regulator. In his prepared remarks, he focused on the impact of the pandemic on consumer credit markets, including loan defaults and auto repossessions. He identified “persistent pain points” for consumers, including errors on credit reports and in the attempted collection of debts already paid or not owed. With respect to the housing market, he focused on the prospect of consumers losing their homes and stated that “fair and effective oversight” can promote resiliency in the mortgage market and address “systemic inequities faced by families of color.” He concluded his prepared remarks by pledging to approach the CFPB’s mission with an “open mind and attuned to market realities.”

COVID-19 and foreclosures

In response to a question from Chairman Brown about what role the CFPB can play in preventing another foreclosure crisis, Mr. Chopra stated that regulators had missed linkages between the mortgage market and the broader economy during the prior financial crisis. He stated that “we saw too many unlawful foreclosures, and it’s going to be critical for the CFPB to monitor those markets using the best available data and insights, enforce homeowner protections when it comes to foreclosure mitigation, and work across the government so we do not see a déjà vu or that crisis again.” Later in the hearing, when asked by Senator Tester what his housing priorities will be, Mr. Chopra specifically identified being “ready to address potentially looming problems when it comes to forbearances that might flip to foreclosures.”

These answers strongly suggest that the Bureau will focus its risk-based market monitoring, supervisory, and enforcement efforts on mortgage servicing activities this year.

Data privacy and “Big Tech” scrutiny

In response to a question from Chairman Brown about the biggest risks (outside of housing) that consumers face due to the pandemic, Mr. Chopra noted that “it will be critical for the CFPB to take a hard look at how big tech companies and others are entering financial services, the impact on our privacy and personal data. We must look at today’s problems but also anticipate tomorrow’s risks.” Later in the hearing, in response to a question from Senator Kennedy Mr. Chopra again described “the mass databases collected by the big tech companies that are increasingly part of financial services” as one of the notable “big issues we are facing.” And in a second round of questioning by Chairman Brown, Mr. Chopra expressed concern about the implications of mass data collection for consumer privacy, and the transparency of algorithmic credit decision-making. He also said “big data, particularly by large platforms, who have detailed behavioral data on all of us, is something we must carefully look at…we need to make sure that we have a vibrant and competitive market and not one that is simply dominated by a few.”

Mr. Chopra’s evident focus on potential consumer privacy and consumer protection risks posed by “big tech” companies providing financial services is consistent with concerns he has raised as a Commissioner at the FTC.

No indication on direction of QM Rules

In response to a question from Senator Tester about the most important considerations as CFPB looks to revise the QM rules, Mr. Chopra demurred, stating that he had an open mind and looked forward to getting input from everyone and determining how the rule needs to evolve over time.

Enforcement approach

When asked by Chair Brown about helping consumers affected by the coronavirus crisis, Mr. Chopra laid out his general approach to enforcement: “If there are unlawful, egregious practices, it is important for enforcement to make sure that they stop — that’s what’s best for consumers, that’s what’s best for the honest market participants, and that’s the role Congress has asked the CFPB to play.” Later, when Senator Cortez Masto asked Mr. Chopra for his views on seeking restitution for consumers, he affirmed that restitution will be a critical part of CFPB’s law enforcement work in order to make victims whole.

Student loans

When asked by Senator Smith for his views on what the CFPB can do to protect federal student loan programs, Mr. Chopra said that it is critical that loans servicers live up to their obligations and that they communicate and make sure that borrowers can navigate their options, and that the CFPB has a role to play in working with the Department of Education and State Attorneys General and state licensers to avoid an avalanche of defaults when borrower repayments are restarted.

Regulation by enforcement

When pressed by Senator Scott about the “regulation by enforcement” doctrine used by former Director Cordray, Mr. Chopra said he would commit to transparency “and I also will commit that the CFPB and every federal agency should be focused on fixing harms, making it clear to marketplace participants what’s expected of them.”

Mr. Chopra’s statement is a significant commitment to fair notice and due process in the enforcement of federal consumer financial law. If Mr. Chopra makes good on his commitment to provide clear rules of the road before commencing enforcement actions, it will be welcome news for market participants.

CFPB Delays Implementation of General “QM” Rule, May Jettison the “Seasoned QM” Rule

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A&B ABstract

In a statement issued on February 23, 2021, the Consumer Financial Protection Bureau (“CFPB”) indicated that it intends to delay the General Qualified Mortgage (“QM”) rule’s mandatory July 1 2021 compliance date, and may amend or revoke the “Seasoned QM Rule” that was supposed to become effective on March 1, 2021.

Background

As we previously reported in this blog, on December 10, 2020, the CFPB issued two significant rulemakings. In the first rulemaking, known as the General QM Rule, CFPB terminated the “QM Patch” and significantly revised the criteria for what constitutes a qualified mortgage (“QM”) loan.  Notably, in this rule, the CFPB replaced the dreaded Appendix Q and strict 43% debt-to-income underwriting threshold with a priced-based QM loan definition.  The rule was to take effect on March 1, 2021, with compliance not mandatory until July 1, 2021.  The QM Patch will expire on the earlier of (i) July 1, 2021 or (ii) the date that the GSEs exit conservatorship.

In the second rulemaking, known as the “Seasoned QM Rule”, the CFPB issued an innovative final rulemaking that creates a pathway to “safe harbor” Qualified Mortgage (QM) status for performing non-QM and “rebuttable presumption” QM loans that meet certain performance criteria portfolio requirements over a seasoning period of at least 36 months and that satisfy certain product restrictions, points and fees limits, and underwriting requirements prior to consummation.  The “Seasoned QM” rule was to become effective with respect to applications received on or after March 1, 2021.

The CFPB’s Intension to Delay Compliance Date of the “QM” Final Rule 

In its statement, the CFPB expects to issue a proposed rulemaking that would delay the July 1, 2021 mandatory compliance date of the General QM Rule ostensibly to “ensure consumers have the options they need during the pandemic … as well as to provide maximum flexibility to the market”.  The impact of this rulemaking is significant because, if implemented, lenders will have the option of originating QM loans under the new General QM Rule standards or alternatively, adhering to the preexisting QM rules, that require, among other things, that the loans be underwritten to Appendix Q with a hard 43% debt-to-income ratio or be eligible for sale to Fannie Mae or Freddie Mac.

Notably, the CFPB anticipates that the “QM Patch” will remain in effect until the new mandatory compliance date—unless the GSEs exist conservatorship prior to that date.

Further, the CFPB indicated that at a later date, it may initiate another rulemaking to “reconsider other aspects of the General QM Final Rule”.

The CFPB Will Amend or Reject the “Seasoned QM” Rule

 In its statement, the CFPB ominously noted that it may initiate a new rulemaking to “revisit” the Seasoned QM Rule.  The CFPB indicated that if promulgated, this rulemaking would consider whether “any potential final rule revoking or amending the Seasoned QM Final Rule should affect covered transactions for which an application was received during the period from March 1, 2021, until the effective date of such a final rule”.

 Takeaways

The CFPB issued the General QM Rule and the Seasoned QM Rule in the waning days of the Trump Administration, and the Biden CFPB clearly wants to reexamine these rulemakings.  While it is likely that in the short-term, the General QM Rule will be implemented as enacted, albeit with a delayed mandatory compliance date, it is possible that the CFPB could ultimately amend the rule at a later date.  It is also noteworthy that the impact of this delay will be an extension of the controversial “QM Patch”.

By contrast, the CFPB is likely to substantively amend the Seasoned QM Rule or jettison the rulemaking altogether.  In the comments to the final Seasoned QM Rule, consumer groups opposed not only significant aspects of the rule but also the concept of a “Seasoned QM”.  These groups will likely have a sympathetic ear in the Biden CFPB, and hence the rule faces an uncertain fate at best.

CFPB Brings Action Against Connecticut Mortgage Lender

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The number of enforcement actions by the Consumer Financial Protection Bureau (CFPB) more than doubled from 2019 to 2020. The CFPB made clear that cracking down on deceptive and unfair acts and practices under the Consumer Financial Protection Act of 2010 (CFPA) remains a core focus, with 11 of the 15 complaints it filed last year alleging such violations.

Earlier this month, the CFPB filed another lawsuit alleging unfair and deceptive acts or practices in violation of the CFPA. At the dawn of a new year and a new Administration, this litigation may be the proverbial canary in the coalmine for others in the financial services industry. As the case proceeds and briefing is filed, the tone and focus of the new Administration may be brought to light.

In a Client Advisory, our Financial Services Litigation Team examines the latest effort by the CFPB to crack down on deceptive and unfair acts and practices.

CFPB Issues Statement Encouraging Work with LEP Consumers

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A&B ABstract:  On January 13, 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a Statement encouraging financial institutions to expand access to financial products and services for consumers with limited English proficiency (“LEP”). The CFPB considers a consumer to have LEP if the person has a limited ability to read, write, speak, or understand English.

The Statement

The Statement provides guidance to financial institutions for providing access to credit in languages other than English while remaining compliant with the Equal Credit Opportunity Act (“ECOA”), the Dodd-Frank Act prohibition on unfair or deceptive acts and practices (“UDAPs”), and other applicable laws. The CFPB issued the Statement following a request for information (“RFI”) on ECOA, in which the CFPB sought information from the industry that would enable it “to understand the challenges specific to serving LEP consumers. The industry comments received in response to the RFI, which expressed uncertainty with how best to meet the needs of LEP consumers, prompted the CFPB to issue the Statement as guidance for financial institutions that recognize the importance of providing financial products and services to LEP consumers but are cautious of running afoul of statutes and regulations. As such, the Statement outlines the following compliance principles and guidelines that encourage financial institutions to expand access to products and services for LEP consumers: (1) promoting access to financial products for all consumers; (2) facilitating compliance by providing clear rules of the road; and (3) educating and empower consumers to make better informed financial decisions.

Guiding principles for serving LEP consumers

The CFPB encourages financial institutions to better serve LEP consumers by applying the following principles and guidelines:

  • Pilot programs. Financial institutions may use phased approaches for rolling out LEP-consumer-focused products and services, to serve LEP consumers incrementally while managing risks and taking steps to ensure compliance with applicable laws.
  • Compliance approaches. Financial institutions may consider developing a variety of compliance approaches related to the provision of products and services to LEP consumers. These approaches may depend on the size, complexity, and risk profile of an institution. Ultimately, differences in financial institutions, and the ways they choose to serve LEP consumers, may require different compliance solutions.
  • Disclosures to mitigate risk. Financial institutions may mitigate certain compliance risks by providing LEP consumers with clear and timely disclosures in non-English languages describing the extent and limits of any language services provided throughout the product lifecycle. In those disclosures, financial institutions may provide information about the level of non-English language support as well as communication channels through which LEP consumers can obtain additional information and ask questions.
  • Special-purpose credit programs. Financial institutions may wish to consider extending credit pursuant to a special-purpose credit program (“SPCP”) that complies with ECOA and Regulation B, to increase access to credit for certain underserved LEP consumers. As discussed in the CFPB’s recent Advisory Opinion on SPCPs, financial institutions may consider a prohibited basis characteristic such as race or national origin in certain circumstances to help meet the credit needs of underserved communities. Of course, financial institutions may responsibly serve LEP consumers without the use of SPCPs.

Guidelines for developing compliance solutions when serving LEP consumers

The CFPB lays out the following key considerations and compliance management system (“CMS”) guidelines to mitigate ECOA, UDAAP, and other legal risks when making threshold determinations and other decisions related to serving LEP consumers.

Key Considerations

Key considerations include:

    • Language selection. In determining whether to provide non-English language services to LEP consumers and in which language(s), financial institutions may consider documented and verifiable information, such as the stated language preferences of its current customers or U.S. Census Bureau demographic or language data. While a nationwide institution might focus on serving Spanish-speaking consumers, a regional institution might choose to align its language services with local demographics.
    • Product and service selection. In making product and service selections, financial institutions may consider a variety of factors, including the extent to which LEP consumers use particular products, including any existing customer data on what services LEP consumers use most frequently, as well as the availability of non-English language services. Further, in determining when in the product lifecycle to offer these services,  financial institutions should consider those activities and communications, whether verbal or written, that significantly impact consumers (i.e., convey essential information about credit terms and conditions or about borrower obligations and rights, including those related to delinquency and default servicing, loss mitigation, and debt collection). Finally, in making product and service selections, financial institutions should review relevant policies, procedures, and practices for features that may pose heightened risk of unlawful discrimination, including distinctions in product offerings or terms related to prohibited bases or proxies for prohibited bases.
    • Language preference collection and tracking. Financial institutions may choose to collect and track customer language preferences (such as requesting an applicant’s language preference on a loan application form), provided that such information is not used to exclude LEP consumers or in any other way that violates applicable law.  Financial institutions that choose to collect and track this information should monitor how the information is used by the institution to ensure compliance with applicable law.
    • Translated documents. Certain federal and state laws required financial institutions to provide consumers with translated documents. Where the translation of documents is not already legally mandated, financial institutions may assess whether and to what extent to provide translated documents to consumers, with particular attention to those documents that significantly impact consumers. However, financial institutions that choose to provide translated documents to LEP consumers must ensure the accuracy of such translations.
CMS Guidelines

The Statement also addresses CMS guidelines, whether LEP-specific or integrated into the financial institution’s broader fair lending, UDAAP, and/or consumer compliance program, including with respect to:

    • Documentation of decisions. Financial institutions providing products and services in non-English languages should document decisions related to the selection of languages, products, and services. This documentation may include anything that the financial institution considers in making the decision, including operational limitations; cost estimates; or any other information that would allow a regulator to understand the decision-making process.
    • Monitoring. Financial institutions should assess the quality of customer assistance provided in non-English languages, including by assessing whether personnel receive the same training, convey the same information, and have the same authority as other customer service personnel. In addition, financial institutions should consider monitoring or conducting regular fair lending and UDAAP-related assessments to assess whether any populations are missing or excluded, and whether marketing materials and disclosures are designed to ensure accurate understanding by LEP consumers.
    • Fair lending testing. Financial institutions should conduct regular statistical analysis of loan-level data to determine the existence of any potential disparities on a prohibited basis in underwriting, pricing, or other aspects of the credit transaction.
    • Third-party vendor oversight. Financial institutions that contract with service providers to underwrite or price products to LEP consumers should implement a service provider oversight program to ensure that such products do not violate fair lending, UDAP, and other applicable laws.

Takeaways

Given the above, the Statement provides helpful guidelines to financial institutions who are considering expanding their products and services to LEP consumers yet are struggling with balancing the various legal requirements and practical considerations. Yet, as the CFPB recently clarified in a final rule, such supervisory guidance does not have the force and effect of law and cannot form the basis of an enforcement action or issue supervisory criticism. Indeed, the Statement itself notes that it does not mandate any particular approach to serving LEP consumers and should not be interpreted to relieve institutions from their obligation to comply with applicable laws. Still, the CFPB notes that supervisory guidance, such as this Statement, carries more weight than its Compliance Aids, which the CFPB uses merely for providing “practical suggestions” to compliance professionals, industry stakeholders, and the public on existing rules and statutes.

CFPB, NCUA Sign MOU Regarding Cooperation

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The Consumer Financial Protection Bureau (CFPB) and the National Credit Union Administration (NCUA) have signed a Memorandum of Understanding (MOU) to facilitate and improve coordination between the agencies. The CFPB and NCUA have overlapping supervision authority over credit unions with over $10 billion in assets. Both agencies will engage in semi-annual “strategy planning sessions” to align on and coordinate examinations. The MOU will facilitate information sharing between the agencies, including electronic sharing of Examination Reports and training activities and content.

The MOU follows many other MOUs between regulators, which have been in place for years, and reflects the same commitment to information sharing. The CFPB’s press release noted that the “MOU will permit both agencies to share information related to . . . potential enforcement actions.” Coordination on enforcement matters between the agencies could mark a notable turn in the enforcement landscape for credit unions.