Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

Payday Lending: A Juxtaposition of Recent CFPB Actions

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A&B ABstract: Three recent actions by the Consumer Financial Protection Bureau (“CFPB”), on consecutive days, highlights inconsistencies in the CFPB’s current approach to payday lending.

Motion to Dismiss NALCAB Lawsuit

On Monday, March 22, 2021, the CFPB filed in D.C. federal district court a memorandum in support of its motion to dismiss a lawsuit filed last year by National Association for Latino Community Asset Builders (NALCAB). The lawsuit challenged the CFPB’s 2020 final rule that rescinded the mandatory underwriting provisions of its 2017 payday lending rule. The CFPB’s memorandum persuasively argues that NALCAB lacks standing to bring its challenge because (among other things) its claimed injuries are purely speculative, and therefore the court lacks subject-matter jurisdiction to hear the case.

Mandatory Underwriting

One day later, on Tuesday, March 23, 2021, Acting CFPB Director Uejio released a blog post stating that notwithstanding its motion to dismiss NALCAB’s amended complaint, the CFPB “continues to believe that ability to repay is an important underwriting standard.” He further alleged that payday lenders’ business model “is dependent on consumers’ inability to repay their loans” and “those practices cause harm that must be addressed by the CFPB,” including through rulemaking if appropriate.

Consumer Complaints

Two days later, on Wednesday, March 24, 2021, the CFPB released its 2020 Consumer Response Annual Report. The report noted that the CFPB received approximately 542,300 consumer complaints in 2020, an increase of more than 50% over the number of complaints it received in 2019. Acting Director Uejio said in his introduction to the report: “The global pandemic was perhaps the most disruptive long-term event we will see in our lifetimes. Not surprisingly, the shockwaves it sent across the planet were felt deeply in the consumer financial marketplace.”

Notably, however, payday loan complaint volume actually decreased by 24% in 2020. The CFPB received only 1,600 payday loan complaints in 2020, or just 0.3% of all complaints received. Of these, about 600 complaint were routed to other agencies or found to be incomplete, so only about 1,000 complaints were actually sent to companies for review and response. And of these, 83% were closed with an explanation provided by the company, suggesting that complainants may have been simply mistaken about certain facts relating to their payday loan, while only 1% (i.e., 10 complaints) resulted in monetary relief provided to consumers.

Takeaway

In a February 10, 2021 blog post, Acting Director Uejio pledged that consumer complaints and other consumer input would be treated as crucial data that drives CFPB policymaking. Accordingly, the CFPB may be expected to consider whether the paucity of payday lending complaints can be reconciled with its conviction that the payday lending model depends upon causing consumer harm, and whether a discretionary rulemaking is appropriate in light of competing priorities.

CFPB Issues Statement Encouraging Financial Institutions and Debt Collectors to Allow Stimulus Payments to Reach Consumers; Creates Potential Consumer Confusion

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A&B ABstract: Without additional guidance, the recent statement from the Consumer Financial Protection Bureau (CFPB) about stimulus funds may create consumer confusion.

CFPB Raises Concern About EIP Funds Reaching Consumers

On March 17, 2021, Acting CFPB Director Dave Uejio issued a statement regarding consumers’ access to Economic Impact Payment (EIP) funds distributed through the American Rescue Plan.  The Acting Director expressed the CFPB’s concern that “some of the [EIP] funds will not reach consumers, and will instead be intercepted by financial institutions or debt collectors to cover overdraft fees, past-due debts, or other liabilities.”

The Acting Director indicated he had been in dialogue with financial industry trade associations in recent days, and that many of these organizations told the Bureau that they have begun or soon will take proactive measures to help ensure that consumers can access the full value of their stimulus payments. According to the CFPB, “[i]f payments are seized, many financial institutions have pledged to promptly restore the funds to the people who should receive them.” The Acting Director said the CFPB appreciates these efforts and will stay closely engaged on the issue.

Potential Consumer Confusion

In the absence of additional guidance from the CFPB, this statement may inadvertently result in consumer confusion. For one thing, it does not distinguish between depository institutions and third-party debt collectors, which operate according to differing regulatory requirements that may affect how the institutions can work with customers to address concerns about EIP funds. For another thing, the statement does not distinguish between the kinds of issues that depository institutions may be able to work with customers to address (like overdrafts and set-off rights) and the kinds of issues that banks may be legally unable to address (like court garnishment orders).

Takeaway

As the CFPB stays engaged on the issue, additional guidance may be needed to prevent consumer confusion. The provision of additional clarity will no doubt be welcomed by consumers and financial institutions alike.

Evaluating the CFPB’s Proposed Delay of the QM Rule: Timing Considerations

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A&B ABstract: The CFPB must finalize its proposed QM delay rule in April, likely leaving no room for delay.

Background on ATR/QM and the Delay Rule

On March 3, 2021, the Bureau of Consumer Financial Protection (CFPB) released a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022 (the Delay Rule).

As explained in the CFPB’s proposal, the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule) requires a creditor to make a reasonable, good faith determination of a consumer’s ability to repay a residential mortgage loan according to its terms. Loans that meet the ATR/QM Rule’s requirements for qualified mortgages (QMs) obtain certain protections from liability. The ATR/QM Rule defines several categories of QMs.

One QM category defined in the ATR/QM Rule is the General QM category. General QM loans must comply with the ATR/QM Rule’s prohibitions on certain loan features, its points-and-fees limits, and its underwriting requirements. Under the original ATR/QM Rule, the ratio of the consumer’s total monthly debt to total monthly income (DTI ratio) could not exceed 43 percent.

General QM Final Rule

In December 2020, the CFPB issued the General QM Final Rule, which among other changes replaced the General QM loan definition’s DTI limit with a limit based on loan pricing. The General QM Final Rule took effect on March 1, 2021, and it provides a mandatory compliance date of July 1, 2021.

In 2013, the CFPB created a second, supposedly temporary category of QMs for mortgages that (1) comply with the same loan-feature prohibitions and points-and-fees limits as General QMs and (2) are eligible to be purchased or guaranteed by Fannie Mae or Freddie Mac (collectively, the GSEs) while under the conservatorship of the Federal Housing Finance Agency (FHFA). These loans are referred to as Temporary GSE QM loans, and the provision that created this loan category is commonly known as the GSE Patch. Unlike for General QM loans, the ATR/QM rule did not prescribe a DTI limit for Temporary GSE QM loans. Thus, a loan can qualify as a Temporary GSE QM loan even if the consumer’s DTI ratio exceeds 43 percent, as long as the loan is eligible to be purchased or guaranteed by either of the GSEs. Under the original ATR/QM Rule, the Temporary GSE QM loan definition would expire with respect to each GSE when that GSE exits conservatorship or on January 10, 2021, whichever comes first.

Patch Extension Rule

In October 2020, the CFPB issued a final rule (the Patch Extension Rule) to replace the January 10, 2021 sunset date of the Temporary GSE QM loan definition with a provision stating that the Temporary GSE QM loan definition will be available only for covered transactions for which the creditor receives the consumer’s application before the mandatory compliance date of the General QM Final Rule. Therefore, under the CFPB’s current proposal, the Temporary GSE QM loan definition would expire upon the earlier of October 1, 2022 (rather than on the current mandatory compliance date of July 1, 2021) or the date the applicable GSE exits Federal conservatorship.

Timing Considerations

Public comments on the CFPB’s proposed Delay Rule are due on or before April 5, 2021. The CFPB proposes that a final rule based on its proposal be effective “60 days after publication in the Federal Register.” Also, the CFPB “anticipates that this would make the final rule effective before the current July 1, 2021 mandatory compliance date.”

Working backwards from the July 1, 2021 mandatory compliance date, the very last day the final rule could become effective is June 30, 2021. To be effective by that date, the Bureau must publish its final rule in the Federal Register by no later than April 30, 2021.

There is typically a delay between an agency’s public announcement of a final rule and the publication of that final rule in the Federal Register. The length of the delay varies based upon the amount of time required to process an agency’s submission, which mostly depends upon the page number length of the submission, and also on the overall volume of materials submitted by all Federal Departments and agencies for processing at a particular time.  (For example, although the CFPB announced General QM Final Rule on December 10, 2020, it was not published in the Federal Register until December 29, 2020. And although the CFPB announced the Patch Extension Rule on October 20, 2020, it was not published until October 26, 2020.)

Considering the page length and subject matter similarities between the Patch Extension Rule and the Delay Rule, anticipating a minimum six-day delay between announcing the Final Delay Rule and publication of the rule in the Federal Register appears reasonable. Based on this estimate, the CFPB must announce a final Delay Rule by no later than Friday, April 23.

Processing Time

The time period between the close of the April 5 comment period for the proposed Delay Rule and the day by which the CFPB must submit the text of the final Delay Rule to the Federal Register for processing is quite narrow. In fact, the CFPB has provided itself no more than about fourteen business days within which to perform several important and often time-consuming tasks, including:

  • analyzing the public comments, data and research received in response to its proposal;
  • determining whether to revise its proposal in light of relevant points raised by the comments,
  • drafting substantive responses to significant comments;
  • completing the internal divisional clearance process;
  • drafting the text of the final rule; and
  • securing approval of the Acting Director to issue the final rule.

Performing all of these tasks within the CFPB’s self-established timetable and in a manner consistent with the requirements of the Administrative Procedure Act (APA) will be difficult. For one thing, the time constraints suggest that the CFPB may begin drafting its final rule before the comment period closes, which may potentially raise questions about whether comments are given their due consideration and whether the CFPB maintains an open mind throughout the rulemaking process. For another thing, the CFPB likely cannot extend the comment period for its proposed rule; even a two-week extension would likely make it impossible for the CFPB to finalize a rule with an effective date occurring before July 1. This means that the CFPB likely must deny any extension request it receives, no matter what reason is provided in support of the request.

Takeaway

The availability of the GSE Patch and the continued ability of mortgage originators to make Temporary GSE QM loans depends upon the CFPB’s ability to finalize its proposed Delay Rule in short order. The timetable involved presents significant challenges for the CFPB, as noted above. The CFPB’s success or failure in that endeavor, and by extension the survival or demise of the GSE patch, will no doubt be received differently in different quarters, given the size of the mortgage market and the varied interests involved. This post simply notes that the CFPB is trying to thread a very small needle with its proposed Delay Rule.

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.