Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

CFPB Director Provides Update Relating to QM Patch Expiration

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A&B ABstract: A recent letter from Consumer Financial Protection Bureau (“CFPB”) Director Kathleen Kraninger provides clues about the potential future of the so-called “QM Patch.”

Discussion:

In  a December 17, 2020 letter to Senator Mike Rounds (“Letter”), CFPB Director Kathleen Kraninger, revealed a number of interesting insights about the CFPB’s ongoing evaluation of the reformation of the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, including the phase-out of the “QM Patch”.

Background:

The CFPB enacted the QM Patch as a temporary provision of the ATR/QM regulations promulgated pursuant to the Dodd-Frank Act.  It exempts lenders from having to underwrite loans with debt-to-income 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 qualified mortgage and are eligible for purchase by, among others, Fannie Mae and Freddie Mac.

On July 25, 2019, the 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.  In seeking public comment in the ANPR, however, the CFPB announced that it does not intend to extend the “QM Patch” permanently.

The Letter:

Based on public comments submitted in response to the ANPR, Director Kraninger indicated that the CFPB, in amending the definition of what constitutes a qualified mortgage, will issue a Notice of Proposed Rulemaking (“NPRM”) by no later than May 2020.

The Letter provides further detail on the NPRM.  First, the CFPB will propose to eliminate the current 43% debt-to-income requirement and impose an alternative measure such as a pricing threshold (“i.e., the difference between the loan’s APR and the average prime offer rate for a comparable transaction”).  Director Kraninger asserted that the pricing threshold would help facilitate the offering of “responsible, affordable mortgage credit”.   Second, the CFPB will propose to extend the expiration of the QM Patch for a short period pending the effective date of the proposed alternative.

Perhaps even more significantly, Director Kraninger indicated that the CFPB in a separate NPRM may adopt a new “seasoning” mechanism that would confer QM Safe Harbor treatment to certain loans that have a history of timely payments.  This mechanism would greatly facilitate the sale and securitization of non-QM loans that may have missed being classified as QM due to some blemish prior to consummation.

Takeaway:

Director Kraninger’s brief comments in the Letter indicate that the CFPB is determined to eliminate the QM Patch after a short extended transition period.   Further, the CFPB has demonstrated its commitment to reforming the definition of a qualified mortgage in a manner that will enhance credit availability to a broader spectrum of the credit markets—or so it is thought—and give a lifeline to seasoned highly performing loans that have previously been excluded from the gold standard QM Safe Harbor  category.   The credit markets anxiously await the promulgation of these anticipated proposed rulemakings.

 

CFPB Releases Policy Statement on Compliance Aids

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A&B Abstract:

On January 27, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published a policy statement announcing a new designation for CFPB guidance, known as “Compliance Aids,” and explaining the legal status and effect of any Bureau guidance labeled as such (the “Policy Statement”).

CFPB Policy Statement

The Policy Statement announces the Bureau’s intent to establish a new category of materials similar to prior compliance resources, but which will now be designated as Compliance Aids. The Bureau noted that Compliance Aids “will provide the public with greater clarity regarding the legal status and role of these materials.”  The Policy Statement does not alter the status of CFPB materials that were previously issued, but the Bureau indicated that it may reissue certain existing materials as Compliance Aids “if it is in the public interest and as Bureau resources permit.”

Notably, the Policy Statement provides that the Bureau does “not intend to use Compliance Aids to make decisions that bind regulated entities.” Rather, Compliance Aids “present the requirements of existing rules and statutes in a manner that is useful for compliance professionals, other industry stakeholders, and the public” and “may also include practical suggestions for how entities might choose to go about complying with those rules and statutes.” However, the Bureau acknowledges that Compliance Aids may not address all situations and that where there are multiple approaches to compliance that are permitted by the applicable rules and statutes, an entity can make its own business decisions regarding which method to use, which may involve methods not addressed in a Compliance Aid. While entities are not required to comply with Compliance Aids, such aids are designed to accurately summarize and illustrate the underlying rules and statutes. Accordingly, the Bureau indicated that in exercising its enforcement and supervisory discretion, it does not intend to sanction, or ask a court to sanction, entities that reasonably rely on Compliance Aids.

Takeaways

We applaud the Bureau for recognizing that enforcement should be based on compliance with applicable statutes and regulations.  Since its inception, the Bureau has provided guidance to the industry through a variety of means.  The Policy Statement provides a list of examples, including small entity compliance guides, instructional guides for disclosure forms, executive summaries, summaries of regulation changes, factsheets, and compliance checklists.  Notably missing from the Bureau’s list are compliance bulletins, through which the Bureau has previously provided its interpretation of certain statutes and/or regulations within its purview.  While the Bureau does not specify what categories of guidance would receive a Compliance Aid designation moving forward, it noted that it may reissue prior guidance as a Compliance Aid.  It will be interesting to see whether this list of examples is a signal of the types of resources that the Bureau may reissue as Compliance Aids.

California Governor Moves to Strengthen State Consumer Protection Enforcement in 2020

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A&B ABstract:

On January 10, 2020, California Governor Gavin Newsom released his budget summary for 2020 to 2021. Fearing that the Trump administration will further roll back consumer financial protections, Gov. Newsom proposed the California Consumer Financial Protection Law, which would provide the state’s primary financial services regulator with additional authority to enforce consumer protection laws.

Discussion

In his budget summary for 2020 to 2021 (“Budget”), Gov. Newsom expressed concern that “[t]he federal government’s rollback of the [Consumer Financial Protection Bureau (“CFPB”)] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Seeking to protect Californians from the effects of such rollbacks, Gov. Newsom proposed that state funds be allocated to enact and administer the California Consumer Financial Protection Law (“CCFPL”).

A draft of the CCFPL is not yet available.  However, as described in the Budget, the CCFPL would expand the authority and capacity of the state’s primary financial services regulator, the Department of Business Oversight (“DBO”), “to protect [California] consumers and foster the responsible development of new financial products.”

Change in Regulatory Structure

The DBO, which would be re-named the Department of Financial Protection and Innovation (“DFPI”), would be responsible for:

  • Offering services to empower and educate consumers, especially older Americans, students, military service members, and recent immigrants;
  • Licensing and examining new industries that are currently under-regulated [including, but not limited to, debt collectors, credit reporting agencies, and financial technology companies];
  • Analyzing patterns and developments in the market to inform evidence-based policies and enforcement;
  • Protecting consumers through enforcement against unfair, deceptive, and abusive practices;
  • Establishing a new Financial Technology Innovation Office that will proactively cultivate the responsible development of new consumer financial products;
  • Offering legal support for the administration of the new law; and
  • Expanding existing administrative and information technology staff to support the DFPI’s increased regulatory responsibilities.

The statements on the DFPI indicate that it will be another “mini-CFPB” (i.e. a state version of the CFPB) that will protect California consumers in a way that Gov. Newsom believes the CFPB cannot. Former CFPB Director Richard Cordray is reportedly working with California to develop the DFPI.

DFPI Funding and Staffing

The Budget includes a $10.2 million Financial Protection Fund and the creation of 44 new positions at the DFPI between 2020 and 2021. This will grow to $19.3 million and 90 new positions at the DFPI between 2022 and 2023, to establish and administer the CCFPL. According to the Budget, initial costs for the DFPI and the CCFPL “will be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on any newly-covered industries and increased fees on existing licensees.”

Takeaway

Gov. Newsom’s comments in the Budget suggest that California will be more active in investigating regulated financial services entities and enforcing California’s existing consumer protection laws. Additional regulations may be passed as part of this initiative. Action by California is consistent with a growing trend among the states to be more active in their oversight of regulated industries in response to a less active CFPB. Industry participants should be mindful of this trend, assessing their compliance programs to manage oversight from multiple entities under multiple regulatory schemes.

CFPB Issues New Edition of Supervisory Highlights

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A&B ABstract:

 The Fall 2019 edition of the CFPB’s Supervisory Highlights focuses on credit reporting issues of interest.

Discussion

The Fall 2019 edition of Supervisory Highlights represents the second time the Consumer Financial Protection Bureau (“CFPB”)  has focused entirely on credit reporting.  With respect to furnishers, the Supervisory Highlights includes five categories of supervisory observations relating to compliance with the Fair Credit Reporting Act (“FCRA”) and its implementing Regulation V and associated compliance management system weaknesses.

Policies and Procedures

 Under Regulation V, a furnisher must establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the consumer information it provides to consumer reporting companies (“CRCs”).  Related examination findings by the CFPB include:

  • Mortgage industry furnishers failed to have policies and procedures appropriate to the nature, size, complexity, and scope of their activities;
  • The policies and procedures of auto loan furnishers failed to provide sufficient guidance on the conduct of “reasonable investigations of indirect disputes that contain allegations of identity theft”; and
  • Debt collection furnishers failed to have policies and procedures that differentiated between FCRA disputes, disputes under the Fair Debt Collection Practices Act, and debt validation requests.

The CFPB also addressed examination findings for furnishers of deposit account information.

Reporting Information with Actual Knowledge of Errors

 Under FCRA, a furnisher cannot furnish information relating to a consumer that it “knows or has reasonable cause to believe … is inaccurate,” unless the furnisher clearly and conspicuously discloses to the consumer an address to which the consumer can send notice that specific information is inaccurate.

The CFPB found that one or more furnishers violated this prohibition by reporting to CRCs accounts with derogatory status codes that were inaccurate because of coding errors, and that the furnishers knew or had reasonable cause to believe were inaccurate.  Further, these furnishers failed: (1) in investigating disputes of such information to conduct a root-cause analysis that would have identified the source of the issue; and (2) to provide consumers with a clear and conspicuous disclosure of the address to which they could send notices of dispute.

Duty to Correct and Update Information

 A furnisher must promptly notify a CRC if it determines that information provided to the CRC is incomplete or inaccurate, and must make any corrections or addition to the information to correct the issue.  The CFPB identified examples of auto loan and deposit account furnishers who violated this duty.

Duty to Provide Notice of Delinquency of Accounts

 FCRA imposes on furnishers a duty to report the date of first delinquency – defined as “the month and year of commencement of the delinquency on the account that immediately preceded the action” – to a CRC within 90 days.  The CFPB identified instances of furnishers incorrectly reporting the date of delinquency

Obligations Upon Notice of Dispute

 The final category of findings in connection with the activities of furnishers is obligations upon notice of dispute.  If a consumer disputes the accuracy of information contained in a consumer report, FCRA and Regulation V require a furnisher to conduct a reasonable investigation of the dispute.

Among other issues, the CFPB noted that furnishers violated this duty by:

  • Failing to conduct reasonable investigations of both direct and indirect disputes;
  • Failing to timely complete dispute investigations within the timeframe established by Regulation V (generally 30 days); or
  • Failing to notify consumers of a determination that a dispute is frivolous or irrelevant (and that, as a result, the furnisher will not undertake an investigation).

Takeaway

As the second edition dedicated to consumer reporting, these Supervisory Highlights puts furnishers and CRCs that this is an area of focus for the CFPB.  Building on the credit reporting supervisory observations in the Summer 2019 edition, furnishers – banks, mortgage servicers, auto loan servicers, student loan servicers, and debt collectors – should take the opportunity to evaluate their own policies, procedures, and processes for compliance with FCRA and Regulation V.

CFPB Issues Its Fall 2019 Rulemaking Agenda

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A&B Abstract:

On November 20, 2019, the Consumer Financial Protection Bureau (the “Bureau” or “CFPB”) published its Fall 2019 Rulemaking Agenda (the “Rulemaking Agenda”) as part of the Fall 2019 Unified Agenda of Federal Regulatory and Deregulatory Actions. The Rulemaking Agenda sets forth the matters that the Bureau reasonably anticipates having under consideration during the period from October 1, 2019 to September 30, 2020.  The Rulemaking Agenda is the first Unified Agenda prepared by the CFPB since Director Kraninger embarked on her “listening tour” shortly after taking office in December 2018. Below we highlight some of the key agenda items discussed in the Rulemaking Agenda.

Implementing Statutory Directives

In the Rulemaking Agenda, the Bureau indicates that it is engaged in a number of rulemakings to implement directives mandated in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”), the Dodd-Frank Act and other statutes.  For example:

Truth in Lending Act

In March 2019, the Bureau published an Advanced Notice of Proposed Rulemaking (“ANPR”) seeking public comment relating to the implementation of section 307 of the EGRRCPA, which amends the Truth in Lending Act (“TILA”) to mandate that the Bureau prescribe certain regulations relating to “Property Assessed Clean Energy” (“PACE”) financing.  The Bureau indicated that it is reviewing the comments it has received in response to the ANPR as it considers next steps to facilitate the development of a Notice of Proposed Rulemaking (“NPRM”).

TRID Rule Guidance

The Bureau has also been engaged in several other activities to support its rulemaking to implement the EGRRCPA.  For example, the Bureau noted that it has (i) updated its small entity compliance guides and other compliance aids to reflect the EGRRCPA’s statutory changes; and (ii) issued written guidance as encouraged by section 109 of the EGRRCPA, which provides that the Bureau “should endeavor to provide clearer, authoritative guidance” on the CFPB’s TILA/RESPA Integrated Disclosure rule.

Implementation of Section 1071 of Dodd-Frank

Additionally, the Bureau is undertaking certain activities to facilitate its mandate to prescribe rules implementing Section 1071 of the Dodd-Frank Act, which amended the Equal Credit Opportunity Act to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses.  For example, on November 6, 2019, the Bureau hosted a symposium on small business data collection in order to facilitate a discussion with outside experts on the issues implicated by creating such a data collection and reporting regime.

We have previously issued an advisory in which we discuss the key mortgage servicing takeaways from the EGRRCPA.

Continuation of the CFPB’s Spring 2019 Rulemaking Agenda

The Rulemaking Agenda notes that the Bureau will continue with certain other rulemakings that were described in its Spring 2019 Agenda that are intended to “articulate clear rules of the road for regulated entities that promote competition, increase transparency, and preserve fair markets for financial products and services.”  Such rulemakings include:

HMDA and Regulation C

In May 2019, the Bureau issued a NPRM to (i) reconsider the thresholds for reporting data about closed-end mortgage loans and open-end lines of credit under the Bureau’s 2015 Home Mortgage Disclosure Act (“HMDA”) Rule and to incorporate into Regulation C an interpretive and procedural rule that the Bureau issued in August 2018 in order to implement certain partial HMDA exemptions created by the EGRRCPA.  In summer 2020, the Bureau is expecting to issue an NPRM to follow-up on an ANPR issued in May 2019 related to data points and coverage of certain business- or commercial-purpose loans.  The Bureau also anticipates issuing a NPRM addressing the public disclosure of HMDA data in light of consumer privacy interests to allow the Bureau to concurrently consider the collection and reporting of data points and the public disclosure of those data points.

Proposed Regulation F

In May 2019, the Bureau issued a NPRM which would, for the first time, prescribe substantive rules under Regulation F, which implements the Fair Debt Collection Practices Act, to govern the activities of debt collectors (the “Proposed Rule”). The Proposed Rule would address several issues related to debt collection, such as (i) addressing communications in connection with debt collection; (ii) interpreting and applying prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection; and (iii) clarifying requirements for certain consumer-facing debt collection disclosures.  The Bureau noted that it is also engaged in testing of consumer disclosures relating to time time-barred debt disclosure issues that were not part of the Proposed Rule.  The results of the CFPB’s testing will inform the Bureau’s assessment of whether to issue a supplemental NPRM seeking comments on any disclosure proposals related to the collection of time-barred debt.

We previously published a five-part blog series in which we discussed the provisions of the Proposed Rule that are under consideration. We will continue to monitor and report on any developments related to the Proposed Rule.

Payday, Vehicle Title, and Certain High-Cost Installment Loans (the “Payday Rule”)

The Bureau is expecting to take final action in April 2020 on the NPRM issued in February 2019 related to the reconsideration of the mandatory underwriting requirements of the 2017 Payday Rule.  That said, we note that the U.S. District Court for the Western District of Texas has stayed the Payday Rule’s August 19, 2019 compliance date. The parties before the court have a status hearing on December 6, 2019 which could affect the stay and the effective date of the Payday Rule.

Remittance Rule

In addition, the Rulemaking Agenda notes that the Bureau is planning to issue a proposal this year to amend the CFPB’s Remittance Rule to address the effects of the expiration in July 2020 of the Rule’s temporary exception allowing institutions to estimate fees and exchange rates in certain circumstances.

New Rulemakings and Review of Existing Regulations

Expiration of the “GSE Patch”

In January 2019, the Bureau completed an assessment of certain rules that require mortgage lenders to make a reasonable and good faith determination that consumers have a reasonable ability to repay certain mortgage loans and that define certain “qualified mortgages” that a lender may presume comply with the statutory ability-to-repay requirement. The “GSE Patch” is set to expire in January 2021, meaning that loans eligible to be purchased or guaranteed by GSEs that are originated after that date would not be eligible for qualified mortgage status under its criteria. In July 2019, the Bureau issued an ANPR to amend Regulation Z, regarding the scheduled expiration of the GSE Patch, and is currently reviewing the comments it received since the comment period closed on September 2019.

As noted in a previous blog post, the CFPB announced in its ANPR, that the Bureau does not intend to extend the GSE patch permanently. It will be interesting to see whether the Bureau will allow the patch to expire in January 2021 as planned of if the Bureau will use this as an opportunity to possibly extend the expiration date.

Addition of New Regulatory Agenda Items

In response to feedback received in response to the Bureau’s 2018 Call for Evidence and other outreach efforts, the Bureau is adding two new items to its long-term regulatory agenda to address concerns related to (i) loan originator compensation; and (ii) the use of electronic channels of communication in the origination and servicing of credit card accounts.

Review of Existing Regulations

The Rulemaking Agenda also highlights the Bureau’s active review of existing regulations.  For example, the CFPB will be assessing its so-called TRID Rule pursuant to Section 1022(d) of the Dodd-Frank Act, which requires the CFPB to publish a report assessing the effectiveness of each “significant rule or order” within five years of it taking effect.  The Bureau must issue a report with the results of its assessment by October 2020.

The Rulemaking Agenda further notes that, in 2020, the Bureau expects to conduct a 610 RFA review of the Regulation Z rules that implemented the Credit Card Accountability Responsibility and Disclosure Act of 2009.  Section 610 of the RFA requires federal agencies to review each rule that has or will have a significant economic impact on a substantial number of small entities within 10 years of publication of the final rule.

Takeaway

The Bureau’s Rulemaking Agenda gives industry an advanced look at what to expect from the CFPB in the coming months. We expect the Bureau to be active in working through their agenda and will provide further updates as they become available.

* We would like to thank Associate, David McGee, for his contributions to this blog post.