Alston & Bird Consumer Finance Blog

Dodd-Frank Act

CFPB Issues Warning to Mortgage Servicing Industry

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A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

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 Retires the “QM Patch” and Revises QM Rules

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Money

A&B ABstract:

In a significant final rulemaking with potentially far-reaching consequences for the residential mortgage markets, the Consumer Financial Protection Bureau (“CFPB”) is terminating the “QM Patch” and significantly revising the criteria for what constitutes a qualified mortgage (“QM”) loan.

Notably, in this rule, issued on December 10, 2020, the CFPB replaces the dreaded Appendix Q and strict 43% debt-to-income underwriting threshold with a priced-based QM loan definition.  The rule takes effect on February 27, 2021, but compliance with it is 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 a separate rulemaking, the CFPB promulgated new rules for “seasoned QM loans”.  We will discuss that rulemaking in a separate post.

Background

The CFPB’s ability-to-repay/QM regulations, promulgated pursuant to the Dodd-Frank Act, require a creditor to make a reasonable, good-faith determination at or before consummation that a consumer will have a reasonable ability to repay the loan according to its terms.  (The obligation applies to a consumer credit transaction secured by a dwelling.)

The regulations currently provide:

  • a “safe harbor” for compliance with the ability-to-repay rules to creditors or assignees of loans that satisfy the definition of a QM and are not higher-priced mortgage loans; and
  • a “rebuttable presumption” of compliance with the ability-to-repay rules to creditors or assignees for higher-priced mortgage loans.

A “higher-priced mortgage loan” has an annual percentage rate (“APR”) exceeding the average prime offer rate (“APOR”) by 1.5 or more percentage points for first-lien loans, or by 3.5 or more percentage points for subordinate-lien loans.

The QM Patch

In many instances, in order for a loan to achieve QM status, it must be underwritten in accordance with exacting standards of Appendix Q, and the consumer’s debt-to-income (“DTI”) ratio may not exceed a 43% hard limit.  However, the CFPB regulations eliminate these particular requirements if the loan is eligible for purchase by, among others, Fannie Mae and Freddie Mac.  Consequently, a loan satisfies the QM Patch if it can be sold to one of the GSEs and meets certain other QM criteria.  (Such criteria include that the points do not exceed the three percent threshold, and the loan is fully amortizing and doesn’t have a term exceeding 30 years.)

The QM Patch has significantly enhanced the presence of the GSEs in the QM market, as the GSEs are in effect backstopping the underwriting of these loans.  The regulations scheduled this exemption to expire upon the earlier of the termination of the conservatorship of the particular GSEs, or January 10, 2021.

What the rule did not anticipate is that the conservatorship of the GSEs would continue years after the effective date of the CFPB regulations (January 10, 2014). Many have criticized the QM Patch for unduly advantaging the government subsidized GSEs at the expense of the private residential mortgage market participants, and have clamored for its elimination.

The Final Rulemaking: QM Patch Expiration

 Notably, under the final rule, the QM Patch permanently sunsets on the earlier of (i) July 1, 2021 or (ii) the date that the GSEs exit conservatorship.  The timing is tricky because Mark Calabria, the Director of the Federal Housing Finance Agency, the entity that supervises the conservatorships of Fannie Mae and Freddie Mae, has indicated that he might seek to terminate the conservatorships prior to President Trump’s departure from office.  In recent remarks, however, Treasury Secretary Steven Mnuchin has indicated that termination of the conservatorships is not imminent.

Significantly, the expiration of the QM Patch does not affect the QM definitions that apply to Federal Housing Administration (FHA), US Department of Veterans Affairs (VA), US Department of Agriculture (USDA) or Rural Housing Service loans.  In other words, loans eligible to be insured or guaranteed by these agencies may still constitute QMs if they meet the agencies’ respective definitions of a QM.

Appendix Q and 43% DTI Requirement Removal

Further, in this final rule, the CFPB eliminates the Appendix Q 43 percent DTI underwriting requirements and replaces them with a priced-based QM definition.

Under the rule, for first-lien transactions, a loan receives a conclusive presumption that the consumer had the ability to repay (and hence receives the “safe harbor” presumption of QM compliance) if the APR does not exceed the APOR for a comparable transaction by 1.5 percentage points or more as of the date the interest rate is set. A first-lien loan receives a “rebuttable presumption” that the consumer had the ability to repay if the APR exceeds the APOR for a comparable transaction by 1.5 percentage points or more but by less than 2.25 percentage points.  The final rule provides for higher thresholds for loans with smaller loan amounts, for subordinate-lien transactions, and for certain manufactured housing loans.

In order to qualify for QM status, the loan must continue to meet the statutory requirements regarding the 3% points and fees limits, and must not contain  negative amortization, a balloon payment (except in the existing limited circumstances), or a term exceeding 30 years.     

Consider and Verify Consumer Income and Assets

In lieu of underwriting to Appendix Q, the final rule requires that the creditor consider the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan, debt obligations, alimony, child support, and DTI ratio or residual income.  The final rule also requires the creditor to verify the consumer’s current or reasonably expected income or assets other than the value of the dwelling (including any real property attached to the dwelling) that secures the loan and the consumer’s current debt obligations, alimony, and child support.   

Consider Requirement

In particular, in order to comply with the requirement to “consider” under the rule, the CFPB provides creditors the option to “consider” either the consumer’s monthly residual income or DTI.  The CFPB imposes no bright line DTI limits or residual income thresholds.

As part of the consider requirement, a creditor must maintain policies and procedures for how it takes into account the underwriting factors enumerated above, as well as retain documentation showing how it took these factors into account in its ability to repay determination.

The CFPB indicates that this “this documentation may include, for example, an underwriter worksheet or a final automated underwriting system certification, in combination with the creditor’s applicable underwriting standards and any applicable exceptions described in its policies and procedures, that shows how these required factors were taken into account in the creditor’s ability-to-repay determination.”

Verify Requirement and “Safe Harbor”

With respect to the “verify” requirement, the rule does not prescribe specific methods of underwriting that a creditor must use, as long as the creditor uses third-party records that provide reasonably reliable evidence of the consumer’s income or assets.  Indeed, the rule permits the creditor to use any “reasonable verification method and criteria”.

Nevertheless, in an especially significant provision of the rule, the CFPB provides a “safe harbor” to creditors using verification standards from relevant provisions from  Fannie Mae’s Single Family Selling Guide, Freddie Mac’s Single-Family Seller/Servicer Guide, FHA’s Single Family Housing Policy Handbook, the VA’s Lenders Handbook, and the Field Office Handbook for the Direct Single Family Housing Program and Handbook for the Single Family Guaranteed Loan Program of the USDA.  In other words, under the rule, a creditor is deemed to have complied with this “verify” requirement if it complies with the verification standards in one or more of these agency manuals.

In fact, the rule permits the creditor to “mix and match” verification standards from different agency manuals.  Stated another way, the creditor is deemed to comply with the “verify” requirement if it complies with one of more of the verification standards of the manuals listed above.  Again, creditors are not required to verify income and debt according to the standards the CFPB specifies.

Treatment of Certain Five-Year ARM Loans

Under the rule, the CFPB creates a special provision for adjustable rate mortgages (ARMs) with initial fixed-rate periods of five years or less.  In these transactions, the interest rate may or will change within the first five years after the date on which the first regular periodic payment will be due.

For purposes of determining whether these ARMs are accorded QM status, the creditor is required to ascertain the APR by treating the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan.  As an illustration of the foregoing, the rule provides:

For example, assume an adjustable-rate mortgage with a loan term of 30 years and an initial discounted rate of 5.0 percent that is fixed for the first three years. Assume that the maximum interest rate during the first five years after the date on which the first regular periodic payment will be due is 7.0 percent. Pursuant to [ the rule], the creditor must determine the annual percentage rate based on an interest rate of 7.0 percent applied for the full 30-year loan term.

Takeaways   

On its face, the final rule appears to significantly alter the criteria for QM loans and seemingly diminishes the presence of the GSEs in in the QM market.  In eliminating the QM Patch, Appendix Q and the hard 43% DTI threshold, the rule gives a creditor certain flexibility in originating QMs as long as it underwrites the loans using the specified “consider” and “verify” standards.

Ironically, the much-maligned Appendix Q provided a recognized measure of certainty of compliance with the QM underwriting rules if the creditor could adhere it its sometimes-arbitrary standards.  Further, for GSE-conforming loans, as long as the loan was eligible to be purchased by Fannie Mae or Freddie Mac, and otherwise met the product feature and point/fee limits, the loan was automatically deemed QM.

Under the final rule, however, unless the creditor avails itself of the “safe harbor” for verifying the consumer’s income, assets, debt obligations, alimony and child support, the creditor’s underwriting of the loan to achieve QM status is inherently subjective , and hence, at least initially may not be accorded the same recognition in the secondary market as a loan that had been underwritten to Appendix Q or had been subject to the QM Patch under the existing rule.  Consequently, as the rule is implemented, creditors will be strongly incentivized to avail themselves of the “safe harbor” by complying with the verification standards of one or more of the agency manuals.  Perhaps the revised rule will not diminish the presence of the GSEs in the QM market as anticipated.

CFPB Institutes Redlining Action Against Non-Bank Mortgage Lender

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A&B ABstract:

Recently, the Consumer Financial Protection Bureau (“CFPB”) brought its first ever redlining case against a non-depository institution. While the CFPB has yet to issue guidance regarding how it would evaluate a non-bank lender’s activities for potential redlining, the CFPB’s allegations in this case provide some insight to mortgage lenders regarding compliance expectations.

Discussion

On July 15, 2020, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender engaged in the redlining of African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) in violation of the Equal Credit Opportunity Act (“ECOA”) and, in turn, the Consumer Financial Protection Act (“CFPA”).

The complaint does not assert any claims under the Fair Housing Act (“FHA”), as that fair lending statute is enforced by the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”). Typically, “redlining” refers to a specific form of discrimination whereby the lender provides unequal access to, or unequal terms of, credit because of the prohibited basis characteristics of the residents of the area in which the loan applicant resides or in which the residential property to be mortgaged is located.

The Complaint

According to the complaint, during the January 1, 2014 to December 31, 2017 time period, Townstone “engaged in unlawful redlining and acts or practices directed at prospective applicants that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago MSA.” In support of this claim, the CFPB asserts that Townstone’s weekly marketing radio shows and podcasts included statements about African Americans and predominantly African-American neighborhoods (using terms such as “scary” and “jungle”) that would discourage African-American prospective applicants from applying to Townstone for mortgage loans.

Lack of Direct Marketing

Apart from the allegations regarding Townstone’s radio shows and podcasts, the complaint does not point to any intentional conduct or effort by Townstone to discriminate against African Americans or African-American neighborhoods. Rather, the complaint arrives at a general conclusion that Townstone “made no effort to market directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target any marketing toward African-Americans and did not employ an African-American loan officer among its 17 loan officers in the Chicago MSA. As a result, Townstone received few applications from African-Americans and only a handful of applications from residents of majority African-American neighborhoods.

However, with respect to the allegation that Townstone did not specifically target any marketing toward African-Americans, the CFPB concedes that Townstone generated 90% of its applications from radio advertising on an AM radio station that “reached the entire Chicago MSA” and thus included residents of majority African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ any African-American loan officers, it is unclear how the CFPB expects that the race of a particular loan officer would have increased the number of applications from members from the same racial group, since Townstone’s business model relied upon leads received through radio advertising rather than referrals.

Redlining

HUD and DOJ brought early redlining cases under a disparate treatment theory of discrimination, which requires evidence of a lender’s discriminatory motive or intent.  More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s failure to market to, and infiltrate, geographic areas that have a strong minority presence.

Data Support

As further support for its claim against Townstone, the CFPB cites to data comparing the loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of the loan applications received by Townstone were from African Americans, the average among peer lenders was 9.8%. Similarly, only between 1.4% and 2.3% of Townstone’s loan applications came from majority African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In further support of its claim, the CFPB argues that African Americans make up approximately 30% of the population of Chicago, though fails to note the Chicago MSA’s African-American population of approximately 16%.

Given this data, the complaint asserts that Townstone acted to meet the credit needs of majority-white neighborhoods in the Chicago MSA while avoiding the credit needs of majority African-American neighborhoods.  As a result, the CFPB alleges that Townstone thereby discouraged prospective applicants from applying to Townstone for mortgage loans in those neighborhoods.

Townstone’s Response

In response to the allegations, Townstone has published a fact sheet defending itself against the CFPB’s claim and noting its efforts to “reach as broad a geographic area as possible” by considering legitimate, non-discriminatory factors such as signal strength, and referencing other marketing measures specifically targeted at the African-American community. Further, Townstone has hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.

Takeaways

The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even though they are not subject to Community Reinvestment Act requirements regarding meeting the needs of an entire assessment area. Further, the complaint reminds lenders that their performance – measured primarily by number of loan applications received – will be compared against that of other lenders with similar size and loan origination volume. As such, lenders seeking to mitigate fair lending risk should evaluate the geographic distribution of their lending activity to determine whether, during a particular time period, they were significantly less likely to take loan applications from minority areas than non-minority areas.

CFPB’s Pursuit of Redlining Claim

More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim absent the traditional allegation that the lender sought to draw a “red line” around a particular demographic group or geographic area. Townstone’s radio advertising was not restricted to a particular demographic group or geographic area, nor could Townstone have altered the radio signals somehow to include or exclude particular groups or geographic areas. Further, Townstone had no control over the demographics of the AM radio station’s audience or that of particular radio shows.

Rather than alleging a traditional claim of redlining (i.e., actively avoiding a particular demographic group or geographic area), the CFPB seeks to hold Townstone liable for failing to conduct affirmative outreach and marketing to African-Americans. For example, the CFPB points out that Townstone had no African-American loan officers. Yet a lender’s failure to perform affirmative outreach to certain demographic groups or geographic areas, including by hiring loan officers of a particular demographic group, does not constitute redlining – nor are such actions required by ECOA.

The only allegation that Townstone redlined, in the traditional sense, is that its employees made statements that may have been intended to discourage African-American consumers from seeking a loan from Townstone. It is unclear whether these statements were intended to be commercial speech or merely ad hoc commentary regarding local current events.

ECOA Claim

Finally, it is worth noting that ECOA prohibits a creditor from discriminating against any “applicant,” which Regulation B clarifies to include prospective applicants. While the complaint alleges that Townstone discriminated against both prospective applicants and applicants, the CFPB makes no claim that Townstone’s actions had any effect on consumers who already had applied for a loan.

Ultimately, the complaint appears to signal the CFPB’s return to more aggressive and creative redlining enforcement under ECOA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid regulatory risk.

CFPB Issues Policy Statement on Dodd-Frank “Abusiveness” Standard, But Important Uncertainties Remain

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A&B ABstract:

The Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a Policy Statement to provide a framework for how it intends to apply the Dodd-Frank Act’s “abusiveness” standard going forward in its supervision and enforcement activities. While this framework attempts to provide clarity where the Dodd-Frank Act left uncertain what acts and practices would be considered “abusive,” the Policy Statement fails to address several key issues. In particular, the Policy Statement does not identify specific conduct that would be considered abusive—leaving public statements on such issues to enforcement matters and litigation.

Background to the Policy Statement

The Dodd-Frank Act (“the Act”) added a prohibition on “abusive” acts and practices to the established prohibition on unfair or deceptive acts and practices. Over the years, the Federal Trade Commission’s policy statements, enforcement actions, and judicial precedents have defined the prohibitions on “unfair” and “deceptive.” The abusiveness standard is less developed. The Act grants the CFPB authority to declare an act or practice as “abusive” if the act or practice: (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) takes unreasonable advantage of (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. This Policy Statement follows a symposium convened by the CFPB in 2019 where a panel of academics and regulatory and industry experts debated, among other issues, whether the CFPB should further define abusiveness.

Defining “Abusive” in Precedent

The CFPB and other agencies have seldomly alleged a standalone “abusive” claim; instead, such claims are generally paralleled by claims of “unfairness” and “deceptiveness.” When alleging abusive practices, the CFPB almost always alleged deceptive or unfair practices based on the same set of underlying facts. For example, in 2017 the CFPB alleged that a loan servicer routinely entered student loan borrowers into forbearance without adequately providing information to borrowers regarding possible income-based repayment plans. The CFPB argued that the servicer’s actions constituted both abusive practices and unfair practices under the Act, and the Court agreed.  While such decisions have provided some guidance on what constitutes an abusive practice under the Act, the courts, in reviewing such allegations, considered the statutory language but did not offer any guidance on what conduct might be construed as “abusive” but not construed as “unfair.”

The CFPB’s reticence to prosecute claims of abusive practices created a vacuum of interpretive guidance on how the abusiveness standard actually constrains businesses, beyond the black letter definition contained in the Act. For example, questions remained as to what act or practice would “materially interfere” with a consumer’s understanding of terms and conditions, or what exactly would constitute a financial service provider “taking unreasonable advantage” of a consumer seeking a product of service. These undefined terms left confusion and uncertainty for covered persons seeking to avoid violations. By contrast, the unfairness and deceptiveness standards (which were already in place before the Act’s introduction of an abusiveness standard) have been subject to decades of case law and agency interpretations, which have yielded clear guidance on what acts and practices are considered unfair or deceptive.

Content of the Policy Statement

The Policy Statement acknowledges that “[u]ncertainty remains as to the scope and meaning of abusiveness,” which “creates challenges for covered persons in complying with the law,” and it sets forth a framework regarding how the CFPB will enforce the abusiveness standard. It does not, however, describe or provide examples of precisely what conduct the CFPB would deem abusive.

The Policy Statement describes three categories of principles that the CFPB intends to apply to its supervision and enforcement actions.  The CFPB has stated that the principles reflect the standards it has applied in prior actions.

  1. Benefits vs. Harms: “The Bureau intends to focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if the Bureau concludes that the harms to consumers from the conduct outweigh its benefits to consumers (including its effects on access to credit).” The Policy Statement notes that incorporating this principle “not only ensures that the Bureau is committed to using its scarce resources to address conduct that harms consumers, but also ensures that the Bureau’s supervisory and enforcement decisions are consistent across matters.
  2. No Dual Pleadings: The Bureau intends to avoid “dual pleading” of abusiveness along with unfairness or deception violations which arise from all or nearly all the same facts, and alleging “stand alone” abusiveness violations that “demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis.” The Bureau believes that this approach to pleading will “provide more certainty to covered persons as to the metes and bounds of conduct the Bureau determines is abusive” and “facilitate the development of a body of jurisprudence as to the conduct courts conclude is abusive.”
  3. “Good Faith” Limits on Monetary Relief: “[T]he Bureau generally does not intend to seek certain monetary remedies for abusive acts or practices if the covered person made a good-faith effort to comply with the law based on a reasonable—albeit mistaken—interpretation of the abusiveness standard. However, if a covered person makes a good-faith but unsuccessful effort to comply with the abusiveness standard, the Bureau still intends to seek legal or equitable remedies, such as damages and restitution, to redress identifiable consumer injury.”

The Policy Statement in Context

The Policy Statement is not a CFPB rulemaking. Rather, the Policy Statement merely “constitutes a general statement of policy that is exempt from the notice and comment rulemaking requirements of the Administrative Procedure Act” and is only “intended to provide information regarding the Bureau’s general plans to exercise its discretion.” It “does not impose any legal requirements on external parties, nor does it create or confer any substantive rights on external parties that could be enforceable in any administrative or civil Proceeding.” As such, while the Policy Statement is intended as a helpful guide to the Bureau’s enforcement philosophy with regard to the abusiveness standard, it is not law, and is subject to revision in the event of any change in the CFPB’s leadership, policies, or priorities.

The Policy Statement is not expected to affect ongoing litigation.  In remarks to the United States House of Representative Financial Oversight Committee on February 6, 2020, CFPB Director Kathleen Kraninger stated that “At this point, we have not amended any filings in court and don’t intend to related to this specifically,” indicating that the CFPB doesn’t anticipate repleading any of its pending court enforcement actions in light of the Policy Statement.

Takeaways:

While the principles outlined in the Policy Statement provide an indication of how the CFPB will react to conduct it deems to be “abusive,” it falls short of providing clarity on it will deem abusive, thereby continuing the uncertainty regarding the abusive standard that has existed since its inception. Moreover, the principles set forth in the Policy Statement are themselves subject to uncertainty. For example, it is unclear what exactly constitutes consumer benefits or harms and how those factors are weighed to determine whether conduct is abusive; likewise, it is unclear what types of actions are sufficient to demonstrate a good-faith effort to comply with the law under a mistaken interpretation of the abusiveness standard.

Notably, however, the Policy Statement expressly left open “the possibility of engaging in a future rulemaking to further define the abusiveness standard,” which presumably may take the form of enforcement actions, CFPB advisories or other guidance, or updates to the CFPB examination manual.