On August 28, the CFPB announced that it will hold a field hearing on vehicle finance on September 18, 2014 in Indianapolis. Consistent with its past field hearing announcements, the CFPB did not reveal the specific topics to be addressed. The hearing may relate to the CFPB’s planned larger participant rule for nonbank auto finance companies. In addition, earlier this year, Director Cordray stated in an appearance before the House Financial Services Committee that a white paper on the proxy methodology the CFPB uses to identify alleged discrimination in indirect auto finance was forthcoming.
CFPB Enforcement Action Targets Debt-Settlement Payment Processor For Aiding Collection Of Upfront Fees
On August 25, the CFPB announced a consent order with an Oklahoma-based debt-settlement payment processor for allegedly helping other companies collect unlawful upfront fees from consumers. The CFPB specifically alleged that the company violated the Telemarketing Sales Rule by making it possible for debt-settlement companies to charge consumers advance fees before settling any of their debts. The CFPB believes the company processed tens of millions of dollars in illegal advance fees from tens of thousands of customers on behalf of hundreds of debt relief companies across the country. The consent order requires the company to pay $6,099,000 in consumer relief and a civil money penalty of $1 million. In addition, the company is subject to monitoring by the CFPB and a third-party monitor, and must submit compliance reports.
On August 28, the CFPB announced several new hires, as well as the appointments of new consumer finance experts to its Advisory Board, Community Bank Advisory Council, and Credit Union Advisory Council. Director Cordray indicated that the new personnel “provide valuable input to help [the CFPB] better understand the consumer financial marketplace.” The positions announced include Patricia McClung as Assistant Director for Mortgage Markets, Janneke Ratcliffe as Assistant Director for Financial Education, and Will Wade-Gery as Assistant Director for Card and Payments Markets. Persons named to the Advisory Board, Community Bank Advisory Council and the Credit Union Advisory Council are “experts in consumer protection, financial services, community development, fair lending, civil rights, and consumer financial products or services.”
On August 22, the CFPB announced that it is amending Regulation E in order to extend a temporary exception that allows federally insured institutions to provide estimates rather than exact amounts when disclosing third-party fees and exchange rates that apply to remittance transfers sent abroad by U.S. consumers. The original rule went into effect on October 28, 2013 and the exception was set to expire on July 21, 2015. In amending Regulation E, the CFPB deferred the expiration date until July 21, 2020. The CFPB believes the extension will give financial institutions the additional time necessary to develop reasonable methods to provide consumers sending money abroad with exact fees and exchange rates, even in cases where the institution does not have control over all of the participants in the remittance transfer. The amendment also clarifies certain provisions related to error resolution procedures and disclosure delivery methods, as well as the application of the rule to U.S. military bases in foreign countries and non-consumer accounts. Simultaneously, the CFPB amended its official interpretation to Regulation E and released a revised version of its industry compliance guide that reflects modifications made by the final rule.
Recently, the CFPB signed a memorandum of understanding with the Departments of Veterans Affairs, Defense and Education to improve outreach and transparency to veterans and servicemembers by providing meaningful information to help them make informed decisions when selecting an institution of higher learning, including access to financial cost and performance outcome information. These improvements for military educational benefit recipients are designed to prevent deceptive recruiting practices and ensure that educational institutions provide high-quality academic and support services to veterans and servicemembers. Specifically, the agreement requires the CFPB to (i) designate the Assistant Director for Servicemember Affairs, Holly Petraeus, as the point of contact for information sharing processes among the Departments of Veterans Affairs, Defense and Education; (ii) alert agencies to patterns of noncompliance; and (iii) provide complaint data to the FTC. On August 26, the CFPB issued a press release describing this agreement as a means to better protect veterans, servicemembers, and their family members attending college by carrying out “a comprehensive strategy to strengthen enforcement and compliance work.” The agreement is effective July 18, 2014.
On August 26, the Obama Administration announced a new partnership with residential mortgage servicers designed to enhance protections under the Servicemember Civil Relief Act (SCRA). Speaking to the American Legion convention in Charlotte, North Carolina, President Obama observed that under the SCRA, service members and veterans are entitled to certain protections and benefits “but the burden is on them to ask for it and prove they’re eligible.” Under the new partnership, mortgage servicers will proactively identify eligible consumers and inform them of their rights and benefits under the law. Participating servicers will identify eligible participants by regularly checking their servicing portfolios against the Defense Manpower Data Center searchable database of military personnel. The initiative also aims to simplify the process for enrolling and satisfying the SCRA written notice requirements. The announcement was made as part of a White House effort to bolster services for service members, veterans, and their families.
Department Of Education Encourages FFEL Lenders To Adopt New Procedures For Determining SCRA Eligibility
On August 25, the U.S. Department of Education (ED) released a “dear colleague” letter authorizing and encouraging Federal Family Education Loan (FFEL) lenders and lender-servicers to use the new procedures adopted by ED for determining which borrowers are eligible for benefits under the Servicemembers Civil Relief Act. The new ED procedures require ED loan servicers to use the Department of Defense’s website to access the Defense Manpower Data Center (DMDC) database. From there, the ED loan servicers compare their list of borrowers against the DMDC database to identify borrowers who are eligible for the SCRA interest rate limitation. Once the borrower’s status and service dates have been confirmed using the DMDC, the FFEL lenders and lender-servicers using this process may use the DMDC-generated certification information in lieu of having a servicemember submit a copy of his military orders and a written request to receive the SCRA benefits. When the FFEL lender or lender-servicer applies the SCRA interest rate limitation to the borrower’s account, it must notify the borrower of the interest rate change.
On August 22, the Federal Housing Finance Agency (FHFA) announced that it settled litigation with a major investment bank, other related companies, and several individuals over alleged violations of federal and state securities laws in connection with private-label mortgage-backed securities purchased by Fannie Mae and Freddie Mac between 2005 and 2007. In 2011, FHFA, as conservator for the two GSEs brought suit in the U.S. District Court of the Southern District of New York seeking relief for damages that allegedly resulted from a failure to adequately disclose risks related to the subject MBS offerings. Under the terms of the settlement, the bank is required to pay $3.15 billion to repurchase securities that were the subject of the claims in FHFA’s lawsuit. The difference between that amount and the securities’ current value is approximately $1.2 billion. According to FHFA, that difference is sufficient to effectively make the two GSEs whole on their investments. With this settlement, FHFA has resolved sixteen of the eighteen RMBS suits it filed in 2011. For details on those settlements, please see FHFA’s update on private-label securities suits. For specifics relating to how the August 22 settlement will impact each of the GSEs, please see the purchase and settlement agreements with Fannie Mae and Freddie Mac.
On August 22, the CFPB and the federal banking agencies (Fed, OCC, FDIC and NCUA) issued interagency guidance regarding unfair or deceptive credit practices (UDAPs). The guidance clarifies that “the repeal of the credit practices rules applicable to banks, savings associations, and federal credit unions is not a determination that the prohibited practices contained in those rules are permissible.” Notwithstanding the repeal of these rules, the agencies preserve supervisory and enforcement authority regarding UDAPs. Consequently, the guidance cautions that “depending on the facts and circumstances, if banks, savings associations and Federal credit unions engage in the unfair or deceptive practices described in the former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.” The guidance also explains that the FTC Rule remains in effect for creditors within the FTC’s jurisdiction, and can be enforced by the CFPB against creditors that fall under the CFPB’s enforcement authority.
On August 26, HUD issued its final rule prohibiting mortgagees from charging post-payment interest under FHA’s single family mortgage insurance program. The final rule is responsive to the CFPB’s ATR/QM rule, under which post-payment interest charges will be considered a prepayment penalty in connection with FHA loans closed on or after January 21, 2015. Because prepayment penalties are prohibited on higher-priced FHA loans, the new definition of “prepayment penalty” under the ATR/QM rule would have effectively prohibited the making of higher-priced FHA mortgage loans. Also effective January 21, 2015, HUD’s final rule ensures consistency among FHA single-family mortgage products and provides the same protections for all borrowers. Under the final rule, monthly interest on the debt must be calculated on the actual unpaid principal balance as of the date prepayment is received.
On August 26, HUD issued its final rule to amend FHA’s single family adjustable rate mortgage (ARM) program regulations to align with the interest rate adjustment and notification periods required for ARMs under the CFPB’s new TILA mortgage servicing rules. The final rule is effective January 10, 2015 and adopted the proposed rule issued on May 8 without change. Under the final rule, interest rate adjustments resulting in a corresponding change to the mortgagor’s monthly payment for an ARM must be based on the most recent index value available 45 days before the date of the rate adjustment. FHA’s previous regulations provided for a 30-day look-back period. Further, the final rule mandates that mortgagees of FHA-insured ARMs comply with the disclosure and notification requirements of the CFPB’s TILA servicing rules, which require at least 60-days, but no more than 120-days advance notice of an adjustment to a mortgagor’s monthly payment. Previously, the regulations provided for only 25 days advance notice.
On August 27, the SEC adopted revisions to rules governing the disclosure, reporting and offering process for asset-backed securities (ABS) and adopted new requirements for credit rating agencies registered with the SEC to increase governance controls, enhance transparency, and increase credit rating agency accountability. The adopted ABS reforms will make it easier for investors to review and analyze the credit risk of ABS. The revised ABS rules will (i) require issuers to provide standardized asset-level disclosures for ABS backed by residential mortgages, commercial mortgages, auto loans, auto leases, and debt securities; (ii) provide investors with an additional three days to analyze a preliminary prospectus prior to the first sale of securities in the offering; (iii) revise the eligibility requirements for ABS shelf offerings and require additional changes to the procedures and forms related to shelf offerings; and (iv) revise reporting requirements to include expanded and additional information in the prospectus disclosure for ABS. The new rules adopted for credit rating agencies registered with the SEC require these agencies to (i) consider certain identified factors with respect to establishing, maintaining, and enforcing an internal control structure and file an annual report to the SEC regarding the agency’s internal control structure; (ii) implement conflict of interest controls to prevent inappropriate considerations from affecting a credit agency’s production of credit ratings; (iii) require public disclosure of credit rating performance statistics and histories; (iv) implement procedures to protect the credibility and transparency of rating methodologies, including disclosure requirements regarding the same; and (v) establish standards to ensure that credit analysts meet certain training, experience, and competence thresholds.
On August 25, Fannie Mae issued Lender Letter LL-2014-04, which reminds lenders that when a mortgage loan is selected by Fannie Mae for an anti-predatory and HOEPA compliance review, the lender must provide requested loan information to Fannie Mae. Further, the letter reminds sellers that mortgage loans with either an annual percentage rate or total points and fees payable by the borrower that exceed the applicable HOEPA thresholds are not eligible for delivery to Fannie Mae. Additionally, Fannie Mae released an optional worksheet, available on the Fannie Mae website, designed to assist lenders in responding to any information requests from Fannie Mae. This letter highlights the continued focus of Fannie Mae regarding its anti-predatory lending quality control process.
On August 21, the CFPB announced the companies that have been selected to participate in its residential mortgage eClosing pilot program. The program is intended to explore how the increased use of technology during the mortgage closing process may affect consumer understanding and engagement and save time and money for consumers, lenders, and other market participants. Specifically, the program seeks to aid the CFPB in better understanding the role that eClosings can play in addressing consumers’ “pain points” in the closing process, as identified by the CFPB in an April 2014 report. The three-month pilot program will begin later this year, and the participants include both technology vendors that provide eClosing solutions and creditors that have contracted to close loans using those solutions.
On August 21, the DOJ announced that a large financial institution agreed to resolve federal and state mortgage-related claims through what the DOJ characterized as the largest ever civil settlement with a single entity. The agreement actually resolves numerous federal and state investigations related to various alleged practices conducted by the institution and certain former and current subsidiaries that it acquired during the financial crisis. Such allegations relate to the packaging, marketing, sale, arrangement, structuring, and issuance of RMBS and collateralized debt obligations (CDOs), as well as the underwriting and origination of mortgage loans. In total, the institution agreed to pay $9.65 billion in penalties and fines and provide $7 billion in relief to borrowers. Of the more than $9 billion in civil payments, $5 billion resolves several DOJ investigations related to RMBS and CDOs under FIRREA, as well as the allegedly fraudulent origination of loans sold to Fannie Mae and Freddie Mac or insured by the FHA. The origination investigations centered on alleged violations of the False Claims Act in the selling of, or seeking of government insurance for, loans alleged to be defective. Other penalty payments resolve RMBS-related claims by the SEC, the FDIC, and several states. In total, the state participants will receive nearly $1 billion, with California and New York obtaining the largest amounts at $300 million each. An independent monitor will be appointed to oversee the borrower relief provisions, which will require the institution to: (i) offer principal reduction loan modifications; (ii) make loans to “credit worthy borrowers struggling to obtain a loan”; (iii) make donations to certain communities harmed during the financial crisis; and (iv) provide financing for affordable rental housing. The institution also agreed to provide funding to defray any tax liability that will be incurred by borrowers who receive certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.