On June 13, Florida Governor Rick Scott signed HB 783, which prohibits an “affiliated finance company”—i.e. an auto manufacturer’s or wholesale distributor’s captive finance company, as defined by the law—from (i) refusing to purchase or accept an assignment of a vehicle contract from a dealer or (ii) charging a dealer an additional fee or surcharge for the contract, solely because the contract contains an automotive-related product from a third-party. The restrictions apply only if the third-party product is of “similar nature, scope, and quality” to the product provided by affiliated finance company, or its related manufacturer or wholesale distributor. The bill provides factors for determining whether a product is similar. The new restrictions take effect July 1, 2014.
On June 25, the OCC published its semiannual risk report, which provides an overview of the agency’s supervisory concerns for national banks and federal savings associations, including operational and compliance risks. As in prior reports and as Comptroller Curry has done in speeches over the past year, the report highlights cyber-threats and BSA/AML risks. The OCC believes cyber-threats continue to evolve and require heightened awareness and appropriate resources to identify and mitigate the associated risks. Specifically, the OCC is concerned that cyber-criminals will transition from disruptive attacks to attacks that are intended to cause destruction and corruption. Extending another recent OCC theme, the report notes that the number, nature, and complexity of both foreign and domestic third-party relationships continue to expand, resulting in increased system and process interconnectedness and additional vulnerability to cyber-threats. The report also states that BSA/AML risks “remain prevalent given changing methods of money laundering and growth in the volume and sophistication of electronic banking fraud.” The OCC adds that “BSA programs at some banks have failed to evolve or incorporate appropriate controls into new products and services,” and again cautions that a lack of resources and expertise devoted to BSA/AML risk management can compound these concerns. Finally, the OCC expressed concern that competitive pressures in the indirect auto market are leading to an erosion of underwriting standards. The OCC’s supervisory staff plans to review retail credit underwriting practices at banks, especially for indirect auto.
CFPB Director Announces Indirect Auto Finance Proxy Methodology White Paper, Discusses Numerous Other Initiatives
On June 18, in an appearance before the House Financial Services Committee, CFPB Director Richard Cordray stated that later this summer the CFPB hopes to release a white paper on the proxy methodology it employs to identify alleged discrimination in indirect auto financing. The white paper follows repeated attempts by members of the Committee to force the CFPB to reveal more details about its approach to indirect auto finance enforcement. Director Cordray also revealed that the CFPB is working on a white paper regarding manufactured housing finance.
The hearing covered numerous additional topics, some of which overlapped with those addressed during Mr. Cordray’s recent appearance before the Senate Banking Committee. Among the new issues raised before the House Committee, Mr. Cordray expressed openness to developing a limited advisory opinion process for the CFPB. In response to a question from Rep. Ed Royce (R-CA), Mr. Cordray explained that the CFPB regularly provides informal advisory opinions. He acknowledged other agencies’ use of advisory opinions and their potential benefit, and indicated that advisory opinions could be a useful tool for the CFPB on certain specific issues. Nevertheless, he resisted committing to the implementation of a formal advisory opinion process. The Committee recently approved, along party lines, legislation that would require the CFPB to establish an advisory opinion process. Read more…
On June 9, the House passed by voice vote H.R. 3211, the Mortgage Choice Act of 2013. The bill would amend TILA’s definition of “points and fees” for purposes of the CFPB’s Ability to Repay and HOEPA rules to exclude from the definition insurance held in impound accounts and amounts received by affiliated companies as a result of their participation in an affiliated business arrangement. The bill now moves to the Senate where a similar bill was introduced last year by Senator Joe Manchin (D-WV) but has not yet been considered by the Senate Banking Committee. Later in the week, the House Financial Services Committee approved numerous additional bills related to the CFPB, including: (i) H.R. 4804, which would establish certain requirements for CFPB examinations, including prohibiting the use of enforcement attorneys; (ii) H.R. 4811, which would establish standards for CFPB guidance, including a notice and comment period, and would declare the CFPB’s fair lending auto finance guidance to have no force or effect; and (iii) H.R. 3770, which would create an independent inspector general for the CFPB.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
On May 22, the CFPB published its Spring 2014 Supervisory Highlights report, its fourth such report to date. In addition to reviewing recent guidance, rulemakings, and public enforcement actions, the report states that the CFPB’s nonpublic supervisory actions related to deposit products, consumer reporting, credit cards, and mortgage origination and servicing have yielded more than $70 million in remediation to over 775,000 consumers. The report also reiterates CFPB supervisory guidance with regard to oversight of third-party service providers and implementation of compliance management systems (CMS) to mitigate risk.
The report specifically highlights fair lending aspects of CMS, based on CFPB examiners’ observations that “financial institutions lack adequate policies and procedures for managing the fair lending risk that may arise when a lender makes exceptions to its established credit standards.” The CFPB acknowledges that credit exceptions are appropriate when based on a legitimate justification. In addition to reviewing fair lending aspects of CMS, the CFPB states lenders should also maintain adequate documentation and oversight to avoid increasing fair lending risk.
Nonbank Supervisory Findings
The majority of the report summarizes supervisory findings at nonbanks, particularly with regard to consumer reporting, debt collection, and short-term, small-dollar lending: Read more…
Over the past week, Virginia Governor Terry McAuliffe signed several bills impacting banks and certain consumer finance providers. The first bill, HB 358 repealed a state law that that barred out-of-state banks from opening de novo branches in Virginia unless the bank’s home state provided reciprocal access to Virginia banks. The change will allow out-of-state banks to establish branches in Virginia on the same basis as state-chartered banks. A second banking bill, HB 1062, provides that an existing statutory provision requiring the Virginia State Corporation Commission to ascertain that certain minimum capital stock requirements are met prior to issuing a certificate of authority to a bank does not apply to the Commission’s issuance of such a certificate to a bank holding company or to a resulting bank in connection with certain types of mergers involving the holding company and its subsidiary bank. A third bill, HB 69, amends state law to expand the types of services that may be provided under an extended motor vehicle service contract and to authorize the Board of Agriculture and Consumer Services to designate additional services that may be provided under an extended service contract. The bill also provides that extended service contracts are not insurance subject to state regulation as such. The above approved bills will take effect on July 1, 2014. Finally, the Governor has not yet approved a bill passed by the General Assembly, HB 954, which would permit the State Corporation Commission to issue transitional mortgage loan originator licenses.
On March 12, the CFPB announced several new senior officials, as described below. We also have learned that Peter Carroll, the CFPB’s Assistant Director for Mortgage Markets, will be leaving the Bureau later this month.
- Jeffrey Langer has joined the CFPB as the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division. Mr. Langer most recently served as senior counsel at Macy’s, Inc., prior to which he was a lawyer in private practice. Mr. Langer is a founding fellow and treasurer of the American College of Consumer Financial Services Lawyers and is a former chair of the Consumer Financial Services Committee of the American Bar Association Business Law Section.
Mr. Langer will fill a position vacated by Rick Hackett last year. At the time of Mr. Hackett’s departure, Corey Stone, Assistant Director, Credit Information, Collections, and Deposit Markets, took over smaller dollar loan markets on a permanent basis. Rohit Chopra, the CFPB’s Student Loan Ombudsman, took responsibility for auto and student loans on an acting basis. Although Mr. Stone will continue to oversee smaller dollar loan markets, including payday and auto title loans, the addition of Mr. Langer allows Mr. Chopra to focus only on his Ombudsman duties.
- Christopher D. Carroll has joined the CFPB as the Assistant Director and Chief Economist for the Office of Research in the Bureau’s Research, Markets, and Regulations Division, as the CFPB announced last year. Dr. Carroll is a professor of economics at Johns Hopkins University, from which he has taken a leave of absence to serve at the Bureau. He also is a member of the Board of Directors of the National Bureau of Economic Research, and the co-chair of the NBER Research Group on Consumption. Dr. Carroll has served as a senior economist for the Council of Economic Advisors on two separate occasions, and as an economist for the Board of Governors of the Federal Reserve System. Ron Borzekowski, who joined the CFPB at its inception from the Federal Reserve Board, has been serving as the acting head of the Office of Research.
- Daniel Dodd-Ramirez has joined the CFPB as the Assistant Director of Financial Empowerment in the Bureau’s Consumer Education and Engagement Division. Mr. Dodd-Ramirez previously served as the executive director of Step Up Savannah Inc. in Savannah, Ga., from 2005 to 2014. Prior to Step Up, he served as education project director and community organizer for People Acting for Community Together (PACT) in Miami, Florida, and before that was the human resources director for Families First, a social services agency in southern Vermont.
House Financial Services Committee Chairman Jeb Hensarling (R-TX) sent a letter today to CFPB Director Richard Cordray once again pressing the CFPB for information about its March 2013 auto finance guidance and its actions since that time to pursue allegedly discriminatory practices by auto finance companies. That guidance, which the CFPB has characterized as a restatement of existing law, sought to establish publicly the CFPB’s grounds for asserting violations of ECOA against bank and nonbank auto finance companies for the alleged effects of facially neutral pricing policies.
The letter recounts numerous exchanges between members of Congress—including both Democratic and Republican members of the Committee—and the CFPB on this issue to demonstrate what the Chairman characterizes as “a pattern of obfuscation” by the Bureau. Mr. Hensarling explains that through a series of written requests—see, e.g. here, here, and here—as well as in-person exchanges, lawmakers have sought detailed information about the CFPB’s application of the so-called disparate impact theory of discrimination to impose liability on auto finance companies. The letter states that the CFPB has repeatedly refused to provide certain key information used in applying that theory through compliance examinations and enforcement actions, including information about regression analyses, analytical controls, and numerical thresholds employed by the Bureau. Read more…
On January 28, Missouri Attorney General Chris Koster announced a settlement with the owners of a vehicle extended-service-contract seller alleged to have marketed limited-time extend warranty programs for vehicles. The AG alleged that the company attempted to sell vehicle breakdown coverage with a generalized and often misleading description of the coverage, and that many customers later discovered their contracts were actually provided by a third party and did not contain the coverage promised. The AG stated that consumers who asked for refunds faced numerous objections and delays. The settlement requires the owners to pay $60,000 to resolve claims of deception, unfair practices, and unlawful insurance practices, and also permanently prohibits them from selling “additive contracts” in Missouri. The AG stated that the settlement “highlights [his office’s] efforts to clean up the auto service contract industry in Missouri and protect consumers from future deceptive sales practices.”
Last month, New Jersey Governor Chris Christie signed SB 854, which will regulate, among other things, motor vehicle service contracts and motor vehicle ancillary protection products. For example, the new law (i) requires service contract providers or sellers to provide to the purchaser receipts or other written evidence of a contract, and copies of such contracts “within a reasonable period of time following the date of purchase”; (ii) specifies the form and contents of service contracts, including “plain language” requirements and certain disclosures; and (iii) grants purchasers the right to return a contract and obtain a full refund of the contract’s purchase price. In addition, providers must meet certain financial security requirements. A violation of the new provisions constitutes an unlawful practice under to the state’s consumer fraud act, which provides for fines of up to $10,000 for the first offense and up to $20,000 for any subsequent offense. The bill exempts, among other things, warranties and mechanical breakdown insurance policies offered by licensed insurers. The bill takes effect on 180 days following enactment, i.e. July 16, 2014.
On January 24, the National Automobile Dealers Association (NADA) distributed a proposed compliance program to its members aimed at reducing the risk of discrimination allegations stemming from CFPB Bulletin 2013-02, which places limits on how sources of indirect auto financing may compensate dealers. The bulletin and proposed program address the practice by which auto dealers “markup” an indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The NADA program recommends that dealerships adopt fixed markup limits and only exceed those limits if a legitimate business reason completely unrelated to a customer’s background is present. The proposal identifies seven “good faith” reasons for deviation—including a more competitive offer and generally-applicable promotional offers—which mirror those set forth in consent orders entered into between the DOJ and two automobile dealers accused of disparate impact discrimination in 2007. The CFPB has not commented on whether the program as proposed will satisfy regulatory scrutiny but plans to do so.
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
On January 23, the Center for Responsible Lending (CRL) released a report titled “Non-Negotiable: Negotiation Doesn’t Help African-Americans and Latinos on Dealer-Financed Car Loans.” The report provides the results of CRL’s investigation of whether racial disparities occur in auto financing, “considering the consumer’s attempt to negotiate their interest rates and comparison-shop at other institutions.” The CRL also examined “other aspects of car buying by race and ethnicity, including the purchase of ancillary ‘add-on’ products and the accuracy of information provided by the dealer to the customer during the buying experience.” CRL states that its research “supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.” Specifically, the CRL states its investigation revealed (i) African-American and Latino consumers attempt to negotiate pricing on car dealer loans just as much as white consumers, if not more, and their levels of comparison shopping are similar to those of white buyers; (ii) more borrowers of color reported receiving misleading information about their loans from car dealers, which served to negate the impact of negotiations or comparison shopping; and (iii) African Americans and Latinos are nearly twice as likely to be sold multiple add-on products as white consumers. The CRL recommends that policymakers (i) prohibit dealer compensation that varies based on the interest rate or other material, other than the loan’s principal balance; (ii) require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products; and (iii) prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.
Recently, the North Carolina Department of Revenue issued guidance regarding a new state law that imposes the state’s 4.75% general sales and use tax, as well as applicable local and transit sales and use tax rates, to the sales price of “service contracts.” The law applies to “service contracts” sold at retail by a retailer on or after January 1, 2014 and sourced to North Carolina. “Service contract” includes any warranty agreement, maintenance agreement, repair contract, or similar agreement or contract by which a seller agrees to maintain or repair tangible personal property. The guidance addresses retailer liability, stating that a retailer that sells a covered service contract is liable for the sales and use tax due on the transaction. Further, a retailer that authorizes another person to sell or enter into a covered service contract with a purchaser on behalf of the retailer is encouraged to ensure that any agreement between the parties provides that any sales and use tax collected on the sales price of a service contract must be submitted to the retailer to be remitted to the Revenue Department. A retailer is not relieved of its liability for sales and use tax on the retail sale of a covered service contract due to failure by another person to collect or remit the applicable sales and use tax due on the sale to the retailer of the contract. The guidance also addresses (i) sales and use tax applicable to receipts for certain contracts entered into prior to January 1; (ii) sourcing of service contracts; and (iii) cancellation or refund of a service contract.