On August 1, the U.S. Senate passed by unanimous consent H.R. 4386, which will permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs. The bill also covers other non-bank financial institutions such as gaming establishments and jewel merchants. The bill passed the House by voice vote in May. The President, who sought this authority for FinCEN in budget requests, is expected to sign the bill.
On September 12, the CFPB finalized a rule that allows it to supervise larger participants in the international money transfer market. In particular, this rule, which finalizes the proposed rule the CFPB issued in January 2014, allows the CFPB to supervise nonbank international money transfer providers that provide more than $1 million in international transfers annually, for compliance with the Remittance Rule under the Electronic Fund Transfer Act. The final rule will be effective December 1, 2014.
The CFPB will seek to ensure that these providers comply with a number of specific consumer-protection provisions, including the following:
- Disclosures: The CFPB will examine providers to determine that consumers receive the Remittance Rule-required disclosures in English as well as in any other language the provider uses to advertise, solicit, or market its services, or in any language in which the transaction was conducted. These disclosures inform consumers of the exchange rate, fees, the amount of money that will be delivered abroad, and the date the funds will be available.
- Option to Cancel: The CFPB will examine transfer providers to ensure that consumers receive at least thirty minutes to cancel the transfer if it has not yet been received, and that consumers receive a refund regardless of the reason for the cancellation.
- Correction of Errors: The CFPB will insist that remittance transfer providers properly investigate certain errors, and, if a consumer reports an error within 180 days, the CFPB will examine providers to determine that they have investigated and corrected certain types of errors. The CFPB will also examine providers to ensure that they are held accountable for the actions of any agents they use.
The CFPB used the authority granted to it in the Dodd-Frank Act to supervise “larger participants” in consumer financial markets, and this is the Bureau’s fourth larger participant rule. The CFPB indicates that it will use the same examination procedures for nonbank providers as it does for bank remittance providers, and the CFPB intends to coordinate with state examiners in its supervision.
The CFPB estimates that nonbank international money transfer providers transfer $50 billion each year, and 150 million individual international money transactions occur each year through these institutions, with seven million U.S. households transferring funds abroad each year through a nonbank.
On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.
On July 17, the FHFA Office of Inspector General (OIG) published a report on risks to Fannie Mae and Freddie Mac (the Enterprises) related to purchasing mortgages from smaller lenders and nonbank mortgage companies. The report states such lenders present elevated risk in the following areas: (i) counterparty credit risk—smaller lenders and nonbank lenders may have relatively limited financial capacity, and the latter are not subject to federal safety and soundness oversight; (ii) operational risk—smaller or nonbank lenders may lack the sophisticated systems and expertise necessary to manage high volumes of mortgage sales to the Enterprises; and (iii) reputational risk—the report cites as an example an institution that was sanctioned by state regulators for engaging in allegedly abusive lending practices. The report notes that in 2014 the FHFA’s Division of Enterprise Regulation’s plans to focus on Fannie Mae’s and Freddie Mac’s controls for smaller and nonbank sellers, which will include assessments of the Enterprise’s mortgage loan delivery limits and lender eligibility standards and assessment of the counterparty approval process and counterparty credit risk resulting from cash window originations. The report also notes FHFA guidance to the Enterprises last year on contingency planning for high-risk or high-volume counterparties, and states that the FHFA plans to issue additional guidance on counterparty risk management. Specifically, the Division of Supervision Policy and Support plans to issue an advisory bulletin focusing on risk management and the approval process for seller counterparties. The OIG did not make any recommendations to supplement the FHFA’s planned activities.
This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”
The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”
The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act. Read more…
New York DFS Superintendent Promises Scrutiny Of Nonbank Servicer Affiliates, Previews Originator Licensing Changes
On May 20, New York DFS Superintendent Benjamin Lawsky spoke during the Mortgage Bankers Association’s National Secondary Market Conference and extended his recent focus on nonbank mortgage servicers. As detailed in excerpts from the remarks he delivered, Mr. Lawsky specifically addressed concerns about ancillary services offered by nonbank mortgage servicer affiliates—e.g. vacant property inspections, short sales marketed through online auctions, foreclosure sales, and debt collection. He asserted that such arrangements put borrowers and investors at risk of becoming “fee factories” and promised to expand DFS’s investigation of ancillary services. Though not reflected in the excerpts released by the DFS, Mr. Lawsky also previewed changes intended to streamline the DFS’s application process for mortgage originator licenses and branch locations in an effort to reduce burden on licensees and improve processing times.
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…
On May 14, Comptroller of the Currency Thomas Curry spoke to the Conference of State Bank Supervisors, urging state regulators to, among other things, avoid regulatory capture and ensure balanced supervision of nonbanks and banks. Mr. Curry stated that “[r]egulatory capture is a real threat” to federal and state banking agencies and the system more broadly, and that regulators should never employ chartering authority to compete for “market share.” He also cautioned about the potential rise of the “shadow banking system”—the shift of assets from regulated depository institutions to less-regulated, non-depository institutions—as bank regulators become more rigorous in pursuing enhanced safety and soundness and consumer protection at depository institutions. He specifically identified the transfer of mortgage servicing rights as an example of that shift of assets, which “could carry with it the seeds for the next financial crisis.” He called on state regulators to make nonbank supervision, including with regard to mortgage servicing, a top priority.
On May 1, the Conference of State Bank Supervisors (CSBS) published its 2013 annual report, which aggregates and reviews the organization’s activities in the prior year, identifies future goals for the organization, and outlines specific priorities for 2014. Those priorities include, among others, continuing to coordinate with federal regulators on cybersecurity and with the CFPB on complaint sharing. The report also includes more detailed reports on past and future activities by various CSBS divisions and boards, including a report from the Policy and Supervision Division that reviews the CSBS’s legislative and regulatory policy positions, and its bank supervision and consumer protection and non-bank supervision activities.
On April 30, the CFPB published its second annual report to Congress on its fair lending activities. According to the report, in 2013 federal regulators referred 24 ECOA-related matters to the DOJ—6 by the CFPB—as opposed to only 12 referrals in 2012. The report primarily recaps previously announced research, supervision, enforcement, and rulemaking activities related to fair lending issues, devoting much attention to mortgage and auto finance. However, the Bureau notes that it is conducting ongoing supervision and enforcement in other product markets, including credit card lending. The Bureau also identifies the most frequently cited technical Regulation B violations. Read more…
On April 1, the Federal Reserve Board’s Office of Inspector General (OIG), which also is responsible for auditing the CFPB, issued a report that is critical of the CFPB’s supervisory activities and recommends that the CFPB take specific actions to strengthen its supervision program. The report shares concerns raised by entities having been through the examination process.
The report covers the CFPB’s supervisory activities from July 2011 through July 2013, including 82 completed examinations (excluding baseline reviews), which yielded 35 reports of examination and 47 supervisory letters. Of those 82 completed examinations, 63 were of depository institutions, and 19 were of nondepository institutions.
Among the findings, the OIG concludes that: Read more…
On February 28, the UK Financial Conduct Authority (FCA) announced final rules for consumer credit providers, including new protections for consumers in credit transactions. The FCA states that the most drastic changes relate to payday lending and debt management. For example, with regard to “high-cost short-term credit,” the new rules will (i) limit to two the number of loan roll-overs; (ii) restrict to two the number of times a firm can seek repayment using a continuous payment authority; and (iii) require creditors to provide a risk warning. Among other things, the new rules also establish prudential standards and conduct protocols for debt management companies, peer-to-peer lending platforms, and debt advice companies. The policy statement also describes the FCA’s risk-based and proactive supervisory approach, which the FCA states will subject firms engaged in “higher risk business” that “pose a potentially greater risk to consumers” to an “intense and hands on supervisory experience” and will allow the FCA to levy “swift penalties” on violators. The new rules take effect April 1, 2014. The FCA plans next to propose a cap on the cost of high-cost, short-term credit.
CFPB Supplements Consumer Reporting Guidance, Holds Consumer Advisory Board Meeting, Issues Consumer Reporting Complaints Report
On February 27, the CFPB issued supplemental guidance related to consumer reporting and held a public meeting focused on consumer reporting issues. The CFPB also released a report on consumer reporting complaints it has received.
The CFPB issued a supervision bulletin (2014-01) that restates the general obligations under the Fair Credit Reporting Act for furnishers of information to credit reporting agencies and “warn[s] companies that provide information to credit reporting agencies not to avoid investigating consumer disputes.” It follows and supplements guidance issued last year detailing the CFPB’s expectations for furnishers.
The latest guidance is predicated on the CFPB’s concern that when a furnisher responds to a consumer’s dispute, it may, without conducting an investigation, simply direct the consumer reporting agency (CRA) to delete the item it has furnished. The guidance states that a furnisher should not assume that it ceases to be a furnisher with respect to an item that a consumer disputes simply because it directs the CRA to delete that item. In addition, the guidance explains that whether an investigation is reasonable depends on the circumstances, but states that furnishers should not assume that simply deleting an item will generally constitute a reasonable investigation.
The CFPB promises to continue to monitor furnishers’ compliance with FCRA regarding consumer disputes of information they have furnished to CRAs. Furnishers should take immediate steps to ensure they are fulfilling their obligations under the law. Read more…
On February 19, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter asking Comptroller of the Currency Thomas Curry and National Mortgage Settlement Monitor Joseph Smith to “carefully scrutinize the sale of mortgage servicing rights from banks to nonbanks” to ensure nonbank servicers have the capacity to handle increased loan volume and that borrowers are not harmed. Representative Waters explained that consumer advocates are concerned that when a bank subject to the National Mortgage Settlement transfers MSRs to a nonbank not subject to the National Mortgage Settlement, the transferred loans are not afforded the same protections as they would be under that agreement. Ms. Waters is concerned that the CFPB rules that would apply to such transferred loans offer fewer protections than those in the National Mortgage Settlement. She also requested that the Comptroller and/or the Monitor examine the extent to which servicing transfers are potentially being used to “evade the modification of loans for borrowers who would benefit most from the terms of the Settlement.” Ms. Waters joins other policymakers, including the CFPB’s Deputy Director and New York’s banking regulator, who recently raised concerns about the impact on borrowers from the transfer of mortgage servicing rights.
On February 19, CFPB Deputy Director Steve Antonakes spoke at the Mortgage Bankers Association’s annual servicing conference and detailed the CFPB’s expectations for servicers as they implement the new servicing rules that took effect last month.
Mr. Antonakes’s remarks about the CFPB’s plans to supervise and enforce compliance with the new rules are the most assertive to date. Until now, the CFPB’s public position has been that “in the early months” after the rules took effect, the CFPB would not look for strict compliance, but rather would assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Mr. Antonakes clarified this position, stating that “[s]ervicers have had more than a year now to work on implementation” of “basic practices of customer service that should have been implemented long ago” and that “[a] good faith effort . . . does not mean servicers have the freedom to harm consumers.” He went on to state that “[m]ortgage servicing rule compliance is a significant priority for the Bureau. Accordingly, we will be vigilant about overseeing and enforcing these rules.”
Default Servicing and Foreclosures
Specifically, the CFPB expects that, “in these very early days,” servicers will (i) identify and correct “technical issues”; (ii) “conduct outreach to ensure that all consumers in default know their options”; and (iii) “assess loss mitigation applications with care, so that consumers who qualify under [a servicer’s] own standards get the loss mitigation that saves them – and the investor – from foreclosure.” Mr. Antonakes acknowledged that “foreclosures are an important part of the business, but they shouldn’t happen unless they’re necessary and they must be done according to relevant law. We expect the new rules to go a long way to reduce consumer harm for all consumers with mortgages, especially as these rules work in concert with the existing prohibition against unfair, deceptive, and abusive practices.”
Mr. Antonakes specifically detailed expectations concerning mortgage servicing rights transfers. He stated that the CFPB expects servicers to “pay exceptionally close attention to servicing transfers and understand [that the CFPB] will as well. . . . Our rules mandate policies and procedures to transfer ‘all information and documents’ in order to ensure that the new servicer has accurate information about the consumer’s account. We’re going to hold you to that. Servicing transfers where the new servicers are not honoring existing permanent or trial loan modifications will not be tolerated. Struggling borrowers being told to pay incorrect higher amounts because of the failure to honor an in-process loan modification – and then being punished with foreclosure for their inability to pay the incorrect amounts – will not be tolerated. There will be no more shell games where the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”