A Look Back and 2016 and a Look Ahead at 2017

The end of the year is always a time for reflection for me.  As we kick 2016 to the curb, I thought I'd take this opportunity to look back at 2016 and look ahead to 2017. 

2016: A Look Back

Looking back at 2016, the first things that come to my mind are the aggressive rule making agenda undertaken by the CFPB and their struggle to implement rules based upon a less than full understanding of the industries they attempt to regulate.  With 2016 came proposed rules on arbitration and payday lending, adjustments and clarification to the mortgage servicing rules and TRID, as well as an unwieldy and incomplete proposal on debt collection.  The year also saw the CFPB continued to flex its muscle expanding its reach into data privacy and fintech , as well as to inthe way attorneys litigate collection law suits (covered in our prior edition).  Continuing its infatuation with technology, the CFPB also introduced new data tools including its ”Consumer Credit Trends” tools.  In many ways, it was the most ambitious of years for the CFPB. 

As we look forward to 2017, we will closely follow the D.C. Circuit’s en banc review of the CFPB’s jurisdiction.  Coupled with the election of Donald Trump and a Republican majority in Congress here are a couple of things ) think we can expect to see in 2017:

• Reform of the CFPB:  It would not be surprising to see the makeup of the CFPB change to a five person commission and/or to see the CFPB lose its designation as an independent agency.  Challenges have come from the judiciary and legislative branches of government in recent months and we can expect to see reform from the Trump administration. The Financial Services Committee of the House attempted last year to replace Cordray with a bipartisan commission through introduced legislation.  Similarly, the incoming administration has echoed a desire to reign in the Bureau.  Finally, the D.C. Circuit has weighed in on the constitutionality of the CFPB and its ruling is now being considered en banc by its entire panel of judges. Depending upon the outcome of the D.C. Circuit’s en banc review of the PHH decision, the CFPB may become an executive agency vs. an independent agency.  The net result may be that the CFPB and its regulations become subject to the regulatory review process of the Office of Management and Budget. 
• Pending Rules. The CFPB’s pay day and arbitration rules are in jeopardy and may never see the light of the day if the PHH holding is upheld and the CFPB loses its status as an independent agency or if any of the other forces outlined above come to play.
• When all else fails, UDAAP Carries the Day. The CFPB will continue to regulate through enforcement using the UDAAP provisions of Dodd Frank when regulatory authority does not otherwise exist.
• Debt Collection: the CFPB will continue to struggle with the two ton gorilla of debt collection by first putting forward a proposal for first party collections.  We expect to see a SBREFA panel scheduled for some time in the first half of 2017.  Looking further forward, we are likely to see a proposed rule on debt collection by the end of 2017.
• Marketing and Sales. Regulators will continue to focus on marketing and sales aspects of consumer financial service products and continue to emphasize comprehensive compliance management systems.
• Status Quo. Institutions subject to enforcement need to continue to do business under the assumption that nothing will change and remain vigilant in their compliance.  As we sit here today, the status quo remains the order of business.

I'm looking forward to see what's next. On a more personal note,thanks to all who continue to support this blog.  What started out as a six month experiment has become a passion.  This blog has brought new people and opportunities into my life and continues to make me a better lawyer.  I'm grateful to my law firm for supporting me in this endeavor, to my good friends Jerry Myers and Mark Dobosz for their guest posts and to NARCA, WebRecon and the many other blogs and trade associations who continue to pass on my posts to others.  We continue to look for guest posts and I invite anyone with an interest in writing on consumer financial service issues to reach out to me.  Happy New Year!

CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.

Cordray Provides Mortgage Industry with Insight on Examination Priorities

In his prepared remarks to the Mortgage Bankers Association, CFPB Director Richard Cordray offered some insight into his office’s examination priorities with respect to the mortgage industry.    Here are the key takeaways:

• TRID:  In his remarks, Cordray characterized the CFPB’s early examinations of TRID compliance to be “diagnostic and corrective, not punitive.”  According to Cordray, examiners are focused on the institution’s compliance management system and efforts to comply.  Cordray also indicated that examiners are engaged in transaction testing.
• Mortgage Servicing: Cordray confirmed that the complaint portal is being used as a partial basis for examinations as it provides a better understanding of trends.  Cordray also indicated that mortgage servicing remains a focal point of examinations and that examiners will continue to focus on the effectiveness of institutional information technology systems.
• Redlining:  Again, Cordray indicated that this is a “priority issue” in the Bureau’s supervisory work without much elaboration.

CFPB Issues its Summer Supervisory Highlights

The CFPB published its Summer Supervisory Highlights last week, highlighting examinations that were conducted between January 2016 and April 2016 across various financial products.  The Report comes on the heels of a Supervisory highlight report devoted entirely to mortgage servicing. The Report highlights key findings made by the CFPB and provides insight into the current focus of examiners.  The Report highlights a number of technology failures and covers auto finance, debt collection, mortgage origination, payday lending and fair lending.  The CFPB noted the following issues worthy of mention:

AUTO FINANCE

The Report makes two specific observations and one very general observation.  As suggested in other recent CFPB activity, the CFPB is scrutinizing add on products and the representations made by lenders regarding the same.  Specifically, the Bureau noted that add on products and specifically, gap coverage products, should be accurately described. The CFPB also noted that one or more auto lenders engaged in deceptive practices when allowing consumer to defer payments in that they omitted details as to how interest would accrue and how payments would be applied as a result of the deferral. 

The Bureau also noted compliance management system weaknesses in one or more examinations.  Specifically, the Bureau noted the following deficiencies and auto lenders, both direct and indirect, should take note:

·      Failure to raise compliance-related issues to the institution’s board of directors or their principal;

·      Failure to monitor and correct business line practices to align with federal consumer financial law;

·       Failure to adequately track training completed by employees and the Board;

·       Failure to follow up on consumer complaints; and

·      Failure of compliance audits to highlight deficiencies in the consumer complaint response process.

DEBT COLLECTION

· Banks and other original creditors who sell debt should carefully review their technology and their use of coding.  The Bureau noted that, as a result of coding errors, one or more debt sellers sold accounts which were in bankruptcy, accounts that were products of fraud and accounts that had been paid in full.

· The Bureau also found that one or more debt collectors made false representations to collect debt. Particularly, the Bureau noted instances of debt collectors making representations that down payments were required to establish a repayment plan and that use of a checking account was the only option for repayment.  In both instances, the debt collector’s policies and procedures did not support the representations and the Bureau concluded that the practice was deceptive.

MORTGAGE ORIGINATION

The majority of the Report is devoted to mortgage origination issues and reflect some of the struggles faced by lenders since the implementation of TRID.  Specifically, the Bureau’s examinations indicated that:

·       One or more lenders incorrectly calculated the amount financed on loans with discount credits and subsequently incorrectly calculated the finance charge on the same loans, resulting in a negative finance charge and an amount financed that exceeded the stated loan amount;

·       One or more lenders offering bridge loans failed to accurately disclose the interest payments due to a software failure;

·       One or more institution demonstrated weak oversight of their automated systems, including inadequate testing of codes that calculate the finance charge and the amount financed when originating residential loans to consumers.

The Report also noted failures to comply with the Fair Credit Reporting Act.  The Report indicates that one or more institutions failed to comply with the FCRA’s adverse action notice requirements.

PAYDAY LENDING

It should not come as a surprise to those following the proposed payday rules, the CFPB has concerns as to electronic fund transfers on small short term loans.  The Bureau’s examinations noted issues with compliance with the Electronic Fund transfer Act.  Specifically, the Report notes that one or more lenders’ loan agreements were ambiguous as to the acceptable range of amounts to be debited.  As a consequence, lenders were required to revise their loan agreements for new loans. For existing loans, the Bureau required one or more entity to notify borrowers of the amount of any new transfer that will vary from the amount of the previous or preauthorized amount before initiating the new transfer.

CFPB Rulemaking Agenda Confirms Pay Day Rulemaking is Imminent and Plays its Cards Close as to Debt Collection

The CFPB published an aggressive Spring 2016Rulemaking Agenda this week.  Two big takeaways:  The proposed pay day rules will be published within the next few weeks and the Bureau is not providing much of an update on its debt collection rulemaking.  While no definitive dates were provided, the Agenda does give some insight as to an expected time frame for several hot button issues:

 Payday Lending:   The CFPB has confirmed in its press release related to the agenda that it expects to release the proposed rule in the "next several weeks."  The press release suggests that the proposed rule is likely to require all short term loans take into account the consumer's ability to repay without default or re-borrowing.  The proposed rule is also likely to limit the number of rollovers for a loan, prohibit auto title loans, and place limitations on repayment by bank account draft. 

 

Mortgage Servicing:  The CFPB expects to amend certain aspects of the mortgage servicing rules this summer including enhanced loss mitigation requirements and compliance requirements when a borrower is in bankruptcy. 

 

TRID:  Also consistent with recent statements, the Spring Agenda indicates that the CFPB expects to issue a Notice of Proposed Rulemaking clarifying certain aspects of TRID.  Since it took effect, the mortgage industry has raised a number of concerns with ambiguities in the Loan Estimate and Closing Disclosure.  The NPR is likely to address at least some of those issues.

Prepaid Financial Products:  Last fall, the CFPB indicated it expected to issue its final rule on prepaid financial products in early 2016.  The latest press release indicates that the final rule will be released some time this summer.

 Overdrafts:  In the spring of 2015, the CFPB indicated that they were continuing to conduct additional research to assess whether rulemaking is warranted and did not issue a time table for rulemaking.  Since then, the CFPB does not appear to have made much public headway.  The Spring 2016 Agenda indicates the Bureau is still engaged in pre rule making activities.

Debt Collection:  One of the biggest stories that remains is when a proposed rule as to debt collection will be issued.  The CFPB has not committed to a time line. Prerule activities continue and the industry should be on the lookout for the convening of a SBREFA Panel as the next likely step.  The CFPB indicates that they are engaged in consumer testing initiatives to “determine what information would be useful to consumers to have about debt collection and their debts and how that information should be provided to them.” 

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses.  The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules.  Prerule activities are in the initial stage and expected to continue through the third quarter of 2016.

TRID Update: More Changes Coming

In a recent letter to the industry, the CFPB acknowledged the continuing operational challenges presented by TRID, as well as the need for greater certainty and clarity within the rule itself.  In keeping with that, the CFPB has indicated that has begun drafting a Notice of Proposed Rulemaking (NPRM) which will incorporate some of the Bureau's existing informal guidance and provide greater clarity.  The CFPB expects to issue the NPRM this summer.  In the meantime, the CFPB continues to provide assurances that they and other regulators continue to focus their examinations on good faith efforts to come into compliance with TRID. 

CFPB Issues Fact Sheet Clarifying TRID Implementation and Construction Loans

The CFPB has issued a Fact Sheet clarifying that, in most cases, construction loans are subject to the Loan Estimate and Closing Disclosure requirements of TRID.  The exceptions to the rule are open ended transactions and commercial loans. There are two points of interest for lenders:

Construction to Permanent Financing:  The Fact Sheet reminds lenders that they have the option to treat the construction phase and permanent phase as either one transaction or more than one transaction for purposes of the required disclosures.  The lender has the option to provide a combined disclosure or separate disclosures.  This election exists regardless of whether the construction and permanent phases are closed at the same time or whether there are separate closings.

Multiple Advance Loans:  The Fact Sheet also reminds lenders that Appendix D to RegulationZ provides a procedure to estimate and disclose the terms of construction loans with multiple advances.  The Fact Sheet calls special attention to Comment 7 which “provides guidance for making the projected payments disclosures for construction loans in the Loan Estimate and Closing Disclosure.”

CFPB Clarifies Liability Standard for TRID

 Since TRID was introduced, a debate has raged on as to whether the Truth in Lending Act’s (TILA) liability rules or RESPA’s would govern TRID violations. The debate has key ramifications: under TILA, there is a private right of action. Under RESPA, there is not. In a letter to the Mortgage Bankers Association, the CFPB has provided some answers to the debate while attempting to provide some assurances to the mortgage industry. The results are a mixed bag.

The letter comes in response to concerns raised by the Mortgage Bankers Association as to secondary market rejection of mortgages which may contain technical TRID violations. As to the secondary market, the CFPB assured that the Federal Housing Finance Agency, government sponsored entities, and the Federal Housing Administration will not conduct routine post purchase loan file reviews for technical compliance and do not intend to exercise contractual remedies, including repurchase, for noncompliance with TRID’s disclosure rules where the lender is making good faith efforts to comply. The CFPB also reiterated that initial examinations by regulators for compliance with TRID will focus on “whether companies have made good faith efforts come into compliance with the rule.” Examinations with be “corrective and diagnostic, rather than punitive.”

More importantly, the letter provided some helpful clarification of the CFPB’s interpretation of TRID liability and suggests that TILA’s provisions will control:

Cure Provisions:

• TRID provides for curing of certain errors post-closing by issuing a correct Closing Disclosure. The letter reminds that “consistent with existing Truth in Lending Act (TILA) principles, liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability”; and
• TILA provides a safe harbor to lenders for correction of errors and that provisions applies to TRID. Under 15 U.S.C. 1640(b), lenders may cure violations provided the creditor notifies the borrower of the error and makes appropriate adjustments to the account before the creditor receives notice of the violation from the borrower.

Assignee Liability:

• For non high-cost mortgages, there is no general TILA liability unless the violation is apparent on the face of the disclosure documents and the assignment is voluntary.

Limitations on Liability:

• “TILA limits statutory damages for mortgage disclosures, in both individual and class actions to failure to provide a closed-set of disclosures”;
• “Formatting errors and the like are unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure of one of the TILA disclosures listed as giving rise to statutory and class actions damages in 15 U.S.C. 1640(a); and
• “The listed disclosures in 15 U.S.C. 1640(a) that give rise to statutory and class action damages do not include either the RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and Total Interest Percentage.”

Bona Fide Errors:

• TILA’s provisions for unintentional, bona fide errors applies to TRID.

While there has been significant debate as to whether RESPA or TILA would control the liability functions of TRID, Cordray’s letter suggests that the answer is TILA. While that is not entirely good news for the mortgage industry (as RESPA contains no private right action), the CFPB has at least provided some indication of their intentions and with a path in front of it, the mortgage industry can now better assess and manage risk.

Initial Thoughts on TRID and the Potential Regulatory Traps for Lenders

The Truth in Lending RESPA Integrated Disclosure Rule (TRID) took effect October 3, 2015 and placed the mortgage industry in unchartered waters.  Our office has spent immeasurable hours reviewing the rule, the commentary, the CFPB Guidelines and listening to lenders’ concerns about the Rule.  Here are our initial observations.

Initial Examinations:  All of the relevant regulators have provided assurances to their supervised entities that examiners will “evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”  So what does this mean?  It means that examiners will likely be focused on the implementation of policies and procedures and due diligence testing of software in initial examinations.  The good news is that most lenders began implementing policies and procedures regarding TRID well ahead of October 3^rd; however, reports from the CFPB and lenders themselves indicate that the software roll out from vendors may not have been as smooth.  Several lenders have indicated that software is still being updated making it difficult for them to do their due diligence in testing the software.  The CFPB has indicated some awareness of the issue, acknowledging that the implementation process "was not as smooth as we would have hoped" and placing the blame largely at the feet of the software vendors.  Our message for lenders, however, remains the same:  make sure you are adequately testing the software and remember, TRID places liability for noncompliance squarely on the lender.

Private Rights of Action/Class Actions:  Simply put, TRID provides more risk for litigation exposure to lenders.  Under TRID, lenders are solely responsible for compliance with the rule.  While RESPA did not provide a private right of action; the TRID Rule relies on the Truth in Lending Act for all disclosure, timing and content requirements.  Truth in Lending does provide a private right of action and thus, it is a foregone conclusion that we will see more litigation under TRID.  Additionally, class actions are likely to become more prevalent.

Loan Estimates:  The timing requirements for Loan Estimates (3 business days from application) places immense pressure on underwriters to perform their analysis of credit worthiness in a very tight time frame.  The ramifications of this are that lenders are going to make loan decisions without adequate time to fully vet credit worthiness.  Additionally, we see the following pitfalls for Loan Estimates:

• Product Description: When it takes 50+ pages for the CFPB to explain how to fill out a three page form, the form does not meet its goal of simplification.  Case in point: TRID requires that products be described in terms of any payment feature that may change the periodic payment and the duration of the relevant payment feature.  For example, the Commentary to the Rule suggests that an adjustable rate where the introductory rate is 5 years and then adjusts every three years– “5/3 Adjustable Rate.”   It is unlikely that the average consumer is going to understand the import of that product description.
• Projected Payment Changes: TRID requires that projected payment changes be disclosed.  TRID expressly requires that lenders include within those changes the automatic termination of Mortgage Insurance.  The CFPB has indicated recently that it is concerned that lenders are not appropriately terminating Mortgage Insurance.  This disclosure on the Loan Estimate is therefore likely to receive a lot of attention in Initial Examinations.
• Overestimating Costs:  Inevitably, there will be an inclination to overestimate costs in order to not run afoul of the Good Faith Estimate Test and tolerance thresholds.  Lenders need to be careful in doing so as a practice of doing so is likely to be scrutinized by examiners for fair lending violations and unfair and deceptive violations.

Closing Disclosures and Consummation:

• Lenders and their settlement agents need to be cognizant of their obligations to prevent the impermissible disclosure of Nonpublic Personal Information to third parties. 
• Lenders and their settlement agents need to fully contemplate that Closing Disclosures are likely to need to be revised and have a clear idea as to when an additional three day waiting period is required and when it is not.
• Additionally, we anticipate that initial examinations will scrutinize the timeliness of refunds to consumers for overpayment of costs as a result of inaccurate Closing Disclosures and whether revised charges were impermissibly charged to the consumer rather than being absorbed by the lender (as determined by the Good faith Test and permissible tolerances).

Cordray Remarks Hint at Further Changes for the Mortgage Industry and Send Warning to Vendors

In his prepared remarks to the Mortgage Bankers Association this week, Richard Cordray suggested there are more changes to come for the mortgage industry and that regulators need to pay more attention to vendors involved in the mortgage industry.


In addressing the implementation of TRID, Cordray reiterated prior assurances that initial examinations regarding TRID will be focused on the good faith efforts lenders have made to come into compliance with the rule.  Cordray acknowledged that the implementation process "was not as smooth as we would have hoped" despite the agency having allowed almost two years for implementation.  Rather than acknowledging the unwieldy nature of wholesale changes to how lenders provide disclosures to borrowers, Cordray suggested that the issues were largely the fault of vendors who "performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date."  Cordray suggested that financial regulators, including the CFPB, may need to devote greater attention to performance of vendors and how they are affecting the marketplace.  Under Dodd Frank, the CFPB has supervisory authority over service providers to supervised banks and nonbanks, as well as service providers to a substantial number of small insured depository institutions or small insured credit unions.  12 U.S.C. §§5514-5516.


Cordray also noted that more changes are likely in the mortgage The CFPB has been  examining the entire closing experience and evaluating electronic closings and how improvements in technology can be used to the advantage of both the consumer and the lender.  Based on the results of a CFPB pilot program for electronic closings, the CFPB is strongly encouraging the mortgage industry to embrace innovation and "e-closings."

House Passes Bill to Delay Enforcement of TRID

The House overwhelmingly passed the Homebuyers Assistance Act last night by a vote of 303-121.  The Act provides entities who are now subject to the new integrated disclosure rules with a temporary safe harbor, precluding actions to enforce violations until February 1, 2016.  The safe harbor only applies so long as entities have made a good faith efforts to comply with the new  integrated disclosure requirements.  The White House's attempt to veto the bill by issuing a Statement of Administrative Policy failed.  The White House position is premised upon a belief that the bill would revise the effective date and shield lenders from liability so long as they made a good faith effort to comply.  "The Administration strongly opposes H.R. 3192, as it would unnecessarily delay implementation of important consumer protections designed to eradicate opaque lending practices that contribute to risky mortgages, hurt homeowners by removing private right of action for violations, and undercut the Nation's financial stability."


The bill now moves to the Senate. Stay tuned!

Welcome TRID

Tomorrow is D Day for implementation of the TILA-RESPA Integrated Disclosure Rule (“TRID”).  As banks and others in the mortgage industry continue their final preparations to implement wholesale changes to their disclosures and closing practices as required by TRID, trade groups supporting the industry continue to request a formal hold harmless period following the Rule’s implementation.  While the CFPB and OCC politely have declined to adopt a formal hold harmless period, they have continued to offer some assurances to the industry that they will evaluate examinees based upon their “good faith efforts to comply with the Rule’s requirements in a timely manner.”   In a recent letter to the American Bankers Association and other interested trade groups, the CFPB and OCC reiterated that during initial examinations for compliance with TRID, examiners will “evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”  Specifically, the initial focus of examinations will take into account: “the institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff and, it handling of early technical problems or other implementation challenges.”  Meanwhile, formal efforts to extend an official hold harmless date continue in Congress and are expected to come to a vote by the House within the next week.

So what does this mean as we head towards tomorrow’s implementation of TRID? Banks and other affected verticals should already have in place their TRID compliance management systems, completed training of their affected staff, and completed discussions about the transition to TRID with their vendors (including brokers and closing attorneys).  The challenge moving forward is to trouble shoot for issues with implementation and continually evaluate the effectiveness of the entity's TRID compliance management system and revise the same as needed.