Inaccurate TILA Disclosures Not Enough to Create Standing

A district court from New York recently ruled that even assuming a creditor’s initial TILA disclosures fell short under the statutory requirements, the plaintiff must show an injury in fact in order to have standing under Article III.  In Kelen v. Nordstrom, the plaintiff sued the retailer alleging the retailer’s disclosures in connection with its credit card accounts violated the Truth in Lending Act.   Specifically, the plaintiff alleged that the initial disclosures failed to accurately disclose the fees for returned payments and the complete method for the late payment fee including limitations on the maximum fee.  While the plaintiff did not allege that she had actually been charged for a return check or a late fee, she contended that the retailer’s deficient disclosure “constituted a concrete harm and created a material risk of concrete harm to Kelen and to other creditors.”  Kelen v. Nordstrom, Inc., 2016 U.S. Dist. LEXIS 175028, *4 (S.D.NY. Dec. 16, 2016).

The court granted the retailer’s motion to dismiss and determined that the plaintiff lacked standing.  Even assuming the disclosures were deficient, the court determined that the plaintiff had not pled a sufficient injury in fact.  The court reasoned that while the plaintiff had a legally protectable right to receive specified disclosures, the plaintiff must demonstrate that as to each of her TILA disclosure challenges, the retailer’s “actions injured her in a way distinct from the body politic.”  Id. at *8.  In following the Second Circuit’s recent decision in Strubel v. Comenity Bank, 842 F.3d 181 (2d Cir. 2016), the district court stated that “the dissemination of incorrect information to a plaintiff does not alone create a risk of real harm to the plaintiff.  Rather, Article III requires some indication that the inaccuracy would harm the plaintiff, and some “misinformation may be too trivial to cause harm or present any material risk of harm.”  Id. at *9-10 (internal citations omitted).  The court concluded that the plaintiff’s pleadings fell short of the mark because they did not allege a tangible injury to herself and did not explain the risk of concrete harm. 

Kelen’s claim…begins and end with the fact of the alleged TILA violation.  The [complaint] did not claim she changed her behavior in any way based on Nordstrom’s allegedly insufficient disclosures as to the circumstances under which fees for late or returned payments might fall short of the disclosed maximum fees.  It does not allege that Nordstrom ever charged her either a late payment fee or a returned payment fee, let alone an improperly calculated one.  Indeed, the [complaint] does not allege that Kellen ever read the disclosures she challenges relating to such fees.  In light of these Spartan pleadings, Kelen’s claim to have suffer[ed] a concrete, particularized injury falls short of the standards set by the case law, which requires alleging more than a mere fact of a violation of a disclosure statute for a plaintiff to plead a material risk of harm.

Id. at *10. 

Parties filing complaints asserting violations of consumer protection claims should take note.  While the Supreme Court’s decision in Spokeo v. Robins may not have altered the standard for standing, but it has heightened the pleading standard.  Plaintiffs must now tie the violation of the statute to its specific impact on them.

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.

CFPB Enters into Consent Order with Fintech Company

The CFPB has made it abundantly clear that it expects fintech companies to abide by the same rules as traditional brick and mortar lenders.  The Bureau’s consent order with San Francisco online lender Flurish, Inc. highlights the need for startups to effectively vet their products prior to launch to ensure compliance with the consumer protection regulatory scheme. Flurish, Inc., which does business as LendUp, is required to pay $1.82 million in retribution to affected consumers and a $1.8 million civil monetary penalty to the CFPB. 

LendUp held itself out as providing online single payments loans and installment loans and touted its “step up” system as allowing consumers to build up credit and improve credit scores.  The Consent Order highlights violations of multiple consumer protection laws, including the Truth in Lending Act and Fair Credit Reporting Act.  According to the Order,

·        LendUp’s loan-program marketing was misleading.  LendUp marketed its loan programs with claims they would build a consumer’s credit and credit scores by allowing consumers to move up the “LendUp Ladder” by taking out additional loans with more favorable terms.  Although advertised nationally, the two top level tiers of LendUp’s loans, however, were not available except in California.  Moreover, LendUp did not furnish any information to the credit reporting agencies to improve consumer’s credit scores until at least February 2014.

·        LendUp also ran amuck of the Truth in Lending Act in a number of ways:

o   LendUp allowed consumers applying for its lowest tier single payment loans the option to choose a loan maturity date as late as the consumer’s state allowed or an earlier date.  Where the earlier date was selected, the consumer was provided a discount on the origination fee.  If the consumer later extended the repayment fee, the discount was reversed.  According to the Consent Order, LendUp failed to disclose the potential for reversal to the consumer at the time they signed their loan agreement.

o   LendUp also violated the Truth in Lending Act by understating the APR.  According to the Order, LendUp failed to incorporate into its APR the portion of expedited funding fees which were retained by LendUp.  LendUp also used a faulty APR calculation tool for a period of time and did not have adequate testing provisions in place to identify the issue.

·        LendUp also ran afoul of the Fair Credit Reporting Act and Regulation V’s requirement that it have in place written policies and procedures about the accuracy and integrity of the information it furnished to credit reporting agencies. LendUp did not have any such policies and procedures in place until April 2015.

Lessons to be Learned.

·        The Order supports earlier statements by the CFPB that it holds fintech companies to the same standards as other lenders.

·        The CFPB continues to rely upon the Unfair and Deceptive Provisions on the Consumer Financial Protection Act to enforce through consent orders where other statutory authority does not exist.

·        Fintech startups should be reminded that it is essential they review consumer financial service products carefully with a lawyer well versed in the regulatory scheme before they rollout new products to ensure compliance.

·        Marketing is subject to the same scrutiny as the product itself.

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.

Submission of Credit Card Agreements Resume under CARD Act

A year ago, the CFPB temporarily suspended card issuers' obligations to submit their credit card agreements quarterly to the CFPB.  The stated purpose of the rule was to reduce the burden on the CFPB while it works to develop a more efficient electronic submission system.  The suspension has now expired and the CFPB has provided notice to card issuers to resume submitting their currently-offered credit card agreements to the CFPB on May 2, 2016 (the first business day after April 30th).  Regulation Z requires card issuers to submit their currently-offered agreements "in the form and manner specified by the Bureau."  Card issuers' obligation to post currently offered credit card agreements on their publicly available website was not affected by the suspension.  


In other news and perhaps related to the roll out of the CFPB's new electronic submission system, the CFPB rolled out its new website upgrades on April 22, 2016.

TILA’s Rescission Remedy Reigned in by Tennessee District Court

In a pair of decisions by the Eastern District of Tennessee, the court reminded consumers that there are limitations to the right of rescission provided by the Truth in Lending Act. See Jones v. Select Portfolio Servicing, Inc., C.A. No. 2:15-cv-02495, 2016 US Dist. LEXIS 16658 (W.D. Tenn. Feb. 10, 2016); Bowles v. Mass Mutual Life Ins. Co., C.A. No. 2:15-cv-02677, 2016 U.S. DIST. LEXIS 16660 (W.D. Tenn. Feb. 10, 2016).  In both cases, the consumer’s loans were assigned to third parties several years after the consumer executed the note and deed of trust.   In both cases, the consumer took issue with whether or not the loans were properly assigned and whether proper notice of the assignment was provided to the consumer.  Both consumers contended that the transfer of the loan was a material fact and that the defendants’ breach of their statutory duty under the Truth in Lending Act in failing to disclose the transfer of the note and deed of trust entitled them to rescission.  The court in each instance disagreed and granted the lenders’ and servicers’ motion to dismiss.

Under the Truth in Lending Act, a consumer is provided with a limited right to rescind the transaction.  The right to rescission must be exercised by midnight of the third business day following the consummation of the transaction or the delivery of the “information and rescission forms” together with the material disclosures required.  The right of rescission expires in any event three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first.  The right of rescission is not available in purchase money transactions for residential mortgages or certain other transactions. See 15 U.S.C. §1635(e)(1).

The issue before the court in both instances was whether the failure to disclose an assignment of a residential mortgage as required by 15 U.S.C. §1641(g) constitutes a material disclosure allowing for a rescission.  The court held that it was not.  “An assignment is not one of the material disclosures listed or identified in TILA.”  Jones at *37.  Going into more depth, the court in Bowles reminded the consumer that the right of rescission only applied to the required disclosures about the consumer credit transaction.  As defined by TILA, those disclosures are expressly limited to: “the disclosure…of the annual percentage rate, the method of determining the finance charge and the balance upon which a finance charge will be imposed, the amount of the finance charge, the amount to be financed, the total of payments, the number and amount of payments, the due dates or periods of payments scheduled to repay the indebtedness, and the disclosures required by section 1639(a).  Section 1639(a) goes on to require other disclosures for certain mortgages; however, the assignment or transfer of the mortgage is not among them.”  Bowles at *13.

The cases provide the following reminders to the consumer’s bar:

·        Rescission is not available for every residential mortgage transaction;

·        Rescission rights have a fairly short shelf life;

·        Rescission is not available for every violation of the Truth in Lending Act; and

·        Rescission may not be an effective means to thwart foreclosure.

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 Enters Consent Order with Buy Here Pay Here Auto Dealer

In its first enforcement order of the year, the CFPB took aim at the financing practices of a buy here pay here auto dealer.  “Buy here pay here dealers” sell the car and originate the auto loan without selling it to a third party.

The CFPB in its press release noted the dealer engaged in abusive financing schemes, hid auto finance charges and misled consumers.  The consent order requires the dealer pay $700,000.00 in restitution to consumers and levies a civil monetary penalty of $100,000.00 on the dealer.  The civil penalty has been suspended based upon the dealer’s inability to pay.  Additionally, the CFPB once again sets forth specific remediation requirements which should be reviewed carefully and considered by the auto finance industry.

According to the findings, which are set forth in the Consent Order and are neither admitted nor denied by the dealer, the dealer sold used cars and provided onsite financing to consumers.  According to the Consent Order, 98% of all purchases were financed onsite and over a two year period, the dealer offered approximately 1000 people financing/year.  The dealers’ practices were such that consumers filled out credit applications prior to being shown any cars.  Once the dealer determined the monthly payment the consumer could afford, the consumer was shown a car in the dealer’s inventory which met the monthly payment ability of the consumer.  None of the cars on the lot displayed purchase prices and the purchase price was not disclosed to the consumer until after the consumer had test driven the car and was ready to purchase the car.  Additionally, the dealer required that, as a condition to providing financing, the consumers agree to purchase a $1,600.00 service contract and a $100.00 GPS payment reminder device.  It was additionally the dealer’s practice to not negotiate the price of the car with finance customers; however, the dealer did negotiate purchase prices with cash customers.  Put simply, customers who obtained financing were treated differently by being required to pay full price, purchase a service contract and a GPS reminder device. 

Pursuant to the Consent Order, the dealer violated the Truth in Lending Act, as well as the Dodd Frank UDAAP provision as follows:

• The amounts charged for the service contract and GPS payment reminder device were finance charges because they were charges payable directly or indirectly by the consumer and imposed by the creditor as an incident or condition of the extension of credit. By requiring credit consumers to purchase the same but not cash consumers, the dealer imposed a finance charge and therefore needed to disclose the same as a cost of credit.  By failing to do so, the dealer’s inaccurately disclosed the finance charges and APR;
   
• The CFPB additionally considered the fact that credit customers were required to pay the full price of the car but cash customers were often provided with discount purchase prices to mean credit customers essentially paid a markup and the same should have been disclosed as a finance charge and APR;
   
• The dealer’s advertised APR was inaccurate as a result of its failure to take into account the costs of the required service contract, payment reminder device and “markup”; and
• The dealer’s failure to post sticker prices or disclose the asking price until the consumer indicated it would purchase the car, coupled with the TILA disclosure violations set forth above, resulted in an unfair and deceptive practice because it “lured consumers with misleading advertising and then kept them in the dark about the true cost of financing the cars they were purchasing.”

Auto dealers should review the Consent Order and take note of several points:

• The relative scope of the violation was minimal: 2,000 loans over a two year period and yet, the Consent Order requires $700,000.00 in restitution.  The clear indication is that the CFPB is not limiting its focus to large players but also is focused on particular practices;
   
• Required charges are finance charges for purpose of the Truth in Lending Act and should be disclosed as such;
   
• The remediation provisions of the Consent Order should be considered as a likely expectation of the CFPB moving forward and require:
   
  • Purchase prices be clearly and prominently displayed on all vehicles available for for sale; and
     
  • The dealer provide an initial disclosure and receive a written acknowledgement of the disclosures prior or simultaneous with offering a car to the consumer or soliciting a commitment from the consumer to purchase:
    • The make, model and VIN of the vehicle;
    • The duration of the retail installment contract
    • The timing, number and dollar amount of periodic payments;
    • The total number of payments required before the consumer acquires full ownership of the vehicle;
    • The purchase price;
    • The finance charge;
    • An itemization of any additional products to be included in the financing transaction; and
    • The APR

Buy here pay here dealers are encouraged to review their current policies and procedures in light of the Consent Order and adjust their practices accordingly.

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).

CFPB Monthly Report Turns its Attention to Credit Card Products

The CFPB issued its Monthly Report this week. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state.  Additionally, each month it highlights a product type and a geographic area.  This month’s report highlights credit card products and provides some forecasting of areas regulators are likely to focus on in upcoming examinations.



Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to the prior year.  As has been the case in prior months, the Report continues to indicate that the three products yielding the highest volume of complaints are debt collection, mortgage and credit reporting.  If there is good news to be had, the Report indicates that debt collection and credit reporting both showed a significant decrease in complaints in September 2015.  Debt collection showed a 10% decrease and credit reporting showed at 15% decrease.  Interestingly, the products showing the largest increase in claims in a 2014 vs. 2015 comparison were debt settlement, credit repair and check cashing.  Taking this into account, we are likely to see a continued increase in enforcement actions in the debt settlement and credit repair industries.

 

This month’s report focuses on credit card products.  According to the CFPB Reports, credit card products are one of the most complained about financial service products, fourth only to debt collection, credit reporting and mortgage.  Credit card providers and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly with regard to the application of payments and billing disputes.

 

• The most common complaint involves billing disputes.  According to the report, consumers are confused as to how and when late fees can be assessed.  Other consumers indicated confusion as to how to properly and timely make a billing error dispute.  16% of all credit card complaints are categorized by the CFPB as involving billing disputes.

 

• Another issue highlighted by the CFPB is the concern with credit card accounts being closed without notice due to concerns by the credit card companies as to fraud and identity theft. 

 

• Consumers also complained about their inability to allocate payments as they desire and expressed confusion where portions of accounts were subject to differing interest rates, promotions, and expiration dates.

 

Overall, the Report did not contain any surprises.  So what might the credit card industry expect to see from regulators?  Based upon the current complaint trends, the credit card industry is likely to continue to see a continued focus on to their application of credit card payments, as well as scrutiny as to the accuracy of their disclosures for 0% balance transfers and other promotions. 

 

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.

What Mortgage Lenders and Servicers Should Know: CFPB Issues Monthly Complaint Report

The CFPB issued its Monthly Complaint Report today. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state.  Additionally, each month it highlights a product type and a geographic area.  This month’s report highlights mortgage product complaints and provides helpful insight to mortgage lenders and servicers regarding complaints which appear to be of import to the CFPB. 

Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to 2014.  In its third month, the Report continues to indicate that the three products yielding the highest volume of complaints were debt collection, mortgage and credit reporting.  It should come as no surprise then that in its first three monthly reports, debt collection, credit reporting and mortgage have been the CFPB’s featured product spot light.  

Mortgage lenders and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly, servicing transitions and effective loss mitigation programs. 

• Over half of the consumers submitting mortgage complaints in the past month complain about problems that occur when they are unable to make their payments, particularly with loan modifications and foreclosures.  Consumers complained about difficulties in the loss mitigation processes, delays with review of their loan modification applications, frequent changes in their point of contact, and servicers proceeding forward with foreclosure while modification applications remain under review;
• Consumers also complained about problems they incurred during the transition from one servicer to another including payments increasing unexpectedly, unexplained fees charged by the prior servicer, and issues with the successor servicer honoring modifications made by prior servicers;
• Misapplication of payments was also a common complaint.  Consumer complained about payments simply being misapplied, as well as issues with the timely disbursement of escrow amounts for taxes and insurance premiums;
• Consumers also expressed frustration with the communications with their servicer.  The Report notes that consumers were frustrated with having to resubmit paper work in the loan origination, modification and foreclosure stages; and
• Consumers also complained about lengthy approval processes for loans.

While all of these complaints have to be viewed from an objective stand point, they do suggest that mortgage lenders and servicers need to focus on their compliance management systems and processes for upcoming examinations, particularly with respect to the implementation of TRID and the continuing emphasis on Regulation X’s mortgage servicing rules.

CFPB’s Supervisory Highlights Reveal Struggles Complying with Regulation X and Loss Mitigation (Part 3)

The CFPB published its Supervisory Highlights last week, highlighting examinations across various financial products that were conducted between January and April of this year.  The Report highlights key findings made by the CFPB and provides insight into the current focus of the examiners.  The current edition of Highlights provides insights on consumer reporting, fair debt and student lending, but the centerpiece of the Report are the key findings regarding the mortgage industry.  Today’s post focuses on the mortgage findings, both for loan originators and servicers.  The overriding theme of the Highlights continues to be the need to have appropriate compliance management systems in place.

                Loan Origination

The CFPB indicates that this is the first round of examinations to take into account compliance with the Title XIV rules, which include the ability to repay, loan originator compensation, high-cost mortgages, homeownership counseling and escrows.  The Highlights indicate that supervised entities which originate mortgage loans are struggling with the implementation of the policies and procedures necessary to comply with the new regulations. More generally, the CFPB found entities did not provide adequate training in certain key areas, did not provide for sufficient monitoring and corrective action, and failed to have systems in place for robust compliance audits.  The key highlights:

• Not surprisingly, based upon the recent rash of consent orders, heavy scrutiny was applied to compliance with the Loan Originator Rule.  The CFPB noted that while written policies were in place, there were no written procedures instructing employees how to comply with the written policies.  The CFPB emphasized the need for written procedures that not only ensure compliance with the Loan Originator Rule, but also monitor compliance;
• Some supervised entities struggled with the disclosures required by the Regulation X and did not fully comply with the disclosure requirements by failing to provide the list of housing counseling agencies to consumers and in particular, failing  to provide the websites for each agency;
• Supervised institutions also struggled to comply with the good faith estimate requirements of Regulation X.  Particularly, the CFPB found entities:
  • Failed to timely provide the consumer with the good faith estimate within three business days of receipt of the completed application;
  • Failed to timely provide the consumer with revised good faith estimates within three business days of receiving information of changed circumstances; and
  • Failed to include all fees within the good faith estimate.
• Supervised entities failed to ensure that the HUD-1 settlement statements accurately reflect the actual settlement charges paid by the borrower;

Mortgage Servicing

The CFPB acknowledged that compliance with the CFPB mortgage servicing rules is a high priority.  It should come as no surprise, then, that the report details a number of issues in this regard.  The CFPB again made the general observation that entities needed procedures in place to audit for systemic controls.

• Particularly as to loss mitigation, the CFPB noted:
  • A number of issues with acknowledgement notices sent by servicers.  The Highlights make clear the expectation that servicers’ requests for additional documents should be on point and only request the specific additional documents actually required to complete a loss mitigation application;
  • Entities also need to protect against system failures and weaknesses to insure that loss mitigation acknowledgement notices are timely sent; and
  • Entities need to insure that systems and procedures are in place to insure that loans transferred while in loss mitigation are handled appropriately.

• Particularly as to foreclosure, the CFPB noted the expectation that servicers’ notices of intent to foreclose take into account any pending loss mitigation plans.

• The CFPB also noted that one or more servicer failed to automatically cancel private mortgage insurance as required by the Homeowners Protection Act. 

• Entities also struggled with the periodic statement requirements of Regulation Z. Particularly, the CFPB noted that:
• One or more servicers failed to send periodic statements either because of a sustained system error or because of an erroneous belief that the loans were exempt; and
• One or more servicers inaccurately listed fees and transactions in the transaction history.

 

 

CFPB Delays Effective Date for New Mortgage Disclosure Rules

The CFPB has announced that it will  be proposing to delay the effective date of its new mortgage disclosure rules until October 1, 2015.  For months, congressional and trade group leaders have been requesting a delay in the implementation to no avail.  In fact, two weeks ago, the CFPB steadfastly declined to move the date but provided some assurances that it would be "sensitive to the progress made by those entities that have squarely focused on making good-faith efforts to come into compliance with the Rule on time."


In its press release, the CFPB attributed the delay to a newly discovered administrative error and stated that they believe that the additional time "would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year."

CFPB Continues its Focus on Loan Originator Compensation

In the span of a week, the CFPB has made it clear that it will not tolerate compensation to loan originators based upon interest rates.  These are the second and third cases resolved by the CFPB regarding loan originator compensation in the past six months and are based upon Regulation Z’s Loan Originator Compensation (“LOC”) Rules.

On June 4^th, the CFPB and RPM Mortgage entered into a proposed consent order which requires RPM to pay $18 million dollars in monetary relief and a $1 million civil money penalty.  It additionally requires RPM’s CEO to pay an additional $1 million civil money penalty.  The complaint alleged generally that RPM instituted a compensation plan which incentivized loan originators to steer consumers to higher rate mortgage loans.  Specifically, the Complaint alleged that RPM established employee expense accounts into which RPM deposited profits from an originator’s closed loans.  The Loan officers could receive bonuses from the accounts or use the accounts to offset interest rate or provide other incentives to consumers to avoid losing transactions.  The CFPB contended that by doing so, the officers were able to close and earn commissions on accounts they would have otherwise lost to competitors.  All of the actions of RPM occurred prior to January 1, 2014 and therefore fell under the prior version of the LOC Rule.

On June 5^th, the CFPB entered into a consent order with Guarantee Mortgage Corporation to resolve violations of the LOC Rules.   The consent order requires Guarantee, which is no longer in business, to pay $228,000.00 to the CFPB’s Civil Penalty Fund.  The consent order finds that Guarantee paid monthly fees to marketing services entities (“MSEs”) which were associated with Guarantee’s branch offices and set the fees based upon the profitability of the associated branch.  The owners of the MSEs drew the monthly fees as additional compensation. The Consent Order asserts that the MSE owners included in some cases loan originators.  Because of the accounting methods used by Guarantee, the fees paid to the MSEs included income from loans originated by their owners based on interest rates charged on the originated loans.  The CFPB therefore determined that in certain cases compensation was received based upon the terms of loans they originated in violation of the LOC Rule.