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Promontory Financial Group: Consumer Financial Protection Developments

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From the editors of Sightlines
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July 26, 2012

Dear Friends,

The Consumer Financial Protection Bureau’s first enforcement action garnered media attention, but Bulletin 2012-06, which was issued at the same time and addresses the marketing of credit card add-on products, went mostly unnoticed.

The bulletin clearly states that financial institutions must take steps similar to those in the CFPB’s July 16 stipulation and consent order, particularly as it relates to scripts used by sales personnel. Enforcement orders frequently have ramifications that extend well beyond the signatories. The bulletin—which also covers deposit services and other credit products—offers explicit testimony to that effect.

The CFPB has made it clear that it wishes to be a different kind of regulator, and the specificity of the consent order marks another step toward that goal. It details precisely what must be remediated, as well as expected standards of conduct going forward. Prudential regulators have typically preferred to stake out general principles in public agreements and rely on their ongoing supervisory relationship to flesh out precise expectations.

The level of detail could in some cases prevent thoughtful and substantive remediation that doesn’t fit within the bright lines drawn in the actions; on the other hand, to the extent the consent order establishes a meaningful precedent, companies won’t have many questions about what’s expected of them.

The CFPB’s specific directives in the consent order include a compliance plan that prohibits the bank or its representatives from marketing pitches during card-activation calls, unless the consumer is first informed that listening to the solicitation is optional. Other elements include sales scripts that determine cardmember eligibility for products, and required disclosures—billing, cancellation, and refund policies, among other things—for those cardmembers who elect to purchase a product. The order also states that the first periodic statement reflecting a protection or monitoring purchase must be “positioned in a clear and prominent manner and shall be in 12-point font or larger type.”

The CFPB through the consent order has taken a clear role in telling the bank how it may market a product and how it must respond to dissatisfied customers.

The Office of the Comptroller of the Currency’s related July 17 consent order, which found violations of section 5 of the Federal Trade Commission Act, should be familiar to financial institutions. Importantly, it emphasized the “failure… [to] appropriately manage the risks presented by these products,” and required the bank to draft new policies and procedures to address improper practices through the development of a “written enterprise-wide management program.”

The OCC also required an annual assessment of the risk of unfair or deceptive acts and practices related to the products; comprehensive procedures addressing training on consumer laws, particularly unfair and deceptive practices; written policies requiring reporting of violations of consumer laws to an executive risk manager; and written policies and procedures that elevate the status of the bank’s compliance program. The bank’s proposed changes are subject to approval by the OCC, which can require additional changes if necessary.

The OCC seemed to give some leeway in determining how to achieve the required remedies; the CFPB order does not have that flexibility and is quite clear on the terms of the changes it expects. Despite their differing methods, the orders may well achieve similar outcomes.

Through the consent order the CFPB has again reminded observers that transparency is among its guiding principles. Compliance with bank regulatory consent orders has frequently been a matter of speculation, occasionally informed but more frequently uninformed; the CFPB in its enforcement order has established obvious goalposts, and given consumers and the general public the opportunity to measure compliance.

Yours truly,

Amy Friend, Managing Director
afriend@promontory.com
+1 202 384 1056

Amy Friend

Ann Jaedicke, Managing Director
ajaedicke@promontory.com
+1 202 384 1150

Ann Jaedicke

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BJ Sanford, Managing Director
bsanford@promontory.com
+1 202 384 1020

BJ Sanford

Catherine West, Managing Director
cwest@promontory.com
+1 202 384 1169

Catherine West

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Private Student Loans Hearing and Report

The Senate Subcommittee on Financial Institutions and Consumer Protection held a July 24 hearing on private student loans with testimony from Rohit Chopra, student loan ombudsman at the CFPB. Chopra told the panel that private student loans are riskier than federal student loans and that student-loan debt can act as a drag on the economy. He urged Congress to consider offering student borrowers loan modification and refinancing, similar to relief extended to homeowners. Jack Remondi, president of COO of Sallie Mae, told the subcommittee that “Sallie Mae supports reasonable reform to bankruptcy laws that would allow borrowers to discharge their education loans—both private and federal—after a good faith period of attempting to repay.” Deanne Loonin, a director at the National Consumer Law Center, also testified, as did Jen Mishory, a deputy director at a youth-advocacy group. Looning and Mishory focused their attention on the interdependency of for-profit institutions and private lenders.

The hearing followed the July 20 release of a private student loan report by the Department of Education and the CFPB. The long-anticipated report mandated by the Dodd-Frank Act estimated that private student loans account for $150 billion of the roughly $1 trillion in total outstanding student-loan debt—and that the default rate on private student loans is substantially higher than on federal student loans. It noted a boom period between 2005 and 2008 during which “lenders increasingly marketed and disbursed loans directly to students, reducing the involvement of schools in the process.” The report also said many borrowers were steered into private loans when they had not yet exhausted federal Stafford Loan limits. The report recommended greater involvement by schools in the private-lending process, a congressional review of existing bankruptcy options for private-loan borrowers, and better borrower access to information about private loans.

CFPB Issues First Enforcement Action; Capital One to Pay Fine and Refund

As noted above, the CFPB on July 18 announced its first enforcement action. The action was taken in coordination with the Office of the Comptroller of the Currency and included an aggregate $60 million in fines; the OCC estimated restitution at $150 million. In addition to the CFPB’s and OCC’s separate consent orders, the CFPB also issued a bulletin that extended some of the principles in its order to other companies and products. A July 18 post on the bureau’s blog explained the refund process; another CFPB blog post from the same day counseled readers on how to spot stealth credit-card fees.

Payday Lenders Want National Designation

The House Subcommittee on Financial Institutions and Consumer Credit held a July 24 hearing on proposed legislation that would charter certain nonbank lenders, including payday lenders, as “national consumer credit corporations.” The intent of the bill, H.R. 6139, the “Consumer Credit Access, Innovation, and Modernization Act,” is to offer the lenders federal rather than state regulation. The OCC—the proposed regulator for the designated lenders—opposes the bill. Grovetta Gardineer, deputy comptroller for compliance policy, testified that the designation would allow lenders to offer products “most prone to abuse,” including payday, tax refund anticipation, and auto-title loans. The agency has generally prohibited national banks from making those loans. John Munn, a director in the Nebraska Department of Banking and Finance, said designation would allow payday lenders to avoid state oversight “without meeting the necessarily high thresholds that Congress has traditionally required for receiving such a benefit.” Mary Jackson, a vice president with lender Cash America, testified in favor of the bill and said state-by-state regulation is “ineffective.” John Berlau of the Competitive Enterprise Institute told the panel that freeing payday lenders from state-by-state regulation would allow the companies to make short-term loans to entrepreneurs and spur economic growth. A representative of the National Pawnbrokers Association also supported the bill.

Cordray Testifies before House on Credit Availability

CFPB director Richard Cordray on July 24 testified in front of a subcommittee of the House Committee on Oversight and Government reform and in his prepared remarks and answers to lawmakers’ questions defended the bureau against claims that its new rules are over-complex and choke off consumer credit availability. “Concern for credit availability is foremost in our mind as we undertake the task Congress gave us to develop rules to implement statutory reforms in the residential mortgage market,” he told the panel.

CFPB to Supervise Credit Reporting

The CFPB said July 16 it adopted a rule to supervise credit reporting agencies—the first time, according to the agency’s press release, that they have been supervised at the federal level. “The CFPB’s approach to supervising credit reporting will be just like its approach to supervising banks and other nonbanks,” it said. “The companies will be subject to review of compliance systems and procedures, on-site examinations, discussions with relevant personnel, and they will be required to produce relevant reports.” The agency posted the final rule the same day, in addition to a summary fact sheet identifying the new rule as “the first in a series of rulemakings to define ‘larger participants’ in certain nonbank markets.” Director Richard Cordray delivered a related speech about credit reporting at a Detroit field hearing and laid out the bureau’s three areas of focus: reliability of credit reporting information, the accuracy of consumer credit data, and the dispute resolution process. “The credit reporting market is not one where consumers can shop around among different providers, for people have no choice about whether to have any of the credit reporting companies keep track of their credit history,” he said in his remarks. The CFPB’s blog also posted video of Cordray’s speech. The bureau also penned a blog posting with a list of all the supervised credit reporting companies and a guide walking consumers through the annual process of obtaining a credit report.

CFPB Proposes New Mortgage Disclosures and Rule on High-Cost Mortgages

The CFPB unveiled its proposed new mortgage disclosures on July 9. Blog postings leading up to the release include one on July 5 that gave a high-level summary of the current status and background of the disclosures, and another on July 6 that gave more detail on the evolution of the disclosures, including prototype testing in May 2011 that generated more than 27,000 user comments through the bureau’s online feedback tool. It also set up a page with before/after screenshots of the loan estimate and closing disclosure. The formal 1,099-page Federal Register notice of proposed rulemaking included alternative disclosures for loan estimates for a more complicated product, closing disclosures for refinances with no seller, and closing disclosures provided to the seller separately.

In conjunction with the release of the proposed disclosures, the bureau on July 9 issued a notice of proposed rulemaking to expand the types of mortgage loans falling under the auspices of the Home Ownership and Equity Protection Act of 1994. The expansion would include loans that have:

• An annual percentage rate (APR) exceeding the average prime offer rate by 6.5 percentage points for most first-lien mortgages, and by 8.5 percentage points for subordinate lien mortgages

• Points and fees exceeding 5% of the total transaction amount

• Prepayment penalties more than 36 months after loan closing or account opening, or penalties exceeding more than 2% of the amount prepaid.

These high-cost mortgages would be subject to additional new restrictions, including a near-ban on balloon payments and a categorical restriction on prepayment penalties and financing points and fees, among other things. Creditors would be required to confirm that consumers seeking high-cost mortgages have received homeownership counseling “on the advisability of the loan.”

Director Richard Cordray spoke at the National Council of La Raza’s annual conference in Las Vegas on the same day, and his remarks focused on the bureau’s mortgage initiatives.

GAO Finds “Limited” Oversight of SCRA Compliance; Regulators Issue PCS Guidance

The Government Accountability Office on July 17 released a report assessing regulatory oversight of mortgage servicers’ compliance with the Servicemembers Civil Relief Act. The report said prudential oversight was “limited,” finding that “half of all the depository institutions that serviced mortgages were reviewed for SCRA compliance from 2007 through 2011.” Regulators and agencies “should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight,” the report said. It also said the Veterans Administration should expand SCRA monitoring efforts. The full report is here.

Federal banking regulators and the CFPB on June 21 issued joint guidance on appropriate practices for mortgage servicers helping military homeowners that have received Permanent Change of Station orders. The guidance noted the “unique challenges” facing military homeowners due to the short timelines of PCS orders, and identified practices that “have the potential to mislead or otherwise cause harm” to those homeowners. The CFPB posted remarks of Holly Petraeus, the head of its Office of Servicemember Affairs, at a related press conference. Though the agencies issued the guidance jointly, each one put out a different press release.

CFPB
OCC
FDIC
Federal Reserve
NCUA

CFPB Sees Potential Challenges in Mobile Payments

CFPB associate director Marla Blow testified June 29 before the House Subcommittee on Financial Institutions and Consumer Credit on the potential risks of mobile payments and how agencies must change their current regulations to address them, particularly as smartphone penetration increases.

CFPB Releases Congressional Report on Reverse Mortgages

The CFPB announced June 28 that it had released a report to Congress on reverse mortgages mandated by the Dodd-Frank Act. Among the key findings: Reverse mortgages are complex products with features that are “difficult for consumers to grasp;” borrowers are taking out the loans at younger ages than in the past, and 73% of the time they draw down all available funds in a lump sum at closing; a “surprisingly large proportion” of borrowers (9.4%) are at risk of foreclosure for failing to pay taxes and insurance; and the products remain particularly prone to misleading advertising. On June 25, the bureau posted its Federal Register notice requesting information “on the factors that influence reverse mortgage consumers’ decision-making, consumers’ use of reverse mortgage loan proceeds, longer-term consumer outcomes of a decision to obtain a reverse mortgage, and differences in market dynamics and business practices among the broker, correspondent, and retail channels for reverse mortgages.” Separately, the agency posted a consumer fact sheet on reverse mortgages. 

CFPB Publishes Rulemaking Agenda

The CFPB on July 16 posted on its Web site the final draft of the twice-a-year rulemaking agenda that it submits to the Office of Management and Budget. An accompanying post on the bureau’s blog summarized the rulemaking agenda, which included qualified mortgages, supervision of nonbank entities, and reloadable prepaid debit cards.

 

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Promontory's Consumer Protection Group includes:

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Konrad Alt, Managing Director
kalt@promontory.com
+1 415 986 4160

Jeff Brown, Managing Director
jbrown@promontory.com
+1 202 384 1040

Jeanine Catalano, Special Adviser
jcatalano@promontory.com
+1 415 321 6408

Michael Dawson, Managing Director
mdawson@promontory.com
+1 202 384 1080

Susan Eckert, Director
seckert@promontory.com
+1 202 384 1125

Jennifer Faulkner, Director
jfaulkner@promontory.com
+1 202 384 1126

Amy Friend, Managing Director
afriend@promontory.com
+1 202 384 1056

David Gibbons, Managing Director
dgibbons@promontory.com
+1 847 615 1728

Jonathan Gould, Director
jgould@promontory.com
+1 202 384 1018

Austin Hong, Director
ahong@promontory.com
+1 202 384 1030

Ann Jaedicke, Managing Director
ajaedicke@promontory.com
+1 202 384 1150

Chris Lewis, Director
clewis@promontory.com
+1 415 321 6406

Simon McDougall, Managing Director
smcdougall@promontory.com
+44 207 377 2367

BJ Sanford, Managing Director
bsanford@promontory.com
+1 202 384 1020

Catherine West, Managing Director
cwest@promontory.com
+1 202 384 1169

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801 17th Street, N.W.
Suite 1100
Washington, DC 20006

Copyright © 2012 Promontory Financial Group. All rights reserved.

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