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Promontory Financial Group: Consumer Financial Protection Developments

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From the editors of Sightlines
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April 13, 2012

Dear Friends,

The Department of Justice announced earlier this month that it was suing GFI Mortgage Bankers for violations of the Fair Housing Act and the Equal Credit Opportunity Act. The suit is the latest reminder of the government's sharp focus on fair-lending laws — a focus that is also embedded in the Dodd-Frank Act. But for many lenders, their greatest vulnerability to charges of discriminatory lending may emerge in an unexpected area: small-business lending.

The CFPB's fair-lending authority, after all, is not restricted to consumers — a fact easily forgotten amid the intense interest in the bureau's supervision of mortgages and student lending. Section 1071 of Dodd-Frank amends ECOA to require the Consumer Financial Protection Bureau to collect lender data on small-business loans.

The law says the purpose of the collection is to "facilitate enforcement of fair-lending laws," and under it lenders will have to identify any credit inquiries from women-owned, minority-owned, or small businesses. Though the CFPB has not yet spelled out precisely what information it will collect, the statutory language suggests the requirements will be similar to that of collections under the Home Mortgage Disclosure Act — for which rule-writing authority was transferred to the bureau under Dodd-Frank. (Dodd-Frank also expands the data collection under HMDA to include points, fees, maturities, and other terms of mortgages. The language of both data-collection provisions gives the CFPB substantial latitude to collect other information as it deems necessary.)

The small-business data-collection requirement is pending while the bureau decides what it will collect. Lenders have the opportunity in the meantime to examine their fair-lending compliance programs and their performance record in small-business lending. It is not unusual for ECOA compliance controls on the commercial side of the lending business to be less robust than those on the consumer side, as lenders' consumer-compliance functions naturally gravitate to traditional consumer products.

All the more reason for lenders to look carefully at compliance programs for small-business lending. Underwriting small-business lending can be less data-intensive and more often grants discretion to loan officers than the underwriting of most consumer loans. A more subjective underwriting process can make lenders particularly vulnerable to charges of discrimination in small-business lending.

Yours truly,

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

Ann Jaedicke

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

BJ Sanford
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1. CFPB’s Servicing Initiative

The CFPB on Tuesday unveiled a "put the 'service' back in servicing" initiative that it said would tackle two problems in mortgage servicing: lack of transparency and lack of accountability. The agency would address these problems through rulemakings aimed at eight general issues, including disclosures, payment handling, and record keeping. The agency spelled out the initiative in a press release, and posted guidelines it is following as it prepares a proposed rule for release this summer. It is targeting final rules for early next year. A subsequent blog item focused on what the new rules would mean for borrowers.

2. Justice Department Sues Mortgage Lender

The Justice Department said April 2 that it sued GFI Mortgage Bankers, claiming it violated fair-lending laws by charging African-American and Hispanic borrowers higher rates and fees on mortgages than it charged white borrowers. The release said that on average, an African-American borrower taking out a mortgage from GFI in 2007 paid $7,500 more in the first four years of a loan than a similar white borrower; Hispanics paid $5,600 more. "During the period when the discrimination occurred, GFI had a policy or practice of allowing and encouraging its loan officers in New York and New Jersey to promote loan products, price loans and charge fees in a manner that was unrelated to credit risk or loan characteristics," the release said. "GFI knew that its loan officers priced loans in ways unrelated to a borrower's creditworthiness, resulting in thousands of dollars in overcharges for African-American and Hispanic borrowers based on their race or national origin."

3. Know Before You Owe

Sen. Dick Durbin (D-IL) announced on March 29 that he and Sen. Tom Harkin (D-IA) introduced the Know Before You Owe Act of 2012, a bill that would require schools to counsel students on federal loan eligibility and private loan options. "Two-thirds of private student loan borrowers were not aware of the dramatic difference between federal student loans and risky, higher-interest, private student loans," said the release, and in many cases, "students have not applied for federal aid before they apply for private student loans or have not exhausted their federal aid options." Private lenders would be required to certify enrollment and borrowing eligibility with the borrower's school before issuing private loans, provide the borrower with quarterly updates including accrued but unpaid interest and capitalized interest, and report student loan information to the CFPB. Meanwhile, the CFPB in an April 11 blog post introduced a new interactive tool for prospective college students to compare educational costs. The Financial Aid Cost Comparison Shopper web tool — currently in beta — allows students to enter financial aid packages and compare costs for up to three institutions at a time, reporting both nominal costs and monthly loan repayment estimates.

4. CFPB Pressed on Cost-Benefit Analysis

Reps. Randy Neugebauer (R-TX) and Shelley Moore Capito (R-WV) jointly penned a letter to CFPB Director Richard Cordray on March 29 requesting his "assurance" that the CFPB will "conduct rigorous, transparent cost-benefit analysis before it drafts a new rule," and soliciting responses to seven questions about the CFPB's rulemaking process.

5. Open Source

The CFPB announced its official source-code policy on April 6. The agency said it is committed to using flexible and transparent open-source software for its tools and infrastructure, and said source code for all software written by CFPB staff or by contracted third parties will be released into the public domain. The agency has opted to host its projects on its GitHub site.

6. FTC Sues Payday Lender Claiming Tribal Affiliation

The Federal Trade Commission announced April 2 that it had filed for injunctive relief in U.S. district court against more than a dozen payday lending companies and individuals for deceiving and threatening borrowers in violation of the Federal Trade Commission, Truth in Lending, and Electronic Fund Transfer Acts. The companies in question claim their affiliation with Native American tribes gives them immunity from legal action. The commission said it was the second time in seven months that it had brought legal action against a payday lender using a tribal-affiliation defense. The FTC in March expanded the first case, against Payday Financial LLC, to add charges that the lender sued borrowers in a South Dakota tribal court that did not have jurisdiction over their cases.

7. Cordray Testifies on Priorities

CFPB Director Richard Cordray testified March 28 before the House Committee on Financial Services on the bureau's January "Semi-Annual Report of the Consumer Financial Protection Bureau." He said agency priorities included transparency in financial products and "evenhanded oversight" of banks and nonbank competitors. He addressed the U.S. Chamber of Commerce the same day, emphasizing the CFPB's commitment to ensuring a competitive marketplace and efforts to increase transparency in financial documents.

8. Leibowitz Testifies on Data Privacy

On March 29, FTC Chairman Jon Leibowitz testified before Congress on the commission's final consumer privacy best practices report ("Protecting Consumer Privacy in an Era of Rapid Change: Recommendations for Businesses and Policymakers"). He focused on the report's recommendation for the establishment of a universal "Do Not Track" mechanism that would work across different Web sites. "While more work remains to be done on Do Not Track, the commission believes that the developments to date are significant and provide an effective path forward," he said. He urged Congress to enact legislation on: general privacy; security and breach notification; and access to personal information held by data brokers.

9. CFPB Clarifies LO Compensation

On April 2, the CFPB issued a bulletin to clarify the scope of qualified profit sharing, 401(k), and employee stock ownership plans under compensation rules for loan originators. "The bureau's view is that the compensation rules permit employers to contribute to qualified plans out of a profit pool derived from loan originations," said the bulletin.

10. Financial Literacy Month

CFPB representatives will be promoting April's Financial Literacy Month at events across the country, the agency said in an April 2 blog entry. Gail Hillebrand, the CFPB's associate director of Consumer Education and Engagement, will speak during Financial Literacy Day on the Hill on April 17 and at the Financial Literacy and Education Summit in Chicago on April 23. In Amarillo on April 19, Assistant Director Camille Busette will speak during the Texas Panhandle Community Asset Building Forum. Dan Rutherford, senior content specialist, will present at the New York Public Library's Financial Empowerment Day on April 21.

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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

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

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Promontory Financial Group, L.L.C.
801 17th Street, N.W.
Suite 1100
Washington, DC 20006

Copyright © 2012 Promontory Financial Group. All rights reserved.

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