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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 30, 2012

Dear Friends,

The Community Reinvestment Act isn’t always top of mind as bankers implement new requirements under the Dodd-Frank Act and prepare for the Consumer Financial Protection Bureau, but the Office of the Comptroller of the Currency’s most recent release of CRA ratings made us pay attention.

The OCC listed 28 banks in its April 12 release; five banks were rated “needs to improve,” an unusually high number. Poor CRA ratings have historically been due to failures to lend in sufficient volumes, but two of the five received their low ratings due to illegal credit practices.

A “needs to improve” rating has serious consequences for banks looking for growth or acquisitions because regulators generally do not approve branching and merger applications from banks that do not maintain a rating of “satisfactory” or better. Financial holding companies that fail to maintain at least a “satisfactory” rating under the CRA “may not commence any additional activity” not permitted to ordinary bank holding companies. That includes securities underwriting and dealing, among other things.

Discussions during the debate over Dodd-Frank debate included whether to transfer responsibility for the CRA to the new consumer bureau. Prudential regulators retained responsibility in the final legislation, but as a practical matter, CRA compliance represents a new intersection between consumer protection and prudential supervision.

While prudential regulators retain overall responsibility for CRA compliance, Dodd-Frank transferred enforcement authority for several consumer protections laws to the CFPB. The bureau will share examination results with prudential regulators, who will factor any findings of illegal credit practices—including those that are unfair, deceptive, or abusive—into the CRA rating. Fair lending is an important issue for the CFPB, and any evidence of discrimination would also be factored into a CRA rating. Clearly, information sharing between the two regulators will be critical.

If the OCC’s recent ratings are any indication, more low CRA ratings may be forthcoming. While many of them will continue to be for lending-related reasons, the CFPB’s involvement may lead to an increase in downgrades due to illegal credit practices.

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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CFPB to Pursue Disparate-Impact Claims under ECOA

The CFPB said in an April 18 blog posting that it was giving “fair notice on fair lending,” and “letting both lenders and consumers know that in our examination and enforcement work, we will combat unlawful, discriminatory practices—including those that have an illegal disparate impact on protected borrowers.” In a related compliance bulletin, the bureau spelled out its intent to pursue disparate-impact claims under the Equal Credit Opportunity Act. The CFPB announced the initiative in conjunction with a broader effort to crack down on discriminatory lenders, as outlined in another CFPB blog post the same day. The agency also posted a consumer brochure on identifying and reporting discriminatory lending practices.

CFPB Considers Reversing Fed Decision on Card Fees

On April 12, the CFPB published a proposal to remove a cap on credit card fees assessed prior to the opening of the cardholder’s account. The Federal Reserve Board had issued a 2011 rule that interpreted the provisions of the 2009 Credit Card Act to include application and other fees that preceded the opening of the account. But the Federal District Court for South Dakota blocked the cap, citing what the CFPB referred to as the “plain language of the statute that applied restrictions on fees only after a credit card account has been opened by a customer.” The bureau solicited public comment on the rule proposal in a blog item posted the same day, asking whether it should “conform the rule to the court ruling so that it no longer applies to fees charged prior to account opening.”

President Signs Order on Practices Targeting Servicemembers

President Obama on April 27 signed an Executive Order designed to stop deceptive and misleading practices by educational institutions that target veterans, servicemembers, and their families. The order requires schools to provide more transparent information about costs and outcomes. “Of the ten educational institutions collecting the most Post 9/11 GI Bill benefits between 2009 and 2011, eight were for-profit schools. Six of these schools had bachelor student withdrawal rates above 50 percent,” the White House said in a press release. Holly Petraeus, head of the CFPB’s Office of Servicemember Affairs, blogged about the order in advance of accompanying President Obama to its signing.

CFPB Warns on Service Providers

The CFPB warned financial institutions in an April 13 bulletin that they may be held responsible for the actions of service providers with which they contract. Supervised banks and nonbanks are expected to request and review a service provider’s policies, procedures, internal controls, and training materials; include clear compliance expectations and consequences of compliance failure in service contracts; and establish ongoing monitoring of the service providers.

CFPB Launches Arbitration Inquiry

The CFPB said in an April 24 press release that it has launched a public inquiry into arbitration clauses in consumer financial products and services. The Dodd-Frank Act required the agency to study the issue. The bureau is asking about the prevalence of the clauses, the types of claims brought by both consumers and companies, and how both parties are affected by them. The deadline for comments is June 23, according to the Federal Register notice.

Hawaii AG Sues Card Lenders

Hawaii AG David Louis announced on April 12 that he had filed suit in First Circuit Court against seven credit card companies, and alleging that they improperly charged customers for unrequested or unnecessary products. He requested injunctive relief, restitution, and penalties of the seven banks: Bank of America, Barclays, Capital One, JPMorgan Chase, Citigroup, Discover, and HSBC.

CFPB Clarifies Reciprocity in LO Licensing

The CFPB clarified the scope of interstate reciprocity for loan originator licenses in an April 19 bulletin. Among other things, the bulletin said the Secure and Fair Enforcement for Mortgage Licensing Act allows states to grant loan originators a transitional license based on a valid license from another state. However, the bureau said in a press release accompanying the bulletin that its regulations “do not allow states to provide for transitional licensing for registered but unlicensed loan originators who leave banks to act as loan originators while pursuing a state license.”

Extended Comment Deadline for Overdraft Programs

The CFPB in an April 25 Federal Register notice extended the deadline for public comments regarding overdraft programs and their costs, benefits, and risks to consumers. The original April 30 commenting deadline was pushed forward to June 29.

American Bar Association Asks CFPB to Withdraw Privilege Proposal

An April 12 letter from the American Bar Association urged the CFPB to withdraw a proposal in which the bureau asserted it had the authority to compel privileged information – an authority, the organization argued, the agency does not have. “If the bureau decides to move forward with its proposed rule, the ABA urges it to modify the rule to clarify that while the bureau expects supervised entities to provide all relevant factual information that may be requested during examinations and its other supervisory and regulatory practices, the bureau will respect legitimate claims of attorney-client privilege and work product protection by supervised entities and will not seek to compel the production of privileged information or materials,” the letter said.

Plain Writing

The CFPB published its first annual plain language compliance report on April 13, outlining the agency’s compliance plan pursuant to the Plain Writing Act. The agency’s plain writing Web page is here.

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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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