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Promontory Financial Group: Consumer Financial Protection Developments

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From the editors of Sightlines
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June 21, 2012

Dear Friends,

Lenders are fickle about auto finance, and their varying appetite is dictated by basic economics: It’s an appealing business when a dearth of competition makes for generous margins, but generous margins invariably attract competition.

The business appears to be cycling up right now. Banks are swimming in deposits that must be put to work, and compared with other types of consumer credit — mortgages, home equity, credit cards, and student loans — auto finance looks relatively attractive. Credit performance has been strong, and demand is surging, too, as automobile purchases have proved remarkably resilient amidst sluggish economic growth.

Barriers to entry in indirect auto lending are low, and costs are scalable, so it appeals to lenders of all sizes — including credit unions, which remain strong players in the segment. Plenty of third-party venders are ready to help lenders capture the loans they want from the dealers they want, which can keep manpower and IT expenses in check. The decision is hardly irrevocable: Previous down cycles are evidence that getting out of indirect lending, while far from painless, doesn’t have to be debilitating. Lenders typically cite thinning margins, lack of volume, and a commitment to other core products.

We expect, however, that the next down cycle in indirect auto lending may be due to a rarely mentioned but persistent, building concern: regulatory and reputational risk—particularly concerns regarding fair-lending abuses. These risks got a full airing last week in an American Banker article reporting that the Consumer Financial Protection Bureau is investigating indirect auto lending to determine whether dealer markups reflect discriminatory patterns.

Markups are loans made to borrowers at a premium to established benchmarks, and are frequently compared to yield-spread premiums on mortgage loans. Regulators and private litigants argued convincingly that lenders targeted minority borrowers in levying YSPs, and the Federal Reserve Board put an end to them in August 2010, citing the need to “protect mortgage borrowers from unfair, abusive, or deceptive lending practices.” That markups for auto dealers are under regulatory scrutiny therefore comes as no great surprise.

Lenders may contend that they are in a tough position. They by definition do not originate loans that come in through the indirect channel, and dealers have plenty of options. Suffice to say that lenders electing not to purchase marked-up loans might see a pronounced drop in market share; so, too, would lenders asking too many questions about dealer practices and internal controls in extending credit. The question isn’t whether banks engaged in discrimination; it’s whether they were complicit in purchasing dealer-originated loans that violate fair-lending laws or standards regarding unfair or deceptive practices. Indirect auto lenders have tacitly accepted regulatory and reputational risk. Whether they have priced and controlled these risks appropriately remains to be seen.

Regulators do not have a long fair-lending enforcement track record on indirect auto. That may be because gathering evidence is far more complicated than fair-lending analysis on mortgages, which is substantially aided by the Home Mortgage Disclosure Act. The bureau, after gathering as much data as it can from lenders, can be expected to use rough proxies for race and gender, likely sorting through zip codes and census tracks to focus on race and looking at first names for gender. Regulators appear increasingly willing to do the necessary legwork to root out illegal conduct; witness the CFPB’s evolving strategy on disparate-impact analysis.

One step lenders can take to prepare for the increased regulatory attention is to conduct a fair-lending analysis of their indirect auto loan portfolio. The analysis should examine pricing in aggregate, as well as pricing by individual dealers, in search of discriminatory practices. Related to that analysis, lenders should determine how much pricing discretion they’ve given to their dealer clients, and confirm that contracts with car dealers expressly prohibit discriminatory pricing. Beyond the fair-lending analysis, indirect auto lenders will likely benefit from a close look at business impacts, including revenue projections, from a regulatory crackdown related to discriminatory lending.

Car dealerships were memorably carved out of the CFPB’s purview during the contentious Dodd-Frank Act negotiations, but that protection may be of limited value. A CFPB enforcement action against an indirect auto lender over dealer markups would clearly have a chilling effect on other lenders. Carveout or no, the CFPB has the potential to reshape auto finance, either through enforcement or a rulemaking on lender practices for indirect auto.

An investigation of lenders isn’t dealers’ only concern. Courtesy of Dodd-Frank, the Federal Trade Commission has greater autonomy to govern the industry’s conduct. The law specifically removed the usual procedural barriers on FTC UDAP rulemakings that apply to dealers. The Federal Reserve also retained its authority to regulate dealers under the Equal Credit Opportunity Act.

Dodd-Frank directed the CFPB to coordinate with other agencies, including the FTC, “to promote consistent regulatory treatment of consumer financial and investment products and services.” Any of these agencies could take the lead in a rulemaking that addresses auto lending. Similarly, the CFPB and the FTC could coordinate enforcement efforts by pursuing parallel tracks against different actors for common offenses.

The federal government therefore has several options should it decide that it wants to put an end to dealer markups. Doing so would be painful for dealers; whether lenders also take a reputational hit will depend on which option the government chooses.

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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CFPB Announces High-Level Staff Changes

The CFPB on June 19 announced several changes to its senior staff:

Steven L. Antonakes, formerly assistant director of large bank supervision, is now associate director for supervision, enforcement, and fair lending. Paul Sanford is now acting assistant director for large bank supervision; he had been chief of staff for the division.

Meredith Fuchs, previously Director Richard Cordray’s chief of staff, is now general counsel, replacing Len Kennedy, who became senior adviser and counselor to Cordray. Garry Reeder is now Cordray’s acting chief of staff.

Camille Busette, formerly of the Center for American Progress, is the new assistant director of the office of financial education.

Clifford Rosenthal joined the bureau as assistant director of financial empowerment; he was formerly president and CEO of the National Federation of Community Development Credit Unions.

Wendy E. Kamenshine, acting ombudsman, is now ombudsman.

CFPB Releases Complaint Data on Credit Cards; Other Complaints on the Way

The CFPB launched its Consumer Complaint Database on June 19 despite opposition from lenders. “We do not verify the accuracy of these complaints, but we do take steps to confirm a commercial relationship between the consumer and the identified company,” the bureau noted on the tool’s introductory page. The database contains credit card complaints received since the beginning of June, and is refreshed daily. It provides several graphical representations of complaint data, including issuers involved, complaint classification, and disposition.

The database is still in its beta stage of development, and the CFPB has said it may roll older complaints into it when it formally releases the tool. In the meantime, the bureau supplemented the database—which had 137 complaints as of Tuesday morning—with a “Snapshot of Complaints Received.” The bureau began collecting credit card complaints on July 21, 2011, mortgage complaints in December, and bank products and consumer/student loans this March. Though it began collecting mortgage data five months later, they represent 42% of 45,630 consumer complaints the bureau has logged thus far, compared with 37% in credit cards, 14% in bank products and services, and 3% in private student loans. Approximately 55% of the complaints were submitted directly to the CFPB and 39% were referred by other agencies. According to the snapshot:

• Billing disputes are the most common type of credit card complaints

• Issues related to loan modification, collection, or foreclosure are the most common type of mortgage complaint

• Confusing marketing, denials, fees, and statements on accounts are the most common complaint about bank products and services.

The bureau issued a notice June 15 that it intends to begin releasing data on all complaints—not just those relating to credit cards. Comments are due by July 19.

CFPB Looking Into Elder Abuse

The CFPB announced on June 14 that it is seeking information from the public on the issue of financial-related elder abuse. The bureau’s request for information asked about financial advice provided by investment professionals and about financial literacy. It also asked for specific instances of financial exploitation, particularly unfair, deceptive, or abusive financial practices aimed at senior Armed Forces veterans. The CFPB has “a broad mandate to look out for the consumer financial interests of older Americans,” said Skip Humphrey, who leads the bureau’s Office for Older Americans.

Bureau Seeks Another Round of Comments on Private Student Loans

The CFPB, which last November sought comment on private student lending, on June 13 issued a new notice and request for comment on student lending, and this time asked specifically for complaints. A related press release referenced the 2,000 comments the bureau received in response to its November solicitation, and mentioned the bureau’s responsibility under Dodd-Frank to compile and analyze data on private student lending in order to make recommendations to Congress (the release also mentioned the bureau’s student-loan complaint system). In another related item, a blog posting by CFPB student-loan ombudsman Rohit Chopra excerpted portions of a speech he gave at a town hall meeting organized by Rep. Gregory Meeks (D-NY), during which Chopra said the bureau’s November request elicited comments that “touched every stage in the life cycle of a private student loan—from marketing and origination through repayment and servicing to default, bankruptcy and debt collection.”

Fed Releases Consumer Finance Survey; Tweaks Statistical Release on Consumer Credit

The Federal Reserve on June 11 released its triennial Survey of Consumer Finances for 2010, and the headliner was the decrease in American families’ net worth: a 40% decrease from 2007-2010, to levels last seen in 1992. The housing collapse was a key contributor to the drop, but the report also revealed a corresponding drop in incomes and an increase in educational debt. However, the percentage of families reporting any debt dropped, as did median and mean credit card balances. Only 52% of families reported they saved money the year before—the lowest level since the Federal Reserve started collecting the information in 1992.

Separately, the Federal Reserve said June 4 that it changed its G.19 statistical release, Consumer Credit to combine consumer-borrowing data from commercial banks and savings institutions into a new “depository institutions” category. It previously disclosed the data separately because of now-resolved discrepancies between regulatory reports of banks and savings institutions. The Federal Reserve also added data on credit flow during the reporting period. The June 2012 G.19, which covers consumer-credit data through April 2012, is the first installment that incorporates these changes.

CFPB Weighs in on Stay-at-Home Spouses

CFPB associate director Gail Hillebrand testified June 6 before the House Subcommittee on Financial Institutions and Consumer Credit on the impact of the CARD Act’s ability-to-pay provision on stay-at-home spouses. “We … are evaluating whether there are other situations in which money earned by one person is managed or controlled jointly with another and thus should be available to both individuals of qualifying credit,” she said. “We expect to make a determination soon about how to best proceed on these issues.” Numerous bloggers have accused the CFPB of putting stay-at-home spouses at a significant disadvantage in obtaining credit.

Bank Regulators Issue Memo of Understanding

The Federal Reserve, the FDIC, the NCUA, the OCC, and the CFPB on June 4 issued a memorandum of understanding on coordinating supervision of federally insured banks with more than $10 billion in assets. “Such coordination includes scheduling examinations, conducting simultaneous examinations of covered depository institutions unless an institution requests separate examinations, and sharing draft reports of examination for comment,” according to a Federal Reserve press release. The intent is to eliminate redundancy and ease the burden on the financial institutions the five regulators oversee.

White House and Colleges Unveil Financial-Aid Shopping Sheet

Members of the Obama administration and CFPB head Richard Cordray met at the White House on June 5 to unveil a draft “Financial Aid Shopping Sheet,” a standardized form explaining loan terms to prospective student borrowers. The Department of Education and the CFPB designed it with “input from students, families, and the higher education community,” and 10 colleges and university systems have committed to using it beginning in the 2013-2014 academic year. The White House press release said that the “agencies have received over a thousand comments, and are incorporating this feedback into a final form.” Cordray said the shopping sheet is consistent with the bureau’s goal of giving “people the confidence and peace of mind that the financial world is not full of tricks and traps that will ruin their lives.”

CFPB Issues Four Rules on Enforcement

The CFPB issued three final rules and one interim final rule on June 6 that will guide its enforcement work. The Rule Relating to Investigations asserts CFPB authority to investigate persons suspected of violating consumer-financial law, provides investigation guidelines, and describes the rights of those investigated. The Rule of Practice for Adjudication Proceedings describes the CFPB’s hearings process on enforcement matters. The State Official Notification Rule is designed to keep the bureau appraised of state-level consumer-financial-law developments. Its interim final EAJA Implementation Rule puts into effect the Equal Access to Justice Act, which governs remuneration of attorney fees for administrative proceedings.

CUNA Requests Exemptions from Inherited Regulations

The Credit Union National Association on June 4 submitted a response to the CFPB’s request for comment on streamlining regulations inherited by the bureau via Dodd-Frank in which it generally pressed for regulatory relief. It urged the CFPB to “seriously consider whether smaller institutions, such as credit unions, can be exempt from agency rulemakings under the CFPB’s authority in the Dodd-Frank Act.” Three specific regulatory provisions the organization singled out were ATM disclosures, annual privacy notices, and electronic disclosures.

FTC Gets Injunction against Mod Scammers

A U.S. district court granted the FTC’s request for a preliminary injunction to halt a “forensic audit” scam involving several companies that promised homeowners that the “audits” of their loan documents could be used to negotiate loan modifications—for a fee ranging from $1,995 to $2,590. Charges against the defendants include violations of consumer deception provisions of the FTC Act and disclosure provisions of the Mortgage Assistance Relief Services Rule. The complaint said “the defendants routinely failed to answer or return consumers’ telephone calls and emails seeking updates on their mortgage modifications, failed to provide refunds to consumers who requested them, and put consumers at risk of losing their homes and damaging their credit ratings.”

FTC Puts Stop to Debt-Relief Firm’s Alleged Deceptive Practices

As part of an ongoing crackdown on companies that prey on consumers in financial straits, the Federal Trade Commission put a stop to a debt-relief firm’s “allegedly deceptive practices.” According to the FTC’s June 6 press release, the firm—variously known as FDN Solutions, Everest Debt Solutions, and 1800debtsettlement.com—used paid online ads that featured fake customer testimonials (violation of the FTC Act) and persuaded people to call a toll-free number to speak with an operator who made misleading statements about the amount of debt relief the firm could secure (violation of the Telemarketing Sales Rule). The settlement requires the company to cease all deceptive practices and to pay $85,000 of a total $3.3 million judgment. The defendants will be forced to pay more if the FTC determines that they lied about their financial condition and ability to pay.

CFPB Plugs Fed’s IFR Video

A CFPB blog on June 6 linked to the Federal Reserve’s YouTube video on the independent foreclosure review process. The video—available in both English and Spanish—walks borrowers through eligibility criteria and directs viewers to call the toll-free number or apply via the Web site. The post also directed consumers to submit complaints to the bureau.

Spokeo Pays $800,000 to Settle FTC Charges

Data broker Spokeo agreed to pay $800,000 to settle FTC charges that the company violated the Fair Credit Reporting Act by failing to protect consumers in the process of marketing user data to recruiting and human resources companies. The FTC said in a June 12 press release that Spokeo was accused of “failing to make sure that the information it sold would be used only for legally permissible purposes; failing to ensure the information was accurate; and failing to tell users of its consumer reports about their obligation under the FCRA.” In addition, the FTC had alleged that Spokeo posted fake endorsements on news Web sites and blogs.

Information Collection on the CFPB’s Inherited Regulations

The CFPB issued another request for comment on an information collection, this time in the June 14 Federal Register for a generic clearance on proposed information collections for streamlining of inherited regulations. The bureau’s initial plan calls for a survey of 1,500 financial institutions at an estimated total annual burden of 1,950 hours. The CFPB seeks comment on whether the collection is necessary, the accuracy of the agency’s burden estimates, ways to enhance the quality of the information collected, and minimizing respondent burden.

Limited Reopening of Ability-to-Repay Comment Period

A May 31 CFPB press release announced a limited reopening of the public comment period in connection with its ability-to-repay mortgage rule—a Dodd-Frank requirement for lenders to “make a reasonable and good-faith assessment of consumers’ ability to repay their mortgages” and a subset of the broader “qualified mortgage” rule. The bureau has reopened that aspect of the comment period to solicit feedback on new GSE-loan performance data furnished by the Federal Housing Finance Authority, in addition to requesting similar information on other mortgage loans and other measures by which borrowers’ ability to repay can be determined. Comment is due by July 9. The official notice is here.

CFPB Releases Proposed “Covered Nonbank” Supervision Process

The CFPB on May 20 released its proposed rule outlining its supervision of covered nonbanks as required by Dodd-Frank. The bureau would first notify a nonbank that it was considering its practices expose consumers to risk. The bureau’s deputy assistant director for nonbank supervision—currently Peggy Twohig—would consider any responses and make a recommendation to the director for a final determination. A covered nonbank can also voluntarily consent to supervision at any time. The CFPB subsequently published the rule in the Federal Register on May 25; comments are due by July 24.

CFPB Publishes Ethics Regulations

A May 24 post on the CFPB’s blog invited public comment on its interim ethics regulations, which it said were “very similar to the rules imposed by other financial regulatory agencies” but signaled a more granular approach. “For instance, the Bureau decided to create a list of specific financial holdings that employees may not own rather than a general prohibition on a class of financial holdings,” the post said. The bureau also published the interim final rule in the Federal Register.

Supreme Court Rules for Quicken Loans

The U.S. Supreme Court on May 24 handed down a unanimous verdict in favor of Quicken Loans in the matter of Freeman v. Quicken Loans. At issue was whether RESPA precludes a bank or title company from charging an unearned fee that it itself retains; the statutory language plainly forbids splitting the fee with a third party, but does not specifically address a retained fee. “In our view, [12 U. S. C. §2607(b)] is unambiguous,” said Justice Antonin Scalia, writing for the court. “It covers only a settlement-service provider's splitting of a fee with one or more other persons.”    

Three Agencies Warn Armed Services Community About HAMP Scams

The CFPB, SIGTARP, and Treasury on May 24 jointly issued a fraud alert on HAMP mortgage modification scams targeting the armed forces community. The release outlined a number of “hallmarks” of such scams: “The unofficial use of official program names or logos of government agencies, non-profit organizations, and/or lenders; the advertising of a very high success rate in achieving modifications; and the guarantee of a successful modification in exchange for an upfront fee.” The agencies also linked to an accompanying resource sheet with a list of contact numbers and Web sites servicemembers can use to receive assistance.

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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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Copyright © 2012 Promontory Financial Group. All rights reserved.

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