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Promontory Sightlines: Consumer Financial Protection Developments


December 17, 2012

Dear Friends,

Unprecedented changes in the mortgage industry and its regulation have kept financial executives busy for the past five years, and the pace is likely to only accelerate in 2013. These regulatory changes mean lenders increasingly will need stronger, dedicated mortgage-business leadership to respond and adapt successfully.

Companies that survived the 2008 crisis have spent the past several years addressing the fallout, dedicating significant time, resources, and talent to remediating past weaknesses and addressing instances of consumer harm. They have done so while participating in a series of refinancing booms and boomlets fed by successively lower interest rates and eased restrictions on loan-to-value ratios in federal refinancing programs. Now, amid one of the most sustained of the refi booms, they face sweeping new regulations that will affect every facet of the industry. The mortgage industry’s focus on yesterday’s problems and today’s opportunities must expand to preparing for tomorrow’s changes.

The Consumer Financial Protection Bureau is in many cases the catalyst demanding the industry’s attention. In late January, it is expected to issue mortgage rules that establish new standards on ability to repay and qualified mortgages, mortgage servicing, loan originator compensation, appraisals, high-cost mortgages, and escrow accounts. The Dodd-Frank Act allows the bureau to give companies a maximum of 12 months to comply with the new rules.

The CFPB confirmed in November that a second wave of mortgage rules will follow later in 2013. This will include revised and integrated mortgage disclosures under the Truth in Lending Act and the Real Estate Settlement Procedures Act, along with a number of other disclosures under Title XIV of Dodd-Frank that the bureau delayed in order to coordinate with the TILA-RESPA disclosures. The bureau has recognized that its more inclusive definition of ‘finance charge’ in its proposed TILA-RESPA integrated disclosure rule has implications for complying with the rules expected in January, but the agency has not publicly committed to a specific rollout and implementation timetable. We expect the CFPB to issue the second wave of disclosure rules by the middle of 2013.

Mortgage-market participants will also have to incorporate certain new requirements from prudential regulators, including Basel III rules on risk-based capital requirements that will be phased in as early as 2013, and proposed risk-retention rules that include a carve-out for securitizations comprised solely of ultra-safe qualified residential mortgages.

Taken together, next year’s rules will touch the entire lifecycle of a mortgage, from product design to origination to repayment or foreclosure, and from securitization to servicing. Virtually every aspect of lender and servicer operations will feel these changes.

For example, we expect mortgage lenders to redesign products to meet the definition of a “qualified mortgage” by a margin that is comfortable enough to minimize litigation risk. The proposed rules on compensation for loan originators would require lenders to provide 0-point/0-fee mortgage alternatives and to ensure that employees who originate loans pass criminal-background checks and meet character and fitness standards. Lenders will also need to completely revamp their origination disclosures, possibly with a new, more inclusive approach to calculating finance charges. Mortgage servicers will have to implement new procedures to investigate and correct errors, manage information, and handle loss-mitigation requests, among other things.

The breadth and complexity of the regulatory changes should compel mortgage-market participants to develop a game plan for coordinating the implementation of the forthcoming waves of new mortgage rules. Adapting successfully to the new mortgage requirements will require effective leadership, adequate resources, and cooperation across the entire organization. The volume of the rules, their overlap, and staged rollout pose a substantial project-management challenge, to say nothing of the necessary adjustments to business practices that compliance will demand.

Executives leading this project must have the skill, expertise, and stature to organize and manage the multiple work streams required, and also must be committed to this effort for a sustained period of approximately 18 months. Each mortgage-market participant will need to find the best person or persons to quarterback this process for the organization, and fulfill the critical role of coordinating and synchronizing all units across the enterprise in order to meet all the compliance deadlines.

Of course, leadership alone cannot do the job. The effort must be an organization-wide priority, with all stakeholders assigned clear roles and responsibilities. It will take dedicated and talented resources at every level of the organization to produce the best result. It may be difficult for some companies to find the right people for the job, and indeed, some may have to re-deploy their best staff from other efforts. These companies may have to make the strategic decision to take resources away from correcting yesterday’s problems and pursuing today’s opportunities in order to meet tomorrow’s challenges.

Yours truly,

David Stein, Director
+1 202 384 1183

David Stein

David Stein is a director at Promontory Financial Group, and assists clients with regulatory and compliance issues, focusing on consumer financial services. During his 13-year career as a regulatory attorney and manager with the Federal Reserve Board and the Consumer Financial Protection Bureau, David had responsibility for crafting regulations and developing regulatory policy across a broad range of consumer financial services issues.


Amy Friend
Managing Director
email | +1 202 384 1056

Amy Friend

BJ Sanford
Managing Director
email | +1 202 384 1020

BJ Sanford

Catherine West
Managing Director
email | +1 202 384 1169

Catherine West


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CFPB Ombudsman Report Says Enforcement Presence at Exams Is under Review

A Nov. 30 blog post announced the publication of the CFPB Ombudsman’s Office’s first annual report. The report said the Ombudsman looked at what it calls “systemic issues” affecting large numbers of individuals and financial firms — one of which is the financial industry’s concern over the presence of enforcement attorneys at supervisory exams. The report said that the Ombudsman recommended that the CFPB review the practice, which the bureau is doing. The report also said the office, which opened on Dec. 8, 2011, received 775 inquiries in its first 10 months. “Over 80 percent of those inquiries were from consumers who reached the Ombudsman with questions or issues regarding the processes, services, products, or entities under the CFPB’s jurisdiction,” the report said. Roughly 40% of the inquiries dealt with the “Consumer Complaint Process,” a category the Ombudsman defined as “issues pertaining to the need for increased process transparency.”

Senate Passes Bill Extending Privacy Protections to CFPB Submissions

The Senate on Dec. 11 passed a proposed amendment to the Federal Deposit Insurance Act (H.R. 4014), that would tighten up attorney-client privilege protections for information that banks privately submit to the CFPB, bringing the protections in line with those granted to submissions to other federal banking agencies.

Credit-Reporting Study and Warning; FTC Testifies on FCRA

The CFPB on Dec. 13 issued a 48-page study, “Key Dimensions and Processes in the U.S. Credit Reporting System,” that refers to TransUnion, Equifax, and Experian as the “hub” of the nation’s credit-reporting system. The report purposely avoids referring to conclusions, and instead catalogs its “learnings” — some of which may be of particular interest:

• Errors can get into credit reports “in a number of ways”

• The rate of material inaccuracies is “uncertain”

• Reporting by collection agencies is the largest source of disputes

• The bureaus rely principally on furnishers to resolve disputes

An accompanying press release said bureaus typically receive updates from 10,000 furnishers in a given month on roughly 1.3 billion trade lines. The report also noted that the FTC will issue a decade-long study on credit reporting later this year.

The CFPB on Nov. 29 had issued a bulletin saying that several nationwide specialty consumer reporting agencies might not be in compliance with the Fair Credit Reporting Act requirement that they provide free annual disclosure of a consumer’s file. The bulletin mentioned other, more specific requirements, including a process to for providing reports that has “adequate capacity to accept requests from a reasonably anticipated volume of consumers,” and to make sure that consumers are asked only for as much personal information “as is reasonably necessary to identify the consumer properly.” The bureau said in a separate press release that it was issuing warning letters to those agencies potentially in violation of FCRA.

The Federal Trade Commission said on Dec. 7 that it submitted written testimony to the U.S. Commission on Civil Rights on the FCRA and employer usage of consumer reports. The FTC said in its testimony that consumer-reporting agencies must have reasonable procedures to assure maximum possible accuracy of reports, must notify employers of their obligations under the FCRA, and in the case of a report including negative information, “either has to notify the applicant or employee directly that it has provided the information to the employer, or has to adopt strict procedures to make sure the information is complete and up to date.” The testimony also outlined employer requirements and highlighted recent law enforcement and educational actions in the area.

House Oversight Committee’s CFPB Report

The House Committee on Oversight and Government Reform on Dec. 14 issued “The Consumer Financial Protection Bureau’s Threat to Credit Access in the United States,” a staff report from Chairman Darrell Issa (R-CA) and Rep. Patrick McHenry (R-NC) that says the Obama administration is using the CFPB to “further its partisan agenda.” The bureau “has not implemented adequate measures to fully assess and address the impact of its actions on credit access,” the report said. “Already, according to estimates, the CFPB has increased the cost of consumer credit by a total of $17 billion and depressed job creation by about 150,000 jobs.”

CFPB Issues Report, Reaches Agreement with DoJ, on Fair Lending

The CFPB on Dec. 6 submitted to Congress its inaugural report on fair lending. In the report, the bureau listed its first-year achievements, including the establishment of the Office of Fair Lending and Equal Opportunity as mandated by the Dodd-Frank Act. “We are still in the process of building our fair lending program and expect the CFPB’s contribution to the work of ensuring compliance with fair lending laws and promoting access to credit will grow as our program progresses,” the report said. “We are also developing risk-based approaches to our fair lending supervision and enforcement work to efficiently allocate the CFPB’s resources in a manner that provides the greatest benefit to consumers.” The blog post that accompanied the report said the bureau is “updating the rules that implement” the Equal Credit Opportunity Act and the Home Mortgage Disclosure Act. The report also noted that three banking agencies referred 12 ECOA matters to the Department of Justice during the last five months of 2011.

Separately, the CFPB and the Justice Department also issued a memorandum of understanding on coordinating their efforts, and on interagency sharing of nonpublic information, when enforcing fair-lending laws.

CFPB Eases — and Delays — Remittance Rule

The CFPB on Nov. 27 issued a bulletin on proposed revisions to its remittance rule. Under the revisions, remittance providers would have to try to recover money sent to the wrong accounts, but would not be liable for the money if they can demonstrate that the senders gave incorrect information. The bulletin also said requirements that providers disclose third-party fees and foreign-tax information would be eased. The bureau’s blog noted “a brief extension” of the rule’s effective date: “We’re expecting the new implementation date to be during spring 2013, and will keep you updated,” it said.

Proposed Policy on Trial Disclosures

The CFPB on Dec. 13 announced a proposed policy that would allow financial companies to test new consumer disclosures through trial programs. Under the policy, the CFPB “would approve individual companies, on a case-by-case basis, for limited time exemptions from current federal disclosure laws in order for those companies to research and test informative, cost-effective disclosures,” it said in a press release. “The companies involved will then share the results of their trial disclosure with the CFPB.”

CFPB’s Info-Sharing Agreement with Chicago

CFPB Director Richard Cordray delivered a speech in Chicago Dec. 5 at a joint press conference with Mayor Rahm Emanuel announcing the city’s agreement to share information directly with the bureau — its first such arrangement with a city. “We want to know what you are seeing and how that informs what we should be doing — where our supervision and enforcement teams should focus their attention, and what problems our policymakers should undertake to fix,” he said.

Bureau Crackdown on Use of Government Logos; VA Trademarks “GI Bill”

A Dec. 11 CFPB blog post announced a crackdown on firms that use government logos and letterhead to trick consumers into paying for financial goods and services. Specifically, the blog post warned of companies using government logos to entice struggling homeowners to pay for bogus loan-modification services. The post told consumers to get in touch with the Department of Housing and Urban Development if they think they have encountered such a scam. The bureau announced in a related press release that it had halted two loan-modification scams that “took in more than $10 million by charging consumers for services that falsely promised to prevent foreclosures or renegotiate troubled mortgages.” It said it had a particular concern about firms that falsely claim to be endorsed by, or represent, the government. District court judges in California at the CFPB’s request halted the operations of Gordon Law Firm and the National Legal Help Center and froze their assets.

Separately, the CFPB blog on Dec. 5 cross-posted an item from the U.S. Department of Veterans Affairs that announced the office has trademarked the term “GI Bill” to restrict deceptive use of the phrase by for-profit schools attempting to bring in veterans — and their tuition dollars. The office expects to issue terms of use “in the coming months.”

Overall Consumer Debt Falls Again

The New York Fed put out its 2012 Q3 Quarterly Report on Household Debt and Credit on Nov. 27. “Overall debt fell by $74 billion; mortgage and HELOC debt fell by a combined $135 billion; however, the effect on overall debt was softened by a $61 billion increase in debt not secured by real estate,” it said. Central quarterly report page (with interactive chart) here; full report here.


Promontory's Consumer Protection Group includes:


Konrad Alt, Managing Director
+1 415 986 4160

Jeff Brown, Managing Director
+1 202 384 1040

Jeanine Catalano, Special Adviser
+1 415 321 6408

Michael Dawson, Managing Director
+1 202 384 1080

Susan Eckert, Director
+1 202 384 1125

Jennifer Faulkner, Director
+1 202 384 1126

Amy Friend, Managing Director
+1 202 384 1056

David Gibbons, Managing Director
+1 847 615 1728

Jonathan Gould, Director
+1 202 384 1018

Austin Hong, Director
+1 202 384 1030

Chris Lewis, Director
+1 415 321 6406

Simon McDougall, Managing Director
+44 207 377 2367

Matthew Ondus, Director
+1 202 370 0395

BJ Sanford, Managing Director
+1 202 384 1020

David Stein, Director
+1 202 384 1183

Catherine West, Managing Director
+1 202 384 1169


Please click here to continue receiving Consumer Financial Protection Developments.

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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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