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Promontory Sightlines: Consumer Financial Protection Developments

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February 15, 2013

Dear Friends,

Many a Washington tale begins with the suggestion to follow the money, and with good reason: How people and organizations spend money tells a great deal about their priorities. In the case of the Consumer Financial Protection Bureau, following the money is also far simpler than trying to follow the litigation and legislation.

The D.C. Circuit’s Jan. 25 decision in Noel Canning v. the National Labor Relations Board raises questions about the validity of Richard Cordray’s appointment as CFPB director. With Congress taking an interest and other courts cases pending, definitive assurances about the bureau’s leadership, rulemakings, structure, and funding are unlikely in the near term. Whether recent events will ultimately prove to be a distraction or an impetus for substantive change is unclear.

The CFPB’s recent financial report for fiscal year 2012 makes for interesting reading in the meantime. It suggests that one strand of the popular narrative about the bureau — that its authority and resources are unbounded — may not comport with budget realities. Indeed, how the bureau stretches its resources to meet its mandate to level the playing field between banks and nonbanks will almost certainly be a defining theme of the next chapter of the CFPB’s growth.

The Dodd-Frank Act gave the CFPB a funding structure unlike that of its prudential peers. It receives funding based on a set percentage of the Federal Reserve System’s total operating expenses. In fiscal 2012, the bureau received 11% of the Fed’s operating expenses, or approximately $547.8 million, and going forward will receive 12%. Through fiscal 2014, the bureau can also ask Congress to appropriate as much as $200 million though it has not done so.

Explosive early growth — the CFPB staff has grown at an annualized rate of 400% since the first quarter of fiscal 2011 — has obscured how this funding structure will limit the bureau’s impact. But as the CFPB shifts from start-up to steady-state operations, the cap on the bureau’s funding will loom large.

The report gives statistical heft to the importance of the bureau’s Division of Supervision, Enforcement, and Fair Lending and Equal Opportunity. It already comprises approximately half of the CFPB’s staff, including approximately 300 supervision staff and 100 enforcement attorneys, and receives more than 60% of its net program budget — a share that increased by 5% over the prior year.

The allocation of resources suggests that the bureau’s early emphasis on writing statutorily mandated rules and stand-up activities, like opening its complaint hotline, will give way to monitoring compliance with federal consumer financial laws. Its examiners and enforcement attorneys will naturally lead the way in assessing particular products and practices, institution by institution and market by market.

The CFPB’s mandate to monitor compliance of both depository and nondepository institutions encompasses more firms than all of the other banking agencies combined. It includes more than 100 of the nation’s largest and most sophisticated financial institutions, and thousands of nonbank firms, many of which have never been subject to federal supervision. But under the current funding structure, the CFPB is unlikely to exceed 1,400 employees, according to its Fiscal Year 2013 Budget Justification. Compare that with the Federal Deposit Insurance Corporation, which has 5,500 employees, or the Office of the Comptroller of the Currency, which has 3,700.

New funding sources, including congressional appropriations, are unlikely given the nation’s fiscal condition and the continuing controversy about the bureau’s leadership, structure, and work. The bureau’s ability to provide meaningful and consistent oversight will therefore depend on how well it detects risk of consumer harm and how far it can stretch its finite resources.

Yours truly,

P-R Stark, Senior Principal
prstark@promontory.com
+1 202 370 0392

P-R Stark

P-R assists Promontory clients with regulatory and compliance issues, focusing on consumer financial services. P-R joined Promontory from the Consumer Financial Protection Bureau, where she was one of the first employees and worked in its Enforcement and Regulations offices.

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BJ Sanford
Managing Director
email | +1 202 384 1020
 

BJ Sanford

Catherine West
Managing Director
email | +1 202 384 1169
 

Catherine West

Julie Williams
Managing Director and Director of Domestic Advisory Practice
email | +1 202 384 1087

Julie Williams

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Please click here to continue receiving Consumer Financial Protection Developments.

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CFPB Unveils Implementation Plan for January Rulemakings

The CFPB on Feb. 12 unveiled its implementation plan for its series of mortgage-related rulemakings released in January, including the long-awaited “ability-to-repay” and “qualified mortgage” rules. The bureau said that, prior to the January 2014 effective dates of the new rules, it will publish plain-language guides to the regulations, update the rules’ official interpretations, and coordinate with other agencies that conduct examinations, among other things.

The CFPB on Jan. 10 issued the new ability-to-repay requirements for mortgages and a new definition of “qualified mortgage.” Lenders are presumed to have complied with the ability-to-repay rule if they issue a “qualified mortgage” as defined in a separate rule. The bureau opted to define qualified mortgages as loans to borrowers with debt-to-income ratios of 43% or less — or a loan that satisfies the purchasing standards of the government-sponsored enterprises. The CFPB will confer “safe harbor” legal protection on these loans, while allowing borrowers to rebut ability-to-repay presumptions on higher-value subprime loans. CFPB Director Richard Cordray said in a Jan. 10 field hearing that the safe harbor does not diminish borrower protections: “Protections conferred on borrowers under other federal consumer financial protection laws still apply,” he said. “Thus, the Ability-to-Repay rule does not take away any consumer rights; it adds to them.” A post on the CFPB’s blog presented an abridged version of Cordray’s remarks at the field hearing, and the bureau also issued a fact sheet and a summary.

A week later, the bureau announced mortgage-servicing and foreclosure reforms. “In community forum after community forum, we discovered that the direct link between many borrowers and their lenders had snapped,” said CFPB Director Richard Cordray at a Jan. 17 field hearing. “The rights to service a mortgage had often been sold and resold. The mortgage servicer might not have the right incentives to make a loan work out and could even be better off filing for a foreclosure.” The amended rules mandate new requirements across nine areas:

• Required periodic billing statements for each billing cycle

• Interest-rate adjustment notices for ARMs between 210 and 240 days prior to the first payment under an adjusted rate

• Same-day payment crediting

• At least 45 days’ notice before charging for force-placed insurance coverage, which “must be for a service that was actually performed and must bear a reasonable relationship to the servicer’s cost of providing the service

• Tighter error-resolution procedures

• Early intervention for delinquent borrowers, including notice of loss-mitigation options within 45 days of delinquency

• Single point of contact for borrowers, though the bureau notes “there will not be a private right of action to enforce” the requirement

• Loss-mitigation evaluations for distressed borrowers who apply more than 37 days before a foreclosure sale; servicers may not initiate the foreclosure process while borrowers are being considered for loss-mitigation options (dual-tracking)

• General servicing policies, procedures, and requirements

The final rules exempt servicers with portfolios of 5,000 or fewer loans of their own origination. Summary of rules here, fact sheet here. The full rule documents are here.

On Jan. 18 an interagency statement announced the issuance of the final rule adjusting appraisal requirements on higher-priced mortgage loans. The rule “requires creditors to use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property,” and “requires creditors to disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.” The rule summary is here; the CFPB’s page on the rule is here.

CFPB Issues Guidance on Servicing Transfers

The CFPB on Feb. 11 announced the issuance of a bulletin intended to advise mortgage firms on their legal responsibilities during loan transfers between different mortgage servicers. “When handing over the processing of loans, mortgage servicers should not lose paperwork, lose track of a homeowner’s loss mitigation plans, or hinder a consumer’s chances of saving their home from unnecessary foreclosure,” said the bureau’s press release. The bulletin also alerted mortgage firms to heightened scrutiny of: servicers’ preparations for the transfer of servicing rights, the new servicer’s handling of files it receives, and what policies the servicers have to prevent borrower harm for loans with loss mitigations in process.

FTC Releases “Eye-Opening” Study on Credit Reports

The Federal Trade Commission announced Feb. 11 the release of its second interim report of a mandated study on credit-report accuracy. The report found that one in five consumers had errors on at least one of their credit reports when a “less conservative definition” of error was applied. “These are eye-opening numbers for American consumers,” said Howard Shelanski, director of the FTC’s Bureau of Economics, in the press release. “The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly.  If they don’t, they are potentially putting their pocketbooks at risk.” The full study is here.

HUD Releases Final Rule on Disparate Impact

The Department of Housing and Urban Development released a final rule implementing the Fair Housing Act’s discriminatory-effects standard. The final rule codifies agencies’ use of the “disparate impact” theory in determining whether discriminatory practices have occurred, even absent a finding of discriminatory intent. The agency said in a press release that the rule “provides clarity and consistency for individuals, businesses, and government entities subject to the Fair Housing Act.”

Cordray Renominated; NLRB Ruling Adds to Controversy

President Obama renominated Richard Cordray to continue serving as director of the CFPB (see Cordray’s remarks on his renomination here), but a D.C. Court of Appeals ruling the following day has added to the ongoing controversy over the CFPB and its leadership. The court ruled that the president’s recess appointments of three members to the National Labor Relations Board were unconstitutional. The three NLRB recess appointments had taken place on Jan. 4, 2012 — the same day the president appointed Cordray to be CFPB director. Three Republican senators, including Senate Minority Leader Mitch McConnell (R-KY), subsequently questioned the constitutionality of Cordray’s tenure. Sen. Mike Johanns (R-NE) called on Cordray and the NLRB appointees “to immediately resign and provide a list of actions taken during their tenure.” And Sen. Rob Portman (R-OH) wrote a Feb. 1 letter to Cordray, asking for the restructuring of the CFPB and calling Cordray’s renomination into question.

Within a week of the rule, Sens. John Cornyn (R-TX), Mike Johanns (R-NE), and Lamar Alexander (R-TN) on Jan. 31 introduced a bill to prohibit the National Labor Relations Board and the CFPB from enforcing or implementing decisions “without a constitutionally confirmed board or director.” Cornyn’s press release is here.

On Feb. 1, 43 Republican senators signed a letter to President Obama saying they would not vote to confirm a CFPB director without structural changes, including a bipartisan board of directors to oversee the CFPB; funding through the appropriations process; and safety-and-soundness checks by prudential regulators.

Separately, Raj Date stepped down as the CFPB’s deputy director on Jan. 31. Steven Antonakes will take over as acting deputy director, until the CFPB completes its search for Date’s permanent replacement, the bureau’s press release said. Antonakes in December had announced that the bureau’s Nonbank and Large Bank Supervision offices would be replaced by an office dedicated to examinations and one devoted to policy. “This realignment is consistent with our mission to protect consumers across financial services markets without regard to the charter of the provider,” he said in the announcement.

FTC Updates FDCPA Enforcement; Issues Debt-Buying Report

The FTC on Feb. 13 issued an update on recent enforcement efforts under the Fair Debt Collection Practices Act. The press release said the commission during the past year brought or resolved cases against four operations involving deceptive or abusive practices, including its Jan. 17 enforcement action with Rumson, Bolling & Associates. The FTC on Jan. 30 published a report on the debt-buying industry’s structure and practices, and said in an accompanying press release that it “continued to receive a high level of complaints regarding debt collectors, more than for any other industry.” The release said “the sufficiency and accuracy of the information used in the collection of debts remains a significant consumer protection concern.” The report assessed almost 90 million consumer accounts with a principal value of about $143 billion.

State AGs Settle Mortgage-Servicing Charges with LPS

State attorneys general announced Jan. 31 that Florida-based Lender Processing Services, Inc. and subsidiaries LPS Default Solutions and DocX have entered into a $120 million settlement with 45 states and the District of Columbia to resolve robo-signing charges. Connecticut AG George Jepsen was among many attorney generals that issued a press release. In addition to the financial penalty, the company agreed to “reform its business practices; to review documents executed between Jan. 1, 2009 and Dec. 31, 2010, to determine whether any need to be re-executed or corrected; and to provide a toll-free number for consumers to call to request review and correction of any LPS-executed documents,” the press release said.

Leibowitz Steps Down

FTC Chairman Jon Leibowitz is stepping down. Leibowitz, who was named an FTC commissioner in September 2004 and became chairman in March 2009, has led initiatives aimed at protecting consumer online privacy, enforcing antitrust laws, and preventing financial scams. The commission announced in December that its Consumer Protection Bureau’s director, David Vladeck, was stepping down and that Charles Harwood would take over as acting director. The FTC also said that its executive director, Eileen Harrington, was leaving and that Pat Bak would serve as the acting executive director.

CFPB Launches Campus Inquiry; Issues Student Lender Exam Procedures

The CFPB on Jan. 31 sought public comment on financial products that companies and colleges market to students. “The Bureau wants to find out whether students using college-endorsed banking products are getting a good deal,” CFPB Director Richard Cordray said. A related CFPB blog post asked for information from readers on financial products they signed up for as students. The post pointed out that credit-card firms must disclose relationships they have with colleges and universities, but that “we know less about these arrangements when it comes to other things, like debit cards to access your student loan funds and student checking accounts.” Separately, the bureau in December issued new examination procedures for private student lenders and legacy Family Federal Education Loan Program loan servicers. “For many borrowers, a student loan may be their first major financial decision,” CFPB director Richard Cordray said in a press release announcing the new guidelines, which aim to ensure accurate advertising and marketing of loans, nondiscriminatory lending, proper disclosure of loans’ terms and fees, and adequate handling of borrowers’ questions and complaints.

CFPB Issues Rule on Rules

In a Dec. 28 notice in the Federal Register, the CFPB issued a final rule on how the bureau issues rules. Under the new rule, the bureau considers rules to be issued when they are posted on the bureau’s Web site or published in the Federal Register — whichever happens first.

FTC Issues Report on Debit Cards

The FTC on Dec. 24 published a report on its enforcement of new rules governing debit cards and interchange fees, which the new rule says must “be reasonable and proportional to the cost of the transactions.” The report also detailed the FTC’s efforts to end payment-network exclusivity: “Issuing banks and payment card networks must now permit merchants to choose between two or more unaffiliated competing payment networks for such processing.”

First Joint Enforcement by CFPB and States

The CFPB in December took its first joint enforcement action with states, issuing an order with New Mexico, North Carolina, North Dakota, Wisconsin, and Hawaii against Florida debt-relief firm Payday Loan Debt Solution. The CFPB press release said the firm “routinely charged consumers upfront fees prior to settling the consumers’ debts” — a practice that “violates the Federal Trade Commission’s Telemarketing Sales Rule, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and various state laws.” The stipulated final judgment order, which was filed in federal district court in Miami, is here. The complaint for injunctive relief and damages is here.

CFPB Proposes Changes to Remittance Rule

The CFPB on Dec. 21 proposed changes to rules governing international money transfers that would offer more flexibility and guidance on disclosure of fees and taxes imposed by foreign governments. Another proposed revision stipulates that “when the provider can demonstrate that the consumer provided an incorrect account number and certain other conditions are satisfied, the provider would be required to attempt to recover the funds but would not bear the cost of funds that cannot be recovered,” the press release said.

FTC Orders Data Brokers to Turn over Information

The Federal Trade Commission on Dec. 18 announced that it would study data brokers’ collection and use of consumer data and ordered nine companies — Acxiom, Corelogic, Datalogix, eBureau, ID Analytics, Intelius, Peekyou, Rapleaf, and Recorded Future — to turn over information. The FTC said the companies must “provide a list and description as to the nature and purpose of all the products and services (both online and offline) that the Company offers or sells that use personal data” and “State whether the Company monitors, audits, or evaluates the accuracy of personal data contained in each product or service identified,” among other orders. The commission said it will use the information is compiles to write a report on the industry and its common practices.

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Promontory's Consumer Protection Team 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

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

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

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

Matthew Ondus, Director
mondus@promontory.com
+1 202 370 0395

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

David Stein, Director
dstein@promontory.com
+1 202 384 1183

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

Julie Williams, Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087

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Please click here to continue receiving Consumer Financial Protection Developments.

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

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