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Promontory Sightlines: Consumer Financial Protection Developments

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February 27, 2014

Dear clients and friends,

The Consumer Financial Protection Bureau has now made plain that assessing how mortgage servicers comply with new regulations will be one of its highest priorities this year.

Deputy Director Steve Antonakes said during a blunt address to an industry conference that servicers continue to struggle with customer service and record keeping, and emphasized that operating in good faith “does not mean servicers have the freedom to harm consumers.” He told attendees that “the fundamental rules have changed forever,” and that servicers needed to treat customers “with respect, dignity, and fairness” in all phases of their operations. Director Richard Cordray quickly echoed these comments in remarks to an association of state attorneys general, noting that the CFPB had the authority “to make these new rules stick.”

The tone and timing of these announcements, as well as the underlying market dynamics, suggest important shifts in the CFPB’s outlook on pursuing its core mandate.

Antonakes discussed the bureau’s market-monitoring efforts in two critical areas: default servicing and servicing transfers.

The deputy director pointed to problems in default servicing that included giving customers “the runaround” — in the form of unanswered telephone calls, lost paperwork, and mishandled accounts — as foreclosure approached. In response, the bureau has focused its attention on servicers’ efforts to identify and correct problems, to inform defaulting customers of their options, and to make sure that loss-mitigation applications are handled appropriately.

He said servicing transfers should be “seamless” from the customer’s perspective. A new servicer’s attempt to collect incorrect amounts or failure to honor loan modifications can no longer be chalked up to a “shell game” in which “the first servicer says the transfer ended all of its responsibility to consumers and the second servicer says it got a data dump missing critical documents.”

Until now, the CFPB has signaled that it would focus on assessing whether firms are making good-faith efforts to come into “substantial compliance” with the thicket of new mortgage regulations, rather than requiring strict compliance. Antonakes, however, noted in his speech that the industry had already had more than a year to prepare for implementation of the new servicing standards and made clear that the margin for error is shrinking.

This change in tone comes amid renewed scrutiny of mortgage servicing. Media outlets and state and federal regulators have noted a rising number of complaints about familiar problems, including erroneous charges, uninformed staff, and wrongful evictions. Prudential regulators are working to bring new firms under the terms of the national mortgage settlement, and the CFPB’s first major servicing enforcement action extended that settlement’s principles to a major nonbank servicer.

Underlying the renewed oversight activity is a servicing market that has changed considerably since the mortgage crisis. Heightened reputational and financial risks associated with mortgage servicing — in the form of record regulatory fines and settlements — and stricter capital requirements for banks that own mortgage servicing rights have fueled a dramatic shift in market share toward nonbank servicers. Today, four of the nation’s 10 largest servicers are nonbanks; none of the largest nonbank firms made a comparable list in 2011.

Servicing of nonprime, distressed loans is particularly concentrated in nonbank firms, which generally advertise better default servicing, such as lower costs, stronger modification rates, and reduced redefault rates. The CFPB now appears poised to test whether firms are fulfilling these promises while meeting tougher consumer protection requirements.

Failure to enhance compliance functions to keep pace with the rapid growth of the number of loans being serviced will put firms at risk. In light of the prudential regulators’ new, stricter approaches to vendor management and debt sales, banks selling loan portfolios or servicing rights should also have a strong sense of the acquirer’s consumer protection track record and any regulatory risks it potentially raises.

Antonakes was well aware that his speech would not be received warmly, but said he “would be remiss” if he failed to share the bureau’s view that “business as usual has ended in mortgage servicing.” His speech and Cordray's later comments signal a new chapter in the bureau’s mission to level the playing field between bank and nonbank market participants in the nation’s largest consumer finance market.

Yours truly,

Linda Gallagher
Managing Director and Global Head of the Consumer Protection Practice
lgallagher@promontory.com
+1 202 370 0411

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

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CFPB Sues For-Profit College

On Feb. 26, the CFPB announced it is suing for-profit college chain ITT Educational Services Inc. — in its first public action against a for-profit college — for allegedly misleading students about their job prospects while pushing them into high-cost private loans “destined to default,” in the words of CFPB Director Richard Cordray. “Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics,” he said. The complaint seeks restitution, a civil fine, and an injunction against the company.

GAO Finds Decline in Card Marketing to Students

The Government Accountability Office put out a report on Feb. 25 that found a decline in solicitations by the largest card issuers of college affinity cards. “Four large affinity card issuers GAO interviewed (representing 91 percent of cardholders) said that they primarily targeted alumni and no longer marketed affinity cards directly to students,” the report said. “A survey of students in 2013 by Student Monitor, a research firm, found that 6 percent of students reported obtaining a credit card as a result of a direct mail solicitation, compared with 36 percent in 2000.”

Mortgage Lender Penalized for Illegally Splitting Real Estate Fees

On Feb. 24, the CFPB ordered Connecticut mortgage lender First Alliance to pay $83,000 in civil money penalties for illegally splitting real estate settlement fees with an affiliated hedge fund, in violation of the Real Estate Settlement Procedures Act. “First Alliance self-reported these violations to the Bureau, admitted liability, and provided information related to the conduct of other actors that has facilitated other enforcement investigations,” said the bureau’s press release.

FTC Final Consent Order with Accretive Health Settles Charges of Exposing Sensitive Information

The Federal Trade Commission on Feb. 24 announced a final consent order settling charges that Accretive Health violated the Federal Trade Commission Act by exposing sensitive consumer information to theft or misuse through “inadequate data security measures.” The order requires Accretive to establish enhanced information-security programs that are periodically certified by a third party.

Rep. Waters Urges Scrutiny of Servicing Sales

Rep. Maxine Waters (D-CA) wrote a Feb. 19 letter to Comptroller of the Currency Thomas Curry and Joseph Smith, the monitor of the national mortgage settlement, to request that they “carefully scrutinize the sale of mortgage servicing rights from banks to nonbank servicers to ensure that nonbank servicers have the capacity to handle the increased volume in loans, and that borrowers are not suffering from deterioration in the protections afforded to them because of such transfers.”

OCC Clarifies Expectations for Discharging Consumer Debt

The OCC issued Feb. 14 guidance to clarify its supervisory expectations in regard to secured consumer debt discharged in Chapter 7 bankruptcy proceedings. “No single factor determines the likelihood of repayment, and management should use judgment and consider all facts and circumstances when assessing the situation,” the guidance said, while also listing three repayment factors to consider: the existence of orderly repayment terms, payment-performance history, and post-discharge capacity to repay.

Senate Science Committee Introduces Data-Broker Bill

On Feb. 12, Senate Science Committee Chairman Jay Rockefeller (D-WV) and Sen. Ed Markey (D-MA) announced the introduction of the Data Broker Accountability and Transparency Act of 2014 (DATA Act), which would require data brokers to be accountable and transparent about the information collected on consumers. “Consumers deserve to know what information about their personal lives is being collected and sold to marketers by data brokers,” Rockefeller said. “This booming shadow industry, that generated more than $150 billion in 2012 and operates with very little scrutiny and oversight, is making tremendous profits off practices that can be disturbing and totally unfair to consumers.” 

CFPB Begins HMDA-Improvement Rulemaking, Unveils HMDA Tool

As part of a forthcoming rulemaking to “improve information reported about the residential mortgage market to help better understand borrowers’ access to credit,” the bureau convened a small-business review panel on Feb. 7 to provide input on core issues in the statutorily required initiative. At the same time, the CFPB launched a new online tool to make it easier to navigate publicly available Home Mortgage Disclosure Act data. “We are considering asking financial institutions to include more underwriting and pricing information, such as an applicant’s debt-to-income ratio, the interest rate, the total origination charges, and the total discount points of the loan” in order to “help regulators spot troublesome trends in mortgage markets around the country,” said Director Richard Cordray in a press call. “We are considering requiring institutions to include an explanation of rejected loan applications” and “adding a data point on whether the lender considered the loan to be a ‘Qualified Mortgage,’” he also said.

GAO: HAMP Servicers Offered Fewer Loan Modifications to Some Racial Groups

The GAO announced Feb. 6 a loan-level analysis of four large mortgage servicers participating in the Home Affordable Mortgage Program that found “statistically significant differences in the rate of denials and cancellations of trial modifications” among consumers from different racial groups. “Treasury should (1) assess the extent to which servicers have established internal control programs to monitor compliance with fair lending laws, (2) issue guidance to servicers on working effectively with [Limited English Proficiency] borrowers and (3) monitor servicers’ compliance with the guidance,” the GAO said.

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Promontory's Consumer Protection Team includes:

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Konrad Alt

Konrad Alt
Managing Director
kalt@promontory.com
+1 415 986 4160

Michael Dawson

Michael Dawson
Managing Director
mdawson@promontory.com
+1 202 384 1080

Linda Gallagher

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice

lgallagher@promontory.com
+1 202 370 0411

Stuart King

Stuart King
Managing Director
sking@promontory.com
+44 207 997 3402

Simon McDougall

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

BJ Sanford

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

Julie Williams Julie Williams
Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087

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Promontory Sightlines Consumer Financial Protection Developments

EDITOR IN CHIEF

P-R Stark

GLOBAL HEAD OF THE
CONSUMER PROTECTION PRACTICE

Linda Gallagher

FOUNDER AND CEO

Eugene A. Ludwig

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