Promontory Sightlines: Consumer Financial Protection Developments


May 13, 2014

Dear clients and friends,

Arrangements between mortgage lenders and affiliated businesses are facing increasing scrutiny from federal and state regulators, and companies on both sides of these arrangements now face additional pressure to prove their compliance with related provisions of the Real Estate Settlement Procedures Act.

RESPA's prohibition on kickbacks exempts affiliated business arrangements on the conditions that they are disclosed to the consumer, the consumer is free to opt out, and there is no referral fee or exchange of value (other than a return on the ownership interest). Lenders have generally assumed that, as long as the settlement services provided by their affiliates are bona fide and the charges are disclosed, they are beyond regulatory criticism.

Renewed interest in RESPA compliance has called that assumption into question, as regulators — and particularly the Consumer Financial Protection Bureau — undertake critical reviews of all affiliated business arrangements. Examiners are likely to focus on:

  • Reasonableness of settlement charges paid to affiliates
  • Loan-level documentation and record keeping
  • Disclosures and other information provided to borrowers

The core concern about transactions between affiliates is that referrals may prevent consumers from getting competitive prices. Regulators are therefore interested in how fees charged by affiliates compare to alternatives in the marketplace. Firms should be able to articulate the basis for their fees and maintain appropriate documentation to back up those claims. For charges that vary by loan size, firms should also be able to demonstrate why scaling is appropriate.

Heightened attention to this area should also spur firms to assess how well they document even bona fide services. Best practices include making sure that, even if an affiliate directly invoices a customer, the firm retains copies of those invoices and can make them available during the examination process, rather than relying on the affiliate to do so. Maintaining a clear record is particularly important for services such as recording charges and appraisal fees, where pricing can fluctuate until closing.

The CFPB's emphasis on the quality and plain language of information provided to consumers also applies here. As with any information provided to the borrower, disclosure explaining the business arrangement should be easy to understand and display charges accurately. The critical question, and one relevant to issues surrounding unfair, deceptive, or abusive acts or practices, is whether the information facilitates comparison shopping and makes clear that the consumer isn't obligated to rely on the lender's affiliate. Consistent presentation of this information can be a particular challenge given the frequency of pricing changes in settlement services, and because lenders often provide disclosure about the affiliate, while the affiliates themselves provide other information regarding the settlement.

Doing business with affiliated settlement service providers is common practice, and can offer substantial benefits to borrowers — not the least of which is convenience and efficiency. But given the ongoing interest in RESPA compliance, lenders should be ready to answer regulators' questions about transparency and fair-dealing.

Yours truly,

Tom Curran
Senior Principal
+1 415 321 6407

Linda Gallagher
Managing Director and Global Head of the Consumer Protection Practice
+1 202 370 0411

Tom Curran Linda Gallagher

Cordray Addresses Chicago Federal Reserve Bank

In a May 9 address to the Chicago Federal Reserve Bank, CFPB Director Richard Cordray described the agency's mission in terms of "common-sense principles of good business practice." He emphasized that consumers are entitled to the "fundamental tenets" of good customer service: "Companies should be responsive to customers who seek to communicate with them. Companies should fix errors when they occur. They should process documents properly rather than lose them repeatedly. They should not lie to consumers. They should not ambush people with unexpected fees or penalties."

NY AG Settles with Debt Buyers; N.Y. Courts Propose New Debt-Collection Rules

New York Attorney General Eric Schneiderman on May 8 announced settlements with two debt collectors, Portfolio Recovery Associates, LLC, and Sherman Financial Group, LLC, over improper debt actions against consumers in New York. According to a press release from Schneiderman's office, the firms had obtained uncontested default judgments against consumers even though the underlying claims were not timely under New York law. The settlement vacated roughly $16 million of judgments.

New York's chief judge, Jonathan Lippman, on April 30 proposed new rules to reshape the way creditors sue consumers over unpaid bills. Under the proposed rules, creditors seeking default judgments would have to submit affidavits based on personal knowledge of the basis for the action and file supporting documentation, such as the original credit agreement. The proposal contained additional protections against faulty service practices: The court must mail a second notice to the address where the consumer was served and is prevented from entering a default judgment where that notice is returned due to an incorrect or unknown address. The court also proposed expanding the use of forms designed to assist unrepresented consumers in asserting standard defenses.

FTC Penalizes Mortgage Lead Generator $225K for Deceptive Advertising

The Federal Trade Commission announced May 8 that Texas-based, a lead generator that advertises mortgages, will pay a $225,000 civil penalty to settle charges that it advertised fixed-rate mortgages that were actually adjustable-rate mortgages. "The company also allegedly failed to include important disclosures, such as the annual percentage rate, amount of down payment, and repayment terms that figure into the advertised payment amounts and interest rate," said the commission's press release. The full order is here.

CFPB Highlights Mortgage Challenges for Older Americans

The CFPB released a report May 7 that analyzed data from the Census Bureau, the Federal Reserve Board, and its own consumer-complaint database to highlight mortgage challenges faced by older Americans. "These challenges include more mortgage debt, less affordable housing, and greater risk of foreclosure," the bureau said in a press release. It also issued a consumer advisory with tips for older Americans on how to keep their retirement plans on track while making mortgage payments.

FSOC Annual Report Highlights Concentration of Mortgage Servicing Risk in Nonbanks

Responding to recent sales of mortgage servicing rights to nonbank companies, the Financial Stability Oversight Council's Annual Report, issued on May 7, advised that such firms "are not currently subject to prudential standards such as capital, liquidity, or risk management oversight," and that where investors' ability to collect depends on the performance of a single servicer, "failure could have significant negative consequences for market participants." FSOC called for the CFPB, Federal Housing Finance Agency, and state regulators to coordinate "on prudential and corporate governance standards" as these agencies work to monitor risks associated with servicing transfers to these firms.

CFPB to Allow Institutions to Post Privacy Notices Online

The CFPB proposed a new rule on May 6 to create an alternative delivery method for annual privacy-policy disclosures. Under the proposed revisions to Regulation P of the Gramm-Leach-Bliley Act, financial institutions would be allowed to post privacy notices online instead of mailing paper copies, as long as "they satisfy certain conditions such as not sharing data in ways that would trigger consumers' opt-out rights," said the bureau's press release.

Auto Dealers Settle FTC's Deceptive-Advertising Charges

On May 6, the Federal Trade Commission announced it had approved final consent orders against 10 auto dealers over alleged deceptive-advertising charges, often in violation of the Truth in Lending Act and Consumer Leasing Act. The cases arose out of Operation Steer Clear, "a nationwide sweep focusing on misleading advertising associated with the selling, financing, and leasing of motor vehicles."

FTC's Complaint Tool Goes Mobile

The FTC announced May 6 that its online Complaint Assistant tool is now easier to use on mobile devices, having been revised into "a format that is simpler to navigate on a smaller screen and without a keyboard." However, complaints of identity theft will still be directed to the standard desktop/laptop Complaint Assistant.

GAO Finds Control Deficiencies at CFPB

The Government Accountability Office on May 2 said its audit of the CFPB's 2012 and 2013 financial statement found two "significant deficiencies" in internal controls over financial reporting. GAO said in its report that it found a deficiency in controls related to recording amounts payable during the year-end accrual process, and another deficiency in controls for recording property and equipment transactions. The report includes GAO's four recommendations to CFPB that are designed to improve the bureau's oversight and controls.

White House Issues Big Data and Privacy Working Group Report

The White House on May 1 issued a report that identified the technologies that define the big data landscape and surveyed how existing laws and policies affect these technologies and related changes in behavior. Among other things, the report recommended expanding consumer privacy protections and investing in enhanced technical expertise to identify and stop uses of big data that have discriminatory outcomes in credit-decisioning and other areas. The President's Counsel of Advisors on Science and Technology issued an accompanying report on the technological underpinnings of big data.

CFPB Takes Steps to Protect Foster Children from Inaccurate Credit Reports

On May 1, the CFPB published three action letters for child-welfare caseworkers to send to credit bureaus to dispute inaccuracies in the credit reports of foster children. "Credit reporting … can be of particular significance to youth in foster care as they are more susceptible to credit problems and identity theft," the bureau said in a press release. "The nearly 400,000 children in the United States foster care system often lack a permanent address, and their personal information is frequently shared among numerous adults and agency databases." A related tip sheet offered several steps caseworkers can take to protect children from credit reporting problems.

CFPB on Recent Fair Lending Actions

The CFPB submitted to Congress a required report on its fair lending activities. The report summarized its recent fair-lending enforcement actions involving mortgage lending and auto finance and detailed refinements to its process for identifying fair lending risks.

CFPB Proposes TILA Revisions on QMs

On April 30, the CFPB proposed to adjust its ability-to-repay/qualified mortgage rules issued in January 2013 under the Truth in Lending Act. The bureau's press release said the "proposed amendments respond to concerns about origination and servicing issues, particularly for nonprofit housing providers." Specifically, they would define "nonprofit small servicer," slightly broaden an exemption on ability-to-repay rules for nonprofit groups like Habitat for Humanity, and clarify the type of circumstances when excess points and fees can be refunded. The full rule is here.

CFPB Endorses Lender's Switch to Flat Fee on Indirect Auto

Director Cordray issued an April 30 press release in response to news that BMO Harris Bank had switched from a dealer-reserve system to a flat-fee structure to compensate dealers for originating indirect auto loans. "It is encouraging to see BMO Harris taking this proactive step to protect consumers from discrimination," said Cordray. "When people go to buy a car, they should not have to worry whether they'll pay more for their auto loan because of their race, gender, or ethnic background."

CFPB Reports on Mortgage Closings; Launches eClosings Pilot

On April 23, the CFPB published a report on the role of technology in streamlining the mortgage-closing process. The study identified the three major "pain points" of the process: the short amount of time to review documents, the volume of paperwork, and the complexity of closing packages. The CFPB announced at the same time that it had released guidelines for an upcoming eClosings pilot project, "to better understand the role that eClosings can play in addressing consumers' pain points." The pilot project "is not a rulemaking process," said Cordray in prepared remarks at the Mortgage Closing Forum on April 23. "Instead it is a potential 'win-win' effort to work with all stakeholders to ensure that consumers understand the commitment they are making and experience a more transparent, efficient, and effective process."

CFPB Highlights Student Loan "Auto-Defaults"

The CFPB announced April 22 the release of a report from the Student Loan Ombudsman that highlighted complaints of "auto-defaults" in the private student loan industry — the demand of full and immediate repayment of loans upon the death or bankruptcy of co-signers. "Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans," said Cordray. "A borrower should not have to go through an obstacle course." The report outlined steps private student lenders can take before pushing borrowers into default, such as honoring an existing payment schedule for a designated time period. The CFPB also published on its blog two sample letters for borrowers to use to obtain co-signer releases.


Promontory's Consumer Protection Team includes:

Konrad Alt

Konrad Alt
Managing Director
+1 415 986 4160

Michael Dawson

Michael Dawson
Managing Director
+1 202 384 1080

Linda Gallagher

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice
+1 202 370 0411

Stuart King

Stuart King
Managing Director
+44 207 997 3402

Simon McDougall

Simon McDougall
Managing Director
+44 207 377 2367

BJ Sanford

BJ Sanford
Managing Director
+1 202 384 1020

Julie Williams Julie Williams
Managing Director and
Director of Domestic Advisory Practice
+1 202 384 1087
Promontory Sightlines Consumer Financial Protection Developments


P-R Stark


Linda Gallagher


Eugene A. Ludwig

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