Edited by Suzanne Fay Garwood

Last month the CFPB focused its efforts largely on issuing some key guidance relating to the operations of mortgage lenders – from providing guidance on transitional mortgage originator licenses under the SAFE Act, to its position on disparate impact and loan originator compensation.

The Bureau also made time to recognize April as financial literacy month, and announced a new Director of the Office of Diversity and Women Inclusion.

GUIDANCE DOCUMENTS

Transitional Licensing Under the SAFE Act

CFPB Bulletin No. 2012-05 addresses transitional licensing issues for state- licensed and federally registered loan originators.

The SAFE Act and Regulation H allow a state, if it chooses, to provide a transitional loan originator license to an individual who holds a valid loan originator license from another state. The Regulation does not limit the extent to which a state may take into consideration or rely upon the findings made by another state in determining whether an individual is eligible under its own laws. To receive a transitional loan originator license from the second state, an individual must meet either a net worth or surety bond requirement or pay into a state fund.

For individuals who are federally registered loan originators, Regulation H permits them to pursue SAFE Act-compliant state licenses. For persons who are no longer employed by a federal depository, they are considered unlicensed persons and are prohibited from engaging in the business of a loan originator for a state-licensed entity. Accordingly, such persons are not eligible for a transitional license.

Lending Discrimination

The Equal Credit Opportunity Act makes discrimination in the offering of credit illegal. More specifically, under ECOA, a creditor may not discriminate against a person on the basis of race, color, religion, national origin, sex, marital status, age (provided the consumer is old enough to enter into a contract), or receipt of public assistance income, or because of a good faith exercise of any rights under the Consumer Credit Protection Act.

Because lending discrimination is not always obvious, the CFPB Bulletin 2012- 14. This Bulletin reaffirms the CFPB's acceptance of the legal doctrine of disparate impact (otherwise known as the "effects test"). This means that ECOA prohibits a creditor practice that has a discriminatory effect because it has a disproportionately negative impact on a prohibited basis, even though the creditor has no intent to discriminate and the practice appears neutral on its face, unless the creditor can demonstrate a legitimate business need for the practice.

Service Providers

In CFPB Bulletin No. 2012-03, the CFPB articulated its expectation that supervised banks and nonbanks oversee their business relationships with service providers which ensures compliance with federal consumer finance laws. For purposes of this Bulletin, a "service provider" refers to any person who provides a material service to a covered person in connection with the offering or provision by a covered person of a consumer financial product or service.

The CFPB expects banks and nonbanks to undertake the following steps:

• Conduct thorough due diligence to verify that the service provider understands and is capable of complying with federal consumer financial law;
• Request and review the service provider's policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents who have consumer contact or compliance responsibilities;
• Include in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive or abusive acts or practices;
• Establish internal controls and ongoing monitoring to determine whether the service provider is complying with federal consumer financial law; and
• Take prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate.

Compensation to Loan Officers

In response to a number of inquiries, the CFPB issued Bulletin No. 2012-02 which addresses payment of compensation to loan officers. The Bulletin clarifies that loan originator compensation rules permit employers to contribute to qualified plans out of a profit pool derived from loan originations. More specifically, financial institutions may make contributions to qualified plans for loan originators out of pools of profits from loans originated by employees.

The CFPB also indicated that it will address other profit-sharing arrangements in a separate regulatory undertaking.

PRIVATE EDUCATION LOANS

On April 27th, President Obama signed an Executive Order directing the Departments of Education, Defense, and Veterans Affairs, in consultation with the CFPB, to take steps to ensure that servicemembers, veterans and their families can get the information they need about the schools where they spend their education benefits. The Executive Order will:

• Help Ensure Military and Veteran Students Have the Information They Need: The Executive Order requires that colleges provide more transparent information about their outcomes and financial aid options for students, which will help ensure that students are aware of the true cost and likelihood of completion prior to enrolling. The Executive Order also requires that the Know Before You Owe financial aid form, developed by the Bureau and the Department of Education (ED), is made available to every college stud ent who participates in the Department of Defense's (DoD) Tuition Assistance program (nearly 2,000 schools). The Executive Order also directs the Department of Veterans Affairs (VA) to encourage all schools — roughly 6,000 in total — participating in the GI Bill program to provide the Know Before You Owe form.
• Keep Bad Actors Off of Military Installations : The Executive Order requires the DoD to set forth rules for how educational institutions gain access to military installations, so that servicemembers are not targeted by institutions known for a history of poor behavior in recruiting and marketing practices.
• Crack Down on Improper Online Recruiting Practices : The Executive Order directs the VA to initiate a process to register the term "GI Bill," so that ex ternal websites and programs are not deceptively and fraudulently marketing educational services and benefits to program beneficiaries. For instance, some companies have set up websites that suggest that veterans' benefits are available only at a subset of schools. The websites are also set up to resemble official government sites, and are marketed heavily toward military installations and toward separating servicemembers.
• Provide Veterans with a Complaint System : The Executive Order requires VA, DoD, and ED, in consultation with the CFPB and Department of Justice, to create a centralized complaint system for students receiving military and veterans' educational benefits.
• Improve Support Services for Servicemembers and Veterans : The Executive Order requires that colleges participating in the military and veterans education benefit programs do more to meet the needs of military and veteran students by providing clear educational plans for students and academic and financial aid counseling services with staff who are familiar with the VA and DoD programs, and permits servicemembers to more easily re- enroll and/or receive a refund if they must leave school for service- related reasons.
• Provide Students with Better Data on Educational Institutions : The Executive Order requires DoD, VA, and ED to develop improved student outcome measures, such as completion rates for veterans, and a plan for collecting this data, which will be made available on ED's College Navigator website. The Executive Order also requires better reporting on the extent to which colleges rely on various types of federal benefits for operational support.
• Strengthen Enforcement of Student Protections : The Executive Order requires that VA and DoD strengthen the enforcement and compliance functions of the VA and DoD, so that, working in conjunction with the Department of Education, DOJ, and the CFPB, agencies (including law enforcement agencies with responsibility over fraud investigations) can effectively act on complaints of improper activity.

The CFPB recently launched the beta test version of the financial education shopping prototype which is – available at: http://www.consumerfinance.gov/payingforcollege/.

Consumers can now manipulate the prototype by entering the financial aid information the student has received from colleges, family contributions, scholarships and military benefits, and much more. The beta version provides a rough estimate of the student's monthly payment after graduation, as well as a sense of overall debt burden in relationship to the average starting salary of a college graduate. The beta test ends in May.

OTHER CFPB ACTIVITIES

Office of Minority and Women Inclusion

Stuart Ishimaru, the new Director of the Office of Minority and Women Inclusion at the CFPB, comes to the Bureau after serving for nine years at the U.S. Equal Employment Opportunity Commission (Commission). In 2009, Mr. Ishimaru was appointed the Acting Chairman of the Commission. Earlier in his career, Mr. Ishimaru was appointed the Acting Staff Director of the U.S. Commission on Civil Rights and served as Deputy Assistant Attorney General at the Department of Justice in its Civil Rights Division.

In his capacity as Director of t he CFPB's Office of Minority and Women Inclusion, Mr. Ishimaru intends to:

• Develop and implement standards of equal employment;
• Develop standards for assessing the diversity policies and practices of CFPB-regulated entities;
• Advise on the impact of Bureau policies and regulations on minority- and women-owned businesses; and
• Coordinate with the Director to create and implement solutions to civil rights violations.

Financial Education for Children

Coinciding with "Take Your Child to Work Day," the CFPB annou nced its efforts to ensure that young children are receiving financial education.

Surveys show that children look first to their parent or parents as financial examples and for financial information and advice. According to a recent survey, 82 percent of teens said their parents taught them the basics about money management, and 77 percent said their parents were their financial role models.

In many parts of the country, the family is the only source of financial education. Only 22 states require students to take an economics course as a high school graduation requirement, and only 13 states require a personal finance course or require personal finances to be included in economics courses.

The CFPB identifies (but doesn't endorse) the following games and resources that teach financial principles responsibly in imaginative and fun ways:

• How to Raise a Money $mart Child, by The Jump$tart Coalition
• Piggy Bank Disney (ages 8-12)
• Planet Orange (ages 6-12)
• Practical Money Skills (ages 4-12)
• Reality Check (ages 8-12)
• D2D Fund's Financial Entertainment games (young adults)
• FamilyMint.com

REGULATIONS

Overdrafts

In February, the CFPB launched a public inquiry and an industry research study to gain insight into overdraft practices. As part of that initiative, the Bureau published a Notice and Request for Information. The Comment period on that Notice closed on April 29. However, in light of the number of responses, the Bureau is extending the deadline until June 29.

By way of reminder, the Bureau is seeking information regarding:  How consumers utilize overdraft programs,

• The information provided to consumers that informs their everyday banking decisions,
• Alternatives consumers have for meeting short-term shortfalls,
• How recent regulations and changes in bank products and terms have affected overdraft incidence, and
• The costs financial services providers incur in providing banking and overdraft services.

Mortgage Servicing

Similar to its TILA/RESPA prototype initiative, the Bureau again utilized its Small Business panel to introduce a proposal for mortgage servicing. The proposal contemplates:

• Clear monthly mortgage statements. Servicers would provide a periodic statement that explicitly breaks down principal, interest, fees, escrow, and due dates.
• Warnings before adjusting interest rates. For certain adjustable rate mortgages, servicers would provide a notice that explains how the new rate was determined, when it will take effect, dates of future adjustments, and a list of alternatives for consumers to consider.
• Options for avoiding expensive "forced - placed" insurance . Servicers would provide notice to help borrowers to avoid insurance lapses.
• Early outreach to struggling borrowers. Servicers would provide information relating to potential options to avoid foreclosure.
• Payments to be credited . Payments must be credited to consumer accounts the day payment is received.
• Records are kept up to date and accessible . Servicers must maintain current records.
• Quickly addressing and correcting errors. Servicers must respond within specific timeframes to qualified written requests.
• Giving homeowners direct and ongoing access to servicer staff members.

Outstanding Federal Register Publications

Upcoming Regulations

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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