CFPB: May Roundup

Edited by Suzanne F. Garwood

Supervision of "risky" nonbanks and general purpose prepaid cards dominated the attention of the CFPB in May. And, while the mortgage industry braces itself for the deluge of Title XIV regulations coming this summer, it learned that the highly-anticipated "ability to repay" regulation will be issued later this fall.

SUPERVISION OVER "RISKY" NONBANKS

Beginning in January, the Bureau began rolling out its supervision over nonbanks in phases:

• Phase One – Mortgage, Small Dollar and Private Education. This phase commenced when former Ohio Attorney General Richard Cordray became the Bureau's first Director. In this first phase, the Bureau obtained the ability to directly supervise nonbank mortgage lenders, small dollar lenders and private student lenders.
• Phase Two – "Larger Participants. The Bureau began the next phase of its supervision in February when the Bureau issued a proposed rule to regulate "larger participants" in the credit reporting and debt collection agencies. According to Dodd-Frank, the Bureau has the authority to supervise nonbank "larger participant[s]" in markets for other consumer financial products or services. The next markets we expect the Bureau to target are: consumer credit; money transmitting, check cashing and related activities; prepaid cards; and debt relief. The Bureau must issue an initial "larger participants" rule by July 21, 2012.
• Phase Three – "Risky" Entities. In May, the Bureau began Phase three of its supervision roll-out by announcing a proposed rule setting forth the procedural steps to supervise an entity that the Bureau deems to be a risk to consumers. Under the Dodd-Frank Act, the CFPB has authority to supervise any nonbank that it has reasonable cause to determine is posing a risk to consumers based on complaints or other information it receives.

The proposed rule sets out the procedures the CFPB will use to notify a nonbank that the Bureau believes may pose a risk to consumers such that it is eligible for supervision.

According to the proposal, the Bureau will send a "Notice of Reasonable Cause" to a nonbank covered person when the Bureau has reasonable cause to believe that the nonbank is engaging or has engaged in conduct that poses a risk to consumers with respect to the offering or provision of consumer financial products or services. The Notice is based on complaints collected through the CFPB's complaint databases and "information from other sources." Entities that receive this Notice have 20 days (which include intervening weekends) to fully respond with a rebuttal of the Bureau's findings and may request a supplemental oral response. The Bureau believes that any such oral response should be a telephone conversation rather than an in-person meeting (although the Bureau will consider face-toface meetings).

Comments are due to the Bureau by July 24, 2012. Some issues to consider include:

• Two Year Designation. According to the proposed rule, an entity that falls under the CFPB's supervisory authority would stay under their authority for two years – irrespective of whether the risk to consumers has been eliminated.
• Foreign Reach. The Bureau affirmatively asserts its authority to reach beyond domestic borders to serve Notice on persons located in a foreign country.
• Complaint Database. Generally speaking, the complaint databases are receiving complaints only for large banks. Accordingly, it is unclear how the Bureau will form a basis for targeting nonbanks.
• Sample Notice. The Bureau did not provide a sample Notice such that the industry can view the details or analysis that the Bureau will provide.

PREPAID CARDS

Field Hearing

On May 23, the CFPB held a field hearing in Durham, North Carolina to discuss the topic of prepaid cards, a product that is becoming increasingly more popular, growing by more than 40 percent in the years between 2010 to 2014. And, the growth of the industry has attracted celebrity attention from the Kardashians to Alex Rodriguez; however, these celebrity endorsements can distract consumers from focusing on whether the product is a good choice for their financial needs. (In fact, the Kardashians had to abandon their efforts because the product was not compliant).

Director Cordray kicked the meeting off by asking the audience to consider what it would be like to live outside of the banking system without a debit or credit card.

Approximately nine million American families are "unbanked" and another 21 million are "underbanked." These underbanked may have a bank account, but they often use nonbank products, such as prepaid cards, to meet their financial needs. Notwithstanding how financially vulnerable these underbanked consumers are, the legal framework that provides protection for debit and credit cards, does not apply to these prepaid cards. Given this gap in the regulatory patchwork, the Bureau is initiating a rulemaking to solicit feedback regarding the regulation of prepaid cards. The focus of the rulemaking is two-fold: safety and transparency. A summary of that rulemaking is provided in this Alert under "Regulations," below.

In addition to the proposed rule, the CFPB launched "Ask CFPB: Prepaid Cards," which includes more than 80 questions and answers from staff on prepaid cards and which is available here:

http://www.consumerfinance.gov/askcfpb/search?selected_facets=category_exact:Prepaid%20Cards

MORTGAGE LOANS

Qualified Mortgages

The mortgage lending industry is waiting with held breath for the Bureau to publish its final "qualified mortgage" regulation but it seems they will have to wait a little longer.

Even as the Bureau is poised to celebrate its second birthday, it has not yet finalized a rule originally proposed by the Federal Reserve Board to define a "qualified mortgage" and establish the requirements for the ability to repay. And, the Bureau has signaled that it likely will not issue the final regulation until after the November election. Note, however, that the Bureau must issue the rule by January 2013. If it does not, the Dodd-Frank provisions will go into effect without implementing regulations. A summary of that rulemaking is provided in this Alert under "Regulations," below.

RESIDENTIAL MORTGAGE LOAN ORIGINATION - SBREFA

Even though the Federal Reserve Board issued a loan originator compensation rule just last April, the Bureau is poised to propose yet another regulation addressing the same topic. In May the Bureau published the Small Business Review Panel's consideration of the following residential mortgage loan origination standards:

• Ban on Dual Compensation. Allows consumers to pay certain upfront points and fees in retail and wholesale loan originations, provided: (i) any discount points are bona fide; (ii) any origination fees paid are "flat" and do not vary with the loan amount; and (iii) any upfront fees paid to an affiliate are "flat" and do not vary with the size of the loan (with the exception of title insurance).
• Retirement Plans. Permits employers to make contributions to mortgage loan originators' qualified retirement plans, qualified profit-sharing plans, and qualified stock ownership plans even if contributions to a particular plan are made from profits derived from the company's mortgage business.
• Pricing Concessions. Allows mortgage loan originators to make certain types of pricing concessions to cover unanticipated increases in third-party settlement charges where those settlement charges are not controlled by the MLO, the creditor or their affiliates and exceed or are in addition to the amounts disclosed on the GFE.
• Point Banks. Clarifies that MLO point banks fall within the definition of "compensation" and providing guidance on the award of points to MLOs that would not violate Dodd-Frank's prohibition against compensation that varies based on loan terms.
• Proxies. Provides the following test to determine whether a factor is a proxy for a loan term: (i) if it substantially correlates with a loan term; and (ii) the MLO has discretion to use the factor to present a loan to the consumer with more costly or less advantageous term(s) than term(s) of another loan available through the MLO for which the consumer likely qualifies.
• Record Retention. Requires brokers and creditors to maintain: (i) records of MLO compensation arrangements and agreements; and (ii) records of compensation provided to MLOs by a consumer or a person other than the consumer.
• SAFE Act. Requires entities to ensure that MLOs who work for them are licensed or registered according to SAFE Act requirements.

HAMP for Military Homeowners

Working with the Department of Treasury, the CFPB Office of Servicemember Affairs is making important changes to its Home Affordable Modification Program to provide more opportunities for mortgage assistance to military homeowners. According to new guidelines that went into effect as of June 1, military homeowners and other families who are permanently displaced by a job-related move may still qualify for a HAMP modification if:

• The displacement is because of an out-of-area job transfer and the home was occupied as a principal residence immediately prior to the displacement;
• There is an intent to return to the home at some point in the future; and
• Does not own any other single-family real estate.

OTHER CFPB ACTIVITIES

Assistant Director of Office of Financial Empowerment

Cliff Rosenthal, former President and CEO of the National Federation of Community Development Credit Unions, joined the CFPB last month as the Assistant Director of the Office of Financial Empowerment. The goals of the Office are to:

• Pursue program and policy initiatives that serve lower-income and traditionally underserved consumers;
• Address the consumer finance challenges lower-income and traditionally underserved consumers face to accessing transactional services, savings, and credit;
• Enable consumer friendly innovations that seek to meet the needs of lower-income and traditionally underserved consumers and that also promote financial capability;
• Research, identify, spotlight, and promote the development of promising and effective practices that empower consumers and positively influence their financial decision-making;
• Provide consumers with information and opportunities to improve their financial stability and build assets; and
• Engage with the public on targeted consumer finance issues as they relate to the underserved.

Information Technology

The Federal Financial Institutions Examination Council ("FFIEC") was established in March 1979 to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions. The Council has six voting members, one of which is the CFPB.

The FFIEC recently upgraded the functions and features of the InfoBase for the FFIEC Information Technology Examination Handbook (IT Handbook), which consists of eleven booklets covering a variety of technology and technology-related risk management guidance for financial institutions and examiners. The new architecture will enable the agencies to respond to changes in technology and the risk environment on an as-needed basis rather than waiting for the next revision of a particular booklet or booklets. A link to InfoBase is here: http://ithandbook.ffiec.gov/.

REGULATIONS

Prepaid Cards

As discussed above, the CFPB launched its efforts relating to prepaid cards at a field hearing in North Carolina. Part of this effort includes the release of an Advance Notice of Proposed Rulemaking, requesting comment on the following with respect to open-loop cards:

• How should the CFPB define general purpose reloadable ("GPR") cards?
• Should certain prepaid products, such as university cards or health spending cards be excluded?
• Should GPR cards be exempt from certain portions of Regulation E (i.e., periodic statements)?
• Should disclosures be required pre-sale, post-sale or both?
• How should disclosures be provided to optimize comparison shopping?
• Should the existence of FDIC insurance be disclosed?
• What are the costs, benefits and consumer protection issues related to GPR credit (overdraft) features?
• Should GPR cards be associated with a savings account?
• Should GPR cards include a credit reporting feature?
• How are changes in terms communicated to consumers?

Qualified Mortgage Loans

Citing the need to seek comment on data gathered by the Bureau via the comment period and ex parte communications, the Bureau is reopening the comment period on qualified mortgages/ability to repay until July 9, 2012. Specifically, the Bureau seeks comment and data on the relationship between loan performance and DTI; and hopes to learn more about litigation risk, arguably to determine whether to adopt the ability to repay standard as a safe harbor or a rebuttable presumption. Note that the Clearinghouse Association is urging the Bureau to adopt a "bright line" standard along with inclusion of a debt-to-income test as part of the definition of a qualified mortgage: http://www.theclearinghouse.org/index.html?f=073274.

Outstanding Federal Register Publications

Upcoming Regulations

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