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Consumer financial services at a crossroads

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Key developments, possible impacts

Overview

During 2017 and early 2018, the consumer financial services (CFS) regulatory landscape has undergone seismic shifts.

As the Trump Administration, Congress and the courts, in varying ways and to various degrees, rethink and reshape the Consumer Financial Protection Bureau’s (CFPB or Bureau) structure, agenda and approach, companies—notwithstanding the overall deregulatory trend of such activity—likely will experience continued uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions navigate today’s rapidly evolving regulatory environment, we present a concise retrospective and guide for what likely lies ahead. Amidst so much change, and in an environment redolent with deregulatory rhetoric, it is important to take an intermediate and even long view toward compliance as the ramifications of many decisions made today might not become apparent for years. Thus, as always, a commitment to best practices, a strong compliance culture, and a firm grasp on enduring requirements will serve CFS market participants well.

The shifting landscape

Despite a contentious legal battle over the CFPB’s leadership, Acting Director Mick Mulvaney has pressed forward with significant changes to the Bureau’s organization and priorities. For the time being, it appears that the Bureau has recused itself from certain aspects of overseeing the CFS industry, a stark departure from former Director Richard Cordray’s approach.

In less than six months, the new leadership has announced several political appointments to key CFPB positions, and issued no fewer than ten requests for information (RFIs), asking the public to weigh in on nearly every aspect of the Bureau—enforcement, supervision, rulemaking, market monitoring and education activities, among others. In addition to a comprehensive review of all CFPB rules, the Bureau has specifically focused on rolling back requirements under its payday, prepaid card and HMDA-related rules. 

Congress too has joined the fray, striking down the CFPB’s arbitration rule in November 2017. Bills have been introduced to subject the Bureau to Congressional appropriations—a proposal the Trump Administration adopted in its 2019 budget, which Acting Director Mulvaney also underscored as part of his proposed reforms. Other proposals would reconstitute the Bureau as a multi-member, bipartisan commission.

Separately, as our collective memory of the financial crisis fades and as they have become more accustomed to the CFPB as litigant, some courts appear to be less deferential to the CFPB’s enforcement efforts. Companies and institutions are increasingly challenging the Bureau’s civil and administrative actions, rather than swiftly settling.

The current CFPB leadership has also signaled a new approach to enforcement that includes the use of more traditional legal theories, de-emphasizing the broad and aggressive use of the Bureau’s UDAAP authority as an enforcement tool. Among other actions, the CFPB’s decision to remove its fair lending unit from the supervision and enforcement division, as well as its call for local enforcement of consumer protection laws likely will cause states to increase their enforcement activities. Indeed, several state attorneys general (AGs) have already signaled that they will use their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many ready to draw on or otherwise forming special consumer units. Beyond enforcement of law, state AGs, regulators and legislators also seem poised to revisit existing laws and regulations and issue guidance, as appropriate—all in the name of filling any void the CFPB might leave in its wake. Multistate coordination among these players remains possible, if not probable, in many instances.

A note on new technologies

Concurrent federal deregulation and increasing state oversight may pose unique challenges for tech, fintech and regtech companies as well as incumbent financial institutions leveraging new technologies. Although the Bureau’s Project Catalyst was designed and has the potential to balance oversight with the need to foster consumer-friendly innovation, the current CFPB leadership has yet to take a position on whether it will revamp this initiative, and if so how—regardless of how it will otherwise address fintech solutions in the CFS market.

Other federal agencies, including the federal banking regulators, have yet to demonstrate how they will strike this balance and manage tech innovation in the CFS sector. States, meanwhile, may seek to clarify and enforce time-tested laws and regulations, while also possibly offering a multiplicity of differing responses. All CFS market participants using or offering innovative approaches and products are thus encouraged to navigate this shifting landscape carefully by ensuring a sound understanding of new technologies, an ability to manage their risks, and an ability to communicate their risk management approach, when and as appropriate, to regulators.

CFPB structural changes

The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau’s structure and how it operates. 

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Mortgage origination and servicing

In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market.

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Small-dollar loans

The CFPB has historically focused on how to address so-called "debt traps" associated with payday lending.

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Student loans

The CFPB has historically focused on both federal and private student loans, with an increasing focus on loan servicing practices.

Pencil Erasers

Auto finance

The CFPB has previously targeted the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

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Marketplace lending

The CFPB has traditionally not prioritized  marketplace lenders in its supervisory and enforcement efforts. The new CFPB leadership is expected to maintain the status quo and rely on state attorneys general to oversee industry participants.

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Payment processing

The CFPB finalized its Prepaid Card rule in October 2017. It remains unclear, however, whether the CFPB’s new leadership will leave the rule intact, or instead seek to further delay or alter the rule’s requirements as part of the Bureau’s ongoing review of CFPB regulations.

credit cards

Mortgage origination and servicing

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Supervision

In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market:

 

"The Fair Lending Office will continue to focus on advocacy, coordination, and education, while its current supervision and enforcement functions will [move to the Office of the Director]."

CFPB Acting Director Mick Mulvaney1

Home Mortgage Disclosure Act (HMDA) 

In August 2017, the CFPB published a final rule that clarifies certain HMDA data collection and reporting requirements, most of which became effective on January 1, 2018. Among other changes, the rule introduces mandatory reporting of home equity lines of credit for both depository and non-depository institutions above a certain threshold3 and adds 25 new data points for collection and reporting—in addition to the pre-existing 23 data points.4 The Bureau also published a reference chart intended to assist lenders with compliance with the new collection requirements.5

 

"Know-Before-You-Owe" mortgage disclosure 

In July 2017, the CFPB released an updated version of its TILA-RESPA integrated disclosure rule (TRID). Notably, the amended rule extends coverage to all closed-end credit transactions (other than reverse mortgages) that are secured by a cooperative unit; creates tolerances for calculating the finance charge and disclosures affected by such charge; clarifies the circumstances in which a creditor may provide disclosures to certain parties involved in the origination process; and expands the rule's partial exemption for certain non-interest-bearing subordinate loans that provide down-payment and other homeowner assistance.6 The mortgage industry must comply with these updated provisions by October 1, 2018. Concurrently, the Bureau issued a follow-up proposal for public comment to address the "black hole" issue that prevents creditors from resetting tolerances except in very limited circumstances.7 However, it remains unclear how the new CFPB leadership will proceed on this issue.

"Our coalition of Attorneys General investigating lending disparities and allegations of redlining is growing." 

Pennsylvania Attorney General Josh Shapiro2

 

Truth in Lending Act 

In March 2018, the CFPB also finalized an amendment to its 2016 mortgage servicing rule to clarify and, as of April 19, 2018, afford mortgage servicers more latitude in providing periodic statements to consumers entering or exiting bankruptcy.8 

In December 2017, CFPB Acting Director Mick Mulvaney announced that the Bureau would not penalize industry participants for non-material errors in data reported for 2019, and would open a rulemaking to reconsider certain aspects of HMDA.9 Moving forward, we expect the CFPB to focus on the HMDA disclosure requirements and seek to reduce the regulatory burden for mortgage-related activities, particularly concerning regulatory provisions not required by statute. This could include the removal of certain data points previously added by the CFPB under its discretionary authority. Additionally, the House passed a bill in January 2018 that if enacted, would exempt community banks, small credit unions and nonbank mortgage lenders from the expanded HMDA disclosure requirements.10

 

Enforcement

The CFPB remained a prominent enforcer in the mortgage space in 2017, primarily targeting mortgage lenders and loan servicers with respect to kickback schemes, mortgage servicing violations, and deceptive foreclosure practices and communications.

In 2017, the CFPB resolved two enforcement actions involving alleged illegal kickbacks. In January, the Bureau imposed a US$3.5 million fine on a major mortgage lender for paying illegal kickbacks for mortgage business referrals, including paying for referrals through agreements and split fees.11 In September, the Bureau ordered a real estate settlement services provider to pay US$1.25 million in redress for steering consumers to a title insurer owned in part by several of its executives.12 The CFPB also sued two mortgage servicers for failing to disclose critical information about the process of applying for foreclosure relief,13 or imposing excessive paperwork demands to apply for such relief, as well as issued a US$1.75 million fine on a mortgage company that failed to report accurate mortgage transaction data under HMDA.14 Finally in 2018, in a joint enforcement action with the OCC, the Bureau notably reached an unprecedented US$1 billion settlement with a major financial institution for mortgage servicing abuses that include improperly charging fees to borrowers for mortgage interest rate-lock extensions.

A notable pending enforcement action in 2018 concerns alleged improper mortgage servicing practices. The Bureau filed a lawsuit against a leading nonbank mortgage servicer for failing to provide routine servicing functions, including making widespread errors and runaround costs, failing to send accurate monthly statements, illegally foreclosing on struggling borrowers, ignoring customer complaints and selling off the servicing rights to loans without fully disclosing the mistakes it made in borrowers' records.15

Although the new CFPB leadership is conducting an ongoing review of pending enforcement actions,16 we expect mortgage servicing violations to remain a focal point of the Bureau's enforcement efforts.

In 2016, the mortgage industry represented 23 percent of all consumer complaints,17 82 percent of which concerned mortgage servicing.18 In light of the continued high rates of mortgage servicing-related complaints, we anticipate that the CFPB will continue to scrutinize mortgage servicing practices.

25%

of overall consumer complaints were mortgage-related (since CFPB’s creation)

 

Litigation

In 2017, the Department of Justice (DOJ) and US Attorneys reached several large settlements against bank and nonbank mortgage companies under the False Claim Act (FCA) and the Fair Housing Act (FHA), frequently through joint actions with the Department of Housing and Urban Development (HUD). Enforcement efforts primarily focused on origination and servicing violations in connection with FHA-insured loans, as well as discriminatory lending practices. The DOJ and US Attorneys secured significant settlements (including treble damages) under the FCA. Notably:

  • In September 2017, the US Attorney for the Southern District of Texas obtained a US$280 million settlement against two mortgage companies for violating various FHA guidelines in underwriting and originating FHA-insured loans, as well as falsely certifying compliance with the FHA program.19 The DOJ also reached a US$74 million settlement against a leading mortgage servicer and an US$11.7 million settlement with a Louisiana-based mortgage lender on similar grounds.20 The DOJ has initiated at least one other investigation regarding the adequacy of underwriting and quality control processes of FHA-insured loans21
  • In March 2017, HUD reached a US$1 million settlement with an Illinois bank resolving allegations that the bank engaged in illegal "redlining" of mortgage applicants in minority neighborhoods.22 The US Attorney for the Southern District of New York also obtained a US$53 million settlement against a leading financial institution for discriminatory pricing on the basis of race and national origin in the conduct of its wholesale lending business23

By reassigning the Office of Fair Lending to the Office of the Director, the new CFPB leadership has signaled a possible retreat from fair lending enforcement. HUD and the DOJ seem unlikely to compensate for any such retreat. For example, HUD Secretary Ben Carson has recently proposed to remove language promoting "inclusive, discrimination-free communities" from HUD's mission statement,24 reflecting a similar slowdown in HUD's fair housing enforcement activity. Thus, moving forward, we expect consumer advocates, state enforcement authorities and municipalities to drive further fair housing/lending activity.

 

Fintech outlook and mortgages

Fintechs in this space have principally focused on developing software to assist mortgage lenders in complying with HMDA disclosure requirements, and performing real-time audits of the entire mortgage origination process to reduce cost and exposure. Fintechs have also developed AI-based scoring algorithms used to evaluate alternative data sources and assess mortgage seekers' creditworthiness, as well as provide more accurate mortgage origination pricing and rates. As in other market segments, these tech-focused methods may raise novel fair lending considerations. While the CFPB may not prioritize federal fair lending enforcement moving forward, new market entrants unfamiliar with applicable consumer protection laws and regulations may be particularly susceptible to state fair lending enforcement.

 

State spotlight

State-level mortgage enforcement activity, reflective of a diminishing pool of credit crisis-related cases, trended downward in 2017. One notable exception was the Florida AG's office, which filed a suit against a leading nonbank mortgage loan servicer and its subsidiaries for failing to provide routine servicing functions, including filing illegal foreclosures, mishandling loan modifications, misapplying mortgage payments and collecting excessive fees.25

We expect that AGs will be more proactive in 2018. In light of the new CFPB leadership's retreat from fair lending and explicit reliance on states to take the lead on enforcement actions,26 we anticipate that AGs will focus on discriminatory practices. A recent Senate vote to roll back certain consumer protections under the Dodd-Frank Act, including provisions designed to combat housing discrimination and disclosure requirements for mortgage lenders, may provide an additional impetus for AGs to pick up this issue:27 

  • In February 2018, the Pennsylvania AG announced it has opened three investigations to probe redlining in Philadelphia28; at least five other states have started to investigate local mortgage lending disparities as well29

 

 

    
    

 

Kate Berry, CFPB’s Mulvaney Strips His Fair-Lending Office Of Enforcement Powers (Feb. 1, 2018), https://www.americanbanker.com/news/cfpbs-mulvaney-strips-his-fair-lending-office-of-enforcement-powers.
2 https://twitter.com/JoshShapiroPA/status/974332577522708480.
3 Reporting becomes mandatory for both depository institutions and non-depository institutions that originate at least 100 HELOCs in each of the two preceding
calendar years.
4 CFPB, Home Mortgage Disclosure (Regulation C) (Aug. 24 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201708_cfpb_final-rule_home-mortgage-disclosure_regulation-c.pdf.
5 CFPB, Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart (Feb. 1, 2018), (first version was published in Oct. 2017, and updated in Feb. 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201710_cfpb_reportable-hmda-data_regulatory-and-reporting-overview-reference-chart.pdf.
6 CFPB, Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (Regulation Z) (Jul. 7, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-updates-know-you-owe-mortgage-disclosure.  
7 The CFPB is seeking comments on when lenders may use a Closing Disclosure or revised Closing Disclosure, instead of a Loan Estimate, to determine the good faith of an estimated closing cost. See CFPB, Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z) (Aug. 11, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-08-11/pdf/2017-15763.pdf.
8 CFPB, Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z) (Mar. 8, 2018), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing_final-rule_2018-amendments.pdf.
9 CFPB, CFPB Issues Public Statement On Home Mortgage Disclosure Act Compliance (Dec. 21, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-public-statement-home-mortgage-disclosure-act-compliance
10 H.R. 2954 (Home Mortgage Disclosure Adjustment Act), 115th Cong. (Jun. 20, 2017).
11 Consumer Fin. Prot. Bureau v. Prospect Mortgage LLC, 2017-CFPB-0006 (Jan. 31, 2017), https://files.consumerfinance.gov/f/documents/201701_cfpb_ProspectMortgage-consent-order.pdf.
12 Consumer Fin. Prot. Bureau v. Meridian Title Corporation, 2017-CFPB-0019 (Sept. 27, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_meridian-title-corp_consent-order.pdf.
13 Consumer Fin. Prot. Bureau v. Fay Servicing, LCC, 2017-CFPB-0014 (Jun. 7, 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/062017_cfpb_Fay_Servicing-consent_order.pdf.
14 Consumer Fin. Prot. Bureau v. CitiFinancial, LLC, et al., 2017-CFPB-0004 (Jan. 23, 2017); Consumer Fin. Prot. Bureau v. CitiMortgage, Inc., 2017-CFPB-0005 (Jan. 23, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes.
15 Consumer Fin. Prot. Bureau v. Ocwen Fin. Corp., et al., case no. 9 :17-cv-80495  (S.D. Fla. Apr. 20, 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/20170420_cfpb_Ocwen-Complaint.pdf.
16 Press Release, CFPB Call for Evidence (Jan. 17, 2018), https://www.consumerfinance.gov/policy-compliance/notice-opportunities-comment/open-notices/call-for-evidence; Press Release, CFPB Issues Request For Information On Enforcement Processes (Feb. 7, 2018), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-request-information-enforcement-processes
17 CFPB, Monthly Complaint Report, Vol. 24, at 8 (Jun. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201706_cfpb-Monthly-Complaint-Report-50-State.pdf.
18 CFPB, Monthly Complaint Report, Vol. 19, at 12,  (Jan. 2017),  https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201701_cfpb_Monthly-Complaint-Report.pdf
19 Matthew L. Riffee, Court Awards Nearly $280 Million in Treble Damages Against Former FHA Lender, Consumer Finance Enforcement Watch (Sept. 18, 2017), https://www.enforcementwatch.com/2017/09/18/court-awards-nearly-280-million-in-treble-damages-against-former-fha-lender.  
20 Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage; Dep’t of Justice, IBERIABANK Agrees to Pay Over $11.6 Million to Resolve Alleged False Claims Act Liability for Submitting False Claims for Loan Guarantees (Dec. 8, 2017), https://www.justice.gov/opa/pr/iberiabank-agrees-pay-over-116-million-resolve-alleged-false-claims-act-liability-submitting.
21 U.S. Securities and Exchange Commission, Lennar Corp., Form 10-K, at 20, https://www.sec.gov/Archives/edgar/data/920760/000162828018000562/len-20171130x10k.htm.
22 U.S. Dep’t of Housing and Urban Development, HUD And Northern Illinois Lender Reach Fair Lending Settlement (Mar. 10, 2017), https://www.hud.gov/press/press_releases_media_advisories/2017/HUDNo_17-022.
23 Dep’t of Justice, Manhattan U.S. Attorney Settles Lending Discrimination Suit Against JPMorgan Chase For $53 Million (Jan. 20, 2017), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-settles-lending-discrimination-suit-against-jpmorgan-chase-53.
24 Jacqueline Thomsen, HUD Removes Promises Of Inclusive, Discrimination-Free Communities From Mission Statement: Report, The Hill (Mar. 7, 2018), http://thehill.com/homenews/administration/377115-hud-removes-promises-of-inclusive-discrimination-free-communities.
25 Florida Office of the Attorney General, Attorney General Bondi and OFR Commissioner Breakspear File Action Against Ocwen (Apr. 20, 2017), http://www.myfloridalegal.com/newsrel.nsf/newsreleases/975B9DF2B52BB823852581080060D1A2.
26 Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role On Enforcement: Mulvaney, American Banker (Feb. 28, 2018), https://www.americanbanker.com/news/ags-not-cfpb-should-take-greater-role-on-enforcement-mulvaney.
27 S. 2155 (Economic Growth, Regulatory Relief, and Consumer Protection Act), 115th Cong. (Nov. 16, 2017).
28 Aaron Glantz, 3 Investigations Opened After Reveal Uncovers Redlining In Philly, Reveal (Feb. 22, 2018), https://www.revealnews.org/blog/3-investigations-opened-after-reveal-uncovers-redlining-in-philly.  
29 Aaron Glantz, State Attorneys General Probe Lending Disparities, Reveal (Mar. 13, 2018), https://www.revealnews.org/blog/state-attorneys-general-probe-lending-disparities.

 

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