Regulations and Guidance Update

Consumer Financial Protection Bureau Proposes Changes to Limits on Credit Card Fees

The CFPB is proposing to amend Regulation Z, which implements the Truth in Lending Act. Under the proposed rule, Regulation Z will limit the total amount of fees that a credit card issuer may require a consumer to pay during the first year after any account is opened to 25 percent of the account’s credit limit in effect when the account is opened. It will not limit the amount of fees charged prior to account opening. The proposal, a response to a court’s recent injunction blocking further limits on credit card fees, was published by the CFPB in the Federal Register on April 12, 2012. The CFPB has requested comments on whether to amend Regulation Z to apply the limitation only during the first year after account opening.

When the Federal Reserve Board (FRB) issued a final rule implementing the Credit Card Accountability and Responsibility and Disclosure Act of 2009 (Credit Card Act) in January, 2010, the 25 percent fee limit applied only during the first year after account opening. On April 8, 2011, the FRB amended Regulation Z to state that this limitation applied both prior to account opening and during the first year after account opening. The amendment was scheduled to go into effect on October 1, 2011. In a lawsuit where a bank claimed that the FRB exceeded its authority under the Credit Card Act with its expanded rule, however, a South Dakota district court issued a preliminary injunction blocking that part of the rule from taking effect. The Bureau proposed this most recent amendment to resolve the uncertainty caused by the litigation.

If the proposal is adopted, fees that a consumer is required to pay prior to account opening, including processing and activation fees, will not be subject to limitation. An account is deemed to be open no earlier than the date on which the consumer can use the account for a transaction. The CFPB acknowledged that if adopted, the proposed rule will benefit credit card issuers and disadvantage consumers because it “may impose potential costs on consumers by permitting covered persons to collect fees that would be disallowed absent the proposal.”

Consumer groups view the proposed amendment as a retreat by the CFPB that will primarily burden vulnerable, subprime borrowers. Others, however, see the proposed amendment, which tips the rule in favor of banks, as a shrewd move demonstrating that the Bureau takes both businesses and consumers into account when setting policy. The CFPB, an agency whose creation was widely opposed by Republicans, must not only protect consumers from practices that it considers abusive or deceptive, but also allow financial institutions to make enough money so that they continue to offer loans and credit cards. The proposed amendment demonstrates that the CFPB is looking to serve all of its constituents.

Comments on whether the CFPB should conform the rule to the court ruling so that it no longer applies to fees charged prior to account opening must be received by June 11, 2012. Comments may be submitted electronically, by mail, or by hand delivery.

CFPB Releases Proposed Reforms for Mortgage Servicers

In an April 9, 2012 press release, the CFPB announced a new round of mortgage servicing rules to be proposed for comment by Summer 2012 and finalized by January 2013. The CFPB branded the proposal “No Surprises, No Runarounds” to address perceived problems with transparency and accountability among mortgage servicers. Some of the proposals have been taken up previously by the CFPB, including goals to streamline the information in monthly mortgage statements and de-incentivizing force-placed insurance, and a number address mandates Congress gave the CFPB under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Other proposed rules track reforms similar to the new servicing standards laid out in the State Attorneys General settlement reached with the five largest mortgage servicers in February, such as rules to create direct loss mitigation contacts for borrowers in default and to set timelines for responding to error complaints.

Industry insiders are not surprised that the CFPB is focusing attention on mortgage servicing practices in the wake of the robo-signing scandal and the recent Attorney General settlement. David H. Stevens, President and CEO of the Mortgage Bankers Association, released a statement just after the CFPB announcement stating that the proposed reforms reflect the issues he and his staff have been discussing with CFPB staff. “National standards that apply to all residential loan servicers have the potential to create more confidence and certainty in the real estate market for both borrowers and servicers alike,” Stevens stated. He further noted, “[b]orrowers would be protected by a single standard regardless of where they live and servicers would have one set of rules to comply with everywhere they operate.”

Industry specialists also stressed that additional requirements, especially those that would demand advanced technology, could create higher transactional costs that would likely be passed on to borrowers. Both the CFPB and industry insiders have also addressed the need to ensure that smaller servicers are not priced out of the market due to the reforms. In presenting the proposal, CFPB Director, Richard Cordray, noted that the new rules would apply to both banks and nonbanks but that the CFPB realizes that “a one-size-fits-all approach may not be appropriate, particularly for smaller institutions like community banks and credit unions.”

The CFPB laid out a general overview of the proposed reforms in a fact sheet on April 9, 2012. The rules under consideration by the Bureau include:

• Clear Monthly Mortgage Statements. Servicers would be required to provide a streamlined monthly mortgage statement that would include a summary of mortgage terms; a breakdown of payments by principal, interest, fees, and escrow; the amount and due date for the following payment; an itemization of recent fees and charges; late fee warnings; and information regarding loss mitigation alternatives for delinquent borrowers.
• ARM Warnings. Servicers would be required to provide earlier disclosures of upcoming interest rate adjustments on adjustable-rate mortgages that would include an explanation of how the rate would be determined and when it would take effect; a good-faith estimate of the new monthly payment amount; future interest rate adjustment dates; amounts of pre-payment penalties; and resources for borrowers who cannot afford the adjustment.
• Force-Placed Insurance Limitations. Before purchasing insurance on behalf of borrowers, servicers would be required to request proof of insurance from the borrower twice under certain timing rules; provide a good-faith estimate of the cost of force-placed insurance; accept any “reasonable” form of proof of insurance from the borrower; and terminate any force-placed insurance within 15 days of receiving proof of coverage from the borrower and refund any force-placed insurance premiums. If the servicer maintains an escrow account to cover insurance premiums, then even if a borrower becomes delinquent, the servicer would be required to continue payment under the borrower’s insurance policy rather than purchasing force-placed insurance.
• Avoiding Foreclosure. Servicers would be required to provide information about the foreclosure process, available housing counseling and foreclosure avoidance options to borrowers much earlier in any delinquency.
• Payments Immediately Credited. Servicers would generally be required to credit payments on the day they are received. In the case of partial payments, servicers would be permitted to hold the payments in a suspense account, applying the funds once the suspense account equals one full monthly payment.
• Information Management. This rule would ensure that servicers maintain up-to-date and accessible records in order to minimize errors and facilitate prompt error correction. Servicers would be required to keep records of borrower contact, better organize and manage loss mitigation documents and ensure reasonable and timely access to such information by loss mitigation personnel. The CFPB has acknowledged that some exceptions for small servicers under this rule, for example in maintaining records of all borrower contact, may be appropriate.
• Quick Error Correction. Servicers would be required to acknowledge borrowers’ concerns regarding possible errors within five days of receipt and complete investigations of such errors within thirty days. The CFPB may require shorter timeframe for errors relating to foreclosures and payoffs. Errors falling under this rule would include those involving: incorrect calculations of credits, payments, or amounts due; payment (or nonpayment) of taxes and insurance out of escrow accounts; inaccurate disclosures; inaccurate information about how a borrower can avoid foreclosure; and bringing or continuing a foreclosure after a loan modification.
• Direct and Ongoing Access. Servicers would be required to provide delinquent borrowers (or those asking for help avoiding delinquency) with direct, ongoing access to loss mitigation and foreclosure prevention staff. The CFPB would also require that the foreclosure prevention staff have easy access to the borrower’s records as well as to underwriters who could quickly evaluate loan modification eligibility or other loss mitigation options.

New Bureau Bulletin Imposes Responsibility on Banks and Nonbanks for Their Service Providers

On April 13, 2012, the Bureau issued Bulletin 2012-03, which imposes supervisory responsibility over third-party service providers on large banks and certain nonbanks under the Bureau’s jurisdiction. According to Director Cordray, these supervised institutions “must manage these relationships carefully and can be held accountable if they break the law.” Service providers are defined broadly to include “any person that provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service.”

The CFPB’s regulation of service providers now imposes a duty on supervised banks and nonbanks to ensure that their service providers comply with all applicable consumer financial laws. While recognizing the use of service providers as an appropriate business decision in many situations, in issuing the Bulletin the Bureau hopes to manage and limit the risks attendant to third party relationships. The CFPB cautioned, however, that outsourcing certain functions does not absolve supervised banks and nonbanks from federal law compliance and that these institutions will be held accountable if their servicer providers violate these laws.

In an effort to remove ambiguities as to what is required of supervised banks and nonbanks and to limit potential consumer harm, the CFPB confirmed that it expects supervised banks and nonbanks to employ the following procedures to monitor their service providers:

• Conduct thorough due diligence to verify that the service provider understands the law and is capable of complying with Federal financial consumer 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 that have consumer contact or compliance responsibilities;
• Include in all contracts with the service providers 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 on-going monitoring to determine whether the service provider is complying with Federal financial consumer law; and,
• Take prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate.

Director Cordray emphasized that the foregoing regulation of service providers is critical because “[c]onsumers are at a real disadvantage because they do not get to choose the service providers they deal with …,” therefore, supervised banks and nonbanks must take steps to ensure that their service provides do not engage in conduct harmful to consumers.

FTC Rescinds Nine Consumer Financial Protection Rules After Adoption and Recodification by Bureau

Effective April 13, 2012, the Federal Trade Commission (FTC) rescinded nine of its rules governing consumer financial protection in accordance with the Dodd-Frank Act, which transferred rulemaking authority for the applicable rules to the CFPB. Pursuant to its rulemaking authority under the Dodd-Frank Act, the Bureau has republished and recodified each of the rescinded rules.

Five of the rescinded rules are related to the Fair Credit Reporting Act—the definition of “identity theft” (now codified at 12 CFR § 1022.3); the free annual file disclosure rule (12 CFR § 1022.130); the prohibition against circumventing treatment as a nationwide consumer reporting agency (12 CFR § 1022.140); the rule governing duration of active duty alert (12 CFR § 1022.121); and the appropriate proof of identity rule (12 CFR § 1022.123). Also rescinded are the mortgage acts and practices advertising rules (now codified at 12 CFR Part 1014) and the rules governing mortgage assistance relief services (12 CFR Part 1015). The rules governing disclosure requirements for depository institutions lacking federal deposit insurance (now codified at 12 CFR Part 1009) and the procedure for state application for exemption from the Fair Debt Collection Practices Act (12 CFR Part 1006) have also been rescinded. In July 2011, the FTC rescinded its Fair Credit Reporting Act Commentary. The CFPB did not adopt the FTC Commentary.

News from the Bureau

CFPB Unveils Financial Aid Comparison Shopper

On Wednesday, April 11, 2012, the CFPB unveiled the newest product of its 'Know Before You Owe' initiative—the Financial Aid Comparison Shopper. This follows the CFPB’s financial and shopping sheet which it released a few months ago. The Financial Aid Comparison Shopper, currently in a beta version, is an online interactive tool designed to help students and families plan for the costs of post-secondary education and understand their options. The new tool was unveiled at an event in South Dakota.

Students using the Financial Aid Comparison Shopper can search over 7,500 institutions to compare tuition costs at various colleges. What is more, this new tool helps students figure out how much debt they would likely owe upon graduation and determine what their monthly student loan payments would be.

“Now more than ever, students and their families need to know before they owe. Our Financial Aid Comparison Shopper helps students make apples to apples comparisons of their offers and pick the one that works best for their financial future,” said Director Cordray. The tool enables students to make side-by-side cost comparisons.

According to the CFPB, student loan debt has reached $1 trillion. This staggering amount surpasses credit card and auto-loan debt. On average, graduates owe $25,000 in student loans upon graduation. Incredible numbers such as these drove the creation of the Financial Aid Comparison Shopper. “Our goal was to give parents and students, especially high school seniors, an easy to understand view of how their decisions today will impact their debt burdens after graduation,” said the CFPB.

The Financial Aid Comparison Shopper is not yet in its final form. Nonetheless, students and parents alike are urged to try out the new site and provide feedback to the Bureau so it can improve the tool in subsequent versions. The Financial Aid Comparison Shopper can be found at: http://www.consumerfinance.gov/payingforcollege/costcomparison/.

CFPB Accepting Consumer Complaints About Bank Accounts

When it launched in July 2011, the CFPB began taking consumer complaints related to credit cards. Since July 2011, the CFPB began accepting consumer complaints on mortgages, student loans, and other consumer loans, such as vehicle financing. As of February 2012, the CFPB had received over 20,000 consumer complaints, predominately for issues dealing with credit cards and mortgages. The three major issues observed in consumer complaints related to credit cards are consumer confusion, third-party fraud, and factual disputes between the consumer and the card issuer. Not surprisingly, the most common complaint concerning mortgages has been related to foreclosures.

On March 1, 2012, as part of the next stage of the CFPB’s Consumer Response Complaints Program, the CFPB announced that it will begin accepting consumer complaints related to bank accounts, including checking accounts, savings accounts, CDs, and related services. Richard Cordray, Director of the CFPB, stated that “[d]eposit accounts play a critical role in the lives of most Americans, but these products and the laws governing them are complicated,” and it is the job of the CFPB to hold banks and credit unions accountable. The Bureau anticipates receiving complaints in: (1) account opening, closing, and management; (2) deposits and withdrawals; (3) using a debit or ATM card; (4) making or receiving payments and sending money to others; and (5) problems related to low account funds. The Bureau expects banks to respond to complaints within 15 days and seeks to close all complaints within 60 days. Consumers may initiate the complaint process by going to www.ConsumerFinance.gov or calling 1-855-411-CFPB.

Bureau Releases Report Summarizing Consumer Complaints

The CFPB released a report on April 9, 2012, summarizing the results of the Bureau’s first five months of receiving and addressing certain types of consumer complaints. The Bureau began accepting consumer complaints about credit cards on July 21, 2011, and about mortgages on December 1, 2011. Consumers may lodge complaints through the CFPB website or by phone, mail, email, or fax. The Bureau also accepts complaint referrals from other government agencies.

The Bureau received 13,210 consumer complaints for the period of July 21 through December 31, 2011. Consumers submitted 40 percent of those complaints via the Bureau’s website and 14.7 percent by phone. Referrals from other agencies accounted for 34.9 percent of the complaints. The top credit card complaints involved billing disputes, identity theft or fraud, and interest rates. The top mortgage complaints addressed loan modification and foreclosure, loan servicing, and loan applications.

The CFPB’s Consumer Response team screens consumer complaints to determine whether the subject matter of the complaint falls within the CFPB’s authority, and to ensure that the complaint does not simply duplicate a prior complaint. The Bureau then sends the complaint to the subject company, as it did with 75 percent of all complaints it received during this initial five-month reporting period. After addressing a complaint, the company reports back to the Bureau regarding whether it was able to resolve the complaint and whether the company provided the consumer with any relief. Companies responded to 88 percent of the complaints they received from the CFPB, and closed over 55 percent of the complaints after providing relief to the consumer. The Bureau also provides the consumer with an opportunity to dispute the company’s description of the outcome of the dispute.

The CFPB’s Consumer Response team focuses its review efforts on those cases where a consumer disagrees with a business’s description of the outcome of a dispute. The team also concentrates on companies that fail to respond to consumer complaints in a timely fashion. Director Cordray reports that the Bureau has “been successful in helping consumers resolve disputes with financial services companies.” Cordray also vowed to “continue to meet this challenge and to fulfill Congress’s vision that we stand on the side of consumers to help improve their financial lives.”

In the first few months of 2012, after the reporting period for the report, the Bureau began accepting complaints about student loans, bank products and services, and vehicle and consumer loans. The Bureau will continue expanding the types of complaints it accepts, and expects to be in position to handle complaints regarding all products and services under its authority by the end of 2012.

Bureau Releases Plain Language Compliance Report

On April 13, 2012, the Bureau released a compliance report outlining the steps it is taking to incorporate plain language into its documents and publications. Under the Plain Language Act of 2010 (the “Act”), all federal agencies are required to publish a report outlining their compliance with the Act by April 13, 2012, and annually thereafter.

The Bureau’s report lists three specific types of communications in which it has integrated plain language. The first area of focus is on consumer facing content--that is, all online and print materials that are directed to consumers and assist consumers in understanding financial issues. These materials contain plain language that inform consumers on all CFPB activities; provide consumers information to consumers regarding their rights under federal consumer laws; and assist consumers make financial decisions.

The second area of focus is on technical and specialized documents, such as bulletins targeted towards financial institutions. According to the report, many of these documents do not impact consumers, but rather focus on regulated industries. It is the CFPB’s intent to publish a plain language summary of any technical or specialized document that directly impacts consumers’ behavior or their understanding of their rights under consumer financial laws.

The final category of communications that the report takes into consideration are proposed or final regulations and rules made by the CFPB. While regulations are not covered by the Act, the Bureau intends to publish a plain language summary of all regulations that it issues.

Under the CFPB guidelines, all documents that are subject to the Plain Writing Act will be reviewed by the CFPB’s Senior Plain Writing Officer, Gail Hillebrand, and at least one of the plain language coordinators.

Additionally, the report outlines the CFPB’s activities in training its staff. Currently, all staff in the Division of Consumer Education and Engagement have received in-house training in plain language writing, with additional training sessions being made available on a Bureau-wide and regional basis. The CFPB will also make online training available to its staff later this summer and has issued to all staff, training materials as well as emails covering the requirements of the Act.

A copy of the full report released by the CFPB can be found here: http://www.consumerfinance.gov/plain-writing/.

Miscellany

Diverse Coalition of Business and Consumer Advocacy Groups Asks CFPB For Broader Definition of "Qualified Mortgage"

On April 12, 2012, a diverse group of 33 lenders, investors, housing professionals, consumer advocates and civil rights groups, sent Director Cordray a letter calling upon the CFPB to issue “broadly-defined” and “clear” Qualified Mortgage standards in the CFPB’s forthcoming Ability to Repay regulation. The organizations warn that a narrowly defined Qualified Mortgage would “undermine prospects for a housing recovery and threaten the redevelopment of a sound mortgage market.”

The Ability to Repay regulation is, according to the CFPB, required to implement the statutory changes made by the “Dodd-Frank Act that expand the scope of the ability-to-repay requirement to cover any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan)” and “establish standards for complying with the ability-to-repay requirement, including by making a ‘qualified mortgage.’” The Ability to Repay regulation was first proposed by the Federal Reserve on May 11, 2011 and then transferred to the CFPB on July 12, 2011. The CFPB indicated that it would issue a final rule sometime in April, 2012.

In their letter, the organizations contend that, in passing Dodd-Frank, Congress intended that Qualified Mortgages be broadly defined so that the protections of a Qualified Mortgage be extended to “all creditworthy borrowers—especially low- and moderate-income borrowers and families of color.” The group also warns that non-Qualified Mortgages will be less protective, less available and more expensive, which will “burden[] families least able to bear the expense.” Finally, the group warns that if the standards for Qualified Mortgage definitions are not clear, “the risks become unpredictable, forcing lenders to decrease their risk tolerance and operate well within the standards. Such an outcome will lessen both the availability and affordability of credit for far too many borrowers.”

The organizations explained that, while they are often on opposing sides of issues, they “stand united in urging the Bureau of Consumer Financial Protection (CFPB) to construct a broadly-defined QM using clear standards. We believe that is the only way to help the economy and at the same time ensure that the largest number of credit worthy borrowers are able to access safe, quality loan products for all housing types, as Congress intended in enacting the Dodd-Frank [Act].” In statement released by the CFPB, Spokeswoman Jennifer Howard said, "[t]he ability to repay rule will have a significant impact on the mortgage market and we want to get it right for consumers. Striking the right balance will depend on a careful analysis of the facts and the data." Howard added, “[a]t this point, we are still weighing the options and no decisions have been made."

Regulatory Scorecard

Please click here to access a printable version of the Dykema Regulatory Scorecard, our up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.

Contacts and Caveats

For more information about Dykema’s financial services regulatory and compliance practice, please contact any of the listed attorneys. 

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_{As part of our service to you, we regularly compile short reports on new and interesting developments in our business services program. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this newsletter, or any Dykema publication, are always welcome. © 2012 Dykema Gossett PLLC.}