Regulations and Guidance Update

Proposed Servicing Rule

On August 9, the Consumer Financial Protection Bureau (CFPB) released two sets of proposed rules that will substantially impact the mortgage servicing industry. The proposed rules, which were issued under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), cover nine major topic areas and impose new, stringent requirements on the servicing industry. The proposed TILA rules are available here, and the proposed RESPA rules are available here. In an indirect jab at current mortgage servicing practices, CFPB Director Richard Cordray claims that the new rules “offer consumers basic protections and put the ‘service’ back into mortgage servicing.” Bob Davis, executive vice president of the American Bankers Association, warns that, when considering these rules, servicing should not “get tangled up in so much red tape that high-quality, responsive servicing is no longer viable.” Others caution that these regulations will impose significant costs on mortgage servicers. Indeed, some suggest that some large banks have already begun shifting their mortgage servicing to dedicated mortgage servicers in anticipation of these regulations. The Bureau has provided some relief from the mortgage statement provisions for small servicers that handle 1000 or fewer mortgage loans and is considering similar exemptions from other rule provisions.

The proposed rules are set out in a massive 427 pages of single-spaced text. While a full analysis is beyond the scope of this article, the proposed rules incorporate certain provisions of the national mortgage settlement reached between the state attorneys general and the country’s five largest banks and thereby extend them to non-bank mortgage servicers. Likewise, the proposed rules add additional requirements not included in the settlement. For example, they would require servicers to: (i) respond to homeowners’ complaints or calls for information within five (5) days; (ii) provide “clearer” monthly mortgage statements; (iii) give more advance notice of interest rate changes on adjustable rate mortgages; and (iv) provide borrowers "direct, ongoing access" to staff members. Moreover, as with the national mortgage settlement, the rules would prohibit dual track foreclosure, i.e., prosecuting foreclosures against borrowers during the pendency of a loan modification application. “No surprises and no run-arounds” is how Director Cordray summed up the rules.

The CFPB has divided the proposed rules into two sets. The first addresses transparency issues and includes the following:

• Clear Monthly Mortgage Statements: Servicers would be required to provide regular statements which would include: a breakdown of payments by principal, interest, fees, and escrow; the amount and due date of the next payment; recent transaction activity; and warnings about fees.
• Warning Before Interest Rate Adjusts: Servicers would have to provide earlier disclosures before the interest rate adjusts for most adjustable-rate mortgages. This disclosure would include information about alternatives and counseling resources if the new payment is unaffordable. This requirement would provide greater clarity to borrowers about the impact of interest rate changes. Existing disclosures for interest rate adjustments that cause a change in mortgage payments would be amended to include improved information and arrive earlier so that borrowers can anticipate consequences of payment changes.
• Options for Avoiding Costly “Force-Placed” Insurance: Servicers have the responsibility to ensure that borrowers maintain property insurance. If the borrower does not maintain this insurance, however, the servicer has the right to purchase insurance to protect the lender’s interest in the property. This is called “force-placed” insurance and is typically more expensive than insurance the borrower could privately purchase. The CFPB is proposing a rule that would provide more transparency in this process, including requiring servicers to give advance notice and pricing information before charging consumers for this insurance. The servicer would also be required to terminate the insurance within 15 days if it receives evidence that the borrower has the necessary insurance and the insurer would refund the force-placed insurance premiums.
• Early Information and Options for Avoiding Foreclosure: Servicers would be required to make good faith efforts to contact delinquent borrowers and inform them of their options to avoid foreclosure.

The second set of proposed rules imposes new requirements on mortgage servicers on the handling of consumer accounts. These rules include:

• Payments Promptly Credited: Servicers generally would have to credit a consumer’s account as of the date a payment is received.
• Maintain Accurate and Accessible Documents and Information: Servicers would be required to establish reasonable policies and procedures to provide accurate and current information to borrowers and minimize errors. They would have to submit accurate legal documents that comply with applicable law, help borrowers on options to avoid foreclosure, and provide oversight of their contractors and foreclosure attorneys.
• Timely Error Corrections: If a consumer notifies the servicer that he/she thinks there has been an error, the servicer would be required to acknowledge receiving the notification, conduct a reasonable investigation, and, in a timely manner, inform the consumer about the resolution.
• Direct and Ongoing Access to Servicer Personnel To Assist Delinquent Borrowers: Servicers would be required to provide delinquent borrowers with direct, easy, ongoing access to employees who are dedicated and empowered to help delinquent borrowers.
• Evaluate Borrowers For Options To Avoid Foreclosure: Servicers that offer options to borrowers to avoid foreclosure, such as loan modifications or other payment plans, would be required to promptly review applications for those options. Servicers would be prohibited from proceeding with a foreclosure sale until the review of the borrower’s application is complete. Servicers would also be required to let borrowers know when applications are incomplete and to allow borrowers to appeal certain servicer decisions.

The comment period on these proposed rules closes on October 9, 2012 and the CFPB will issue the final rules in January 2013.

Remittance Transfer Exception for Small Banks

On August 7, 2012, the CFPB released the final version of the new remittance transfer rule. The remittance rule is designed to implement protections under the Dodd-Frank Act for consumer money transfers. The remittance rules requires financial institutions providing money transfer services to disclose fees, the exchange rate, and the amount of funds the recipient will receive. Disclosures must be provided when a consumer first requests the transfer and then again when the payment is made. Consumers are also entitled to error resolution and cancellation rights.

The final version of the remittance rule slightly relaxes the scope of covered financial institutions. Initially, any financial institution that engaged in 25 or more annual remittance transfers was required to comply with the disclosure rules. The final version, however, increases the number from 25 to 100 annual transfers, thereby exempting institutions that do not offer remittance transfers in the ordinary course of business. The final version also provides for a transition period to meet remittance requirements for financial institutions that provided less than 100 remittance transfers in the previous year and more than 100 in the current year.

The CFPB relaxed the remittance requirements to lessen the burden on financial institutions that do not regularly engage in the practice of remittance transfers. CFPB Director Richard Cordray explained that “[w]e recognize that in regulation, one size does not necessarily fit all. The final remittance rule will protect the overwhelming majority of consumers, while making the process easier for community banks, credit unions and other small providers that do not send many remittance transfers.”

Despite the relaxed standards, many believe that the 100 transfer threshold is still too low. Robert Rowe, vice president and senior counsel for the American Bankers Association has cautioned that the new remittance rule will have a negative effect on consumers. Mr. Rowe predicts that depository institutions will likely restrict the number of transfers they offer and implement steps to make sure that they do not go over the 100 transfer threshold—thereby reducing the availability of remittance transfers to consumers. The Independent Community Bankers of America (ICBA) likewise believes the new remittance standards will do more harm than good. In a released statement, the ICBA noted that “[w]hile the 100-transfer threshold is better than the originally proposed limit of 25, it will nevertheless force many community banks to no longer offer remittance services to consumers. Once the threshold is exceeded, too many community banks will have no choice but to discontinue offering international transfers to consumers, rather than comply with the impractical disclosure requirements and assume the additional liability by the error-resolution requirements.” The ICBA further contends that the effective date is impossible for community banks to meet because community banks need time to “establish agreements with upstream providers to offer compliant solutions.” The ICBA is therefore urging the CFPB to extend the effective date by two years. The current effective date is February 7, 2013.

CFPB Proposes New Rule Requiring New Disclosures and Dissemination of Appraisals to Loan Applicants

This morning the CFPB issued a proposed rule requiring mortgage lenders to provide free copies of all written appraisals and valuations developed in connection with an application for a loan to be secured by a first lien on a dwelling no later than three days before closing, regardless of whether credit is extended, denied, incomplete or withdrawn. This rule would modify the existing requirement of providing copies of written appraisals to consumers on request. Moreover, and in seeming contradiction to the CFPB’s general goal of reducing redundancy, the rule would also require creditors to notify applicants in writing—at the time they submit a loan application—of their right to receive a copy of each written appraisal or valuation. That is, if the applicant is already receiving it by virtue of the proposed rule, it is entirely unclear why they would need to be informed of that right. Such a notification would make more sense if the consumer merely had an option to request the data.

The proposed rule would amend the Equal Credit Opportunity Act (ECOA)’s Regulation B, which requires certain disclosures and prohibits lenders from discriminating on the basis of race, national origin, sex, or other protected bases. The public will have 60 days, or until October 15, 2012, to review and provide comments on the proposed rule. The CFPB anticipates issuing a final rule in January 2013.

Examinations/Enforcement Here and Now

CFPB Investigating Mortgage Insurance Deals

The CFPB (Bureau) recently issued subpoenas to major financial institutions and insurance companies as part of an ongoing investigation into captive mortgage reinsurance deals. Those receiving subpoenas have included American International Group (AIG), MGIC Investment Corp., Genworth Financial, Radian Group Inc., and PHH Corp. The Bureau is probing whether insurers paid banks to win a slice of their mortgage insurance business in violation of the Real Estate Settlement Procedures Act (RESPA).

The investigation spawned from borrowers’ accusations that mortgage insurers have paid millions of dollars in kickbacks to banks in exchange for the banks recommending that borrowers purchase insurance from those same mortgage insurers. Banks often require mortgagors who cannot put down at least a 20% down payment on a property to purchase private mortgage insurance. Those banks typically recommend certain insurers to borrowers, and the borrowers frequently choose one of the recommended insurers. Specifically, the allegations involve the lender’s steering of borrowers to preferred mortgage insurers, who, in turn, share their premiums with the lender by buying reinsurance at inflated rates from a company owned by the lender. Payments for the steering of settlement service business is a violation of RESPA.

The U.S. Department of Housing and Urban Development began this investigation, but recently handed over responsibility to the Bureau for investigating RESPA violations. Most of the subpoena recipients have publicly stated that they intend to fully cooperate with the investigation.

CFPB Files First Civil Suit Against a Law Firm in the Central District of California

The CFPB filed its first enforcement action in federal court on July 18 under seal. The suit against a Los Angeles-based law firm and its corporate affiliates for allegedly running a mortgage refinance scam was released to the public on July 23. The suit marks the first time the CFPB has taken action in federal court against a non-bank financial services provider.

The CFPB obtained a temporary restraining order appointing a receiver and freezing the assets of defendants Chance E. Gordon, The Gordon Law Firm, P.C., and certain subsidiaries of the law firm. The CFPB is also seeking damages in an unspecified amount, restitution and disagreement. The complaint accuses The Gordon Law Firm, P.C. of misleading clients regarding their eligibility for foreclosure relief, misrepresenting the companies’ affiliation with government entities, and failing to make disclosures required by law. According to the complaint, the law firm charged up-front fees ranging from $2,500 to $4,500 for evaluating the financial and legal situation of homeowners in default and then, if a lawsuit was not justified, promising a loan modification or other work-out through one of the law firm’s corporate subsidiaries. The complaint goes on to allege that the law firm provided “little, if any, meaningful assistance to modify homeowners’ mortgage loans or prevent foreclosure.” Gordon’s attorney, Gary Kurtz, has justified the fee, stating that Gordon offered homeowners a “custom legal product” to evaluate their financial situation. In the past, law firms have also been able to use retainer fees as a way to justify advances for legal fees in the financial services industry. This lawsuit and similar enforcement actions by other federal agencies suggest these exemptions may not prevent federal agencies from targeting law firms that provide financial services in the future.

The CFPB lawsuit mirrors similar actions taken by the Federal Trade Commission (FTC). The CFPB lawsuit was brought by two former FTC lawyers who have joined the CFPB and follows a similar form to many FTC lawsuits, including the form of the complaint, filing the action under seal in federal court, and seeking a temporary restraining order to freeze assets, appoint a receiver, and gain access to the physical business operations. Because both the FTC and now the CFPB have filed suits targeting loan modification scams, it appears that both the FTC and CFPB will independently bring enforcement actions in subject areas where their oversight overlaps.

News from the Bureau

CFPB and Department of Education Seek Bankruptcy Relief for Student Loans Issued by Private Lenders

The Department of Education (DOE) and the CFPB are pushing Congress to make it easier for students to discharge student debt issued by private lenders by filing for bankruptcy protection. The recommendations of the DOE and CFPB would not affect the majority of student debt, which is issued by the federal government, because federal loans already offer leniency in the form of deferrals, forbearance or more flexible payment options. No such cushion exists for private loans.

Before the mid-1970s, both federal and private education loans were dischargeable in bankruptcy. However, Congress then started to restrict federal loans from being discharged and in the mid-1980s, private loans guaranteed by a nonprofit agency became exempt from bankruptcy. Since 2005, no education loan can be discharged without an "undue hardship," a challenging hurdle few overcome. The position of the DOE and CFPB is that private loans offer very little flexibility to struggling borrowers, particularly in today's tough economic climate, thus making reform necessary. Although bankruptcy has long-lasting repercussions (e.g., challenges in securing credit cards or mortgages down the line and/or paying much higher interest rates if approved), it may be the only option for young 20-somethings with over $100,000 in debt and no job prospects in sight.

Richard Hunt, president of the Washington-based Consumer Bankers Association, is concerned about the new initiatives stating, "We made a contract with students to repay their loans, and that's how the banking system operates." Hunt anticipates a rush of bankruptcy filings if private student loans are allowed to be discharged in bankruptcy. However, Sallie Mae, the nation's largest private issuer of student loans, takes a more measured approach by supporting reform that would allow federal and private student loans to be dischargeable in bankruptcy in limited cases. It issued a statement that "Sallie Mae continues to support reform that would allow federal and private loans to be dischargeable in bankruptcy for those who have made a good-faith effort to repay their student loans over a five-to-seven year period and still experience financial difficulty."

CFPB Issues Semi-Annual and Annual Reports

On July 30, the CFPB issued its second Semi-Annual Report highlighting the Bureau’s activities and accomplishments during the first half of 2012. The Dodd-Frank Act created the CFPB to protect consumers of financial products and to encourage the fair and competitive operation of consumer financial markets. The Bureau’s mission is to make consumer financial markets work for consumers, businesses, and the economy. The Semi-Annual Report provides an update on the CFPB’s activities, highlighting the Bureau’s most significant achievements over the past several months and providing additional information required by the Dodd-Frank Act.

The CFPB has solicited input about the challenges faced by consumers in obtaining financial products and services. The CFPB has heard from consumers about their experiences, both positive and negative, with financial products and services through the “Tell Your Story” tool on the CFPB’s website, roundtables, town halls, and field hearings. Additionally, the Bureau launched an infrastructure to receive, process, and facilitate responses to consumer complaints. The CFPB is also gathering data about consumers’ behavior and choices when they shop for financial products and the ways that market structure and sales practices may shape such conduct.

The CFPB has also taken steps toward making consumer financial markets work better for consumers and companies. To that end, the Bureau has launched different offices to provide resources for consumers. For example, the Consumer Response team receives complaints and inquiries directly from consumers. The Division of Consumer Education and Engagement develops and implements initiatives to educate and empower consumers to make better-informed financial decisions. Its initiatives include programs directed toward particular populations which have traditionally been underserved by the financial markets.

Only a year old, the CFPB has also made great efforts in its start-up activities. As of June 30, 2012, the CFPB team consists of 889 staff members working to carry out the Bureau’s mission. The Bureau has worked to build a human and physical infrastructure that promotes transparency, accountability, fairness, and service to the public. This includes demonstrating a commitment to openness and using the CFPB’s website to share information on the Bureau’s operations, recruiting highly qualified personnel, providing training and opportunities for CFPB staff to improve skills and knowledge and maintain excellence, and promoting diversity in the CFPB’s workforce and among its contractors by launching the Bureau’s Office of Minority and Women Inclusion.

The Bureau has also engaged in extensive outreach to consumers and industry, initiated and developed partnerships with federal and state agencies, has begun to establish advisory groups comprised of both consumer and industry groups, implemented statutory protections and begun the process of streamlining regulations inherited from other agencies, launched programs for supervising large banks and other companies that provide consumer financial products and services, investigated potential violations of laws under its purview, and used extensive outreach in its efforts to ensure nondiscriminatory access to fair credit.

On July 31, the CFPB issued its inaugural Annual Report in fulfillment of its statutory responsibilities pursuant to section 1017(e)(4) of the Dodd-Frank Act. Section 1017(e)(4) requires the CFPB Director to prepare and submit a report to the Committees on Appropriations of the United States Senate and House of Representatives. The Annual Report covers the period from when the CFPB opened its doors, July 21, 2011, to June 30, 2012.

The Annual Report restates much of the content of the Semi-Annual Report. It reiterates the Bureau’s accomplishments and its start-up activities, including recruiting staff and building its internal infrastructure. The CFPB also discusses how it has employed several different avenues to gather consumers’ input about their experiences with financial products and services to understand the different challenges faced by consumers. The Bureau has also launched different offices to provide resources to consumers. Some of the duties of these offices include receiving, processing, and managing complaints and inquiries directly from consumers; and launching initiatives to educate and empower consumers to make better-informed financial decisions.

The CFPB will update its website, ConsumerFinance.gov, with information on the Bureau’s work in the coming months.

Miscellany

Senators Ask CFPB to Address Medical Collections Reporting

Four U.S. Senators are asking the CFPB to address the impact of medical debt reporting practices on consumers’ ability to obtain credit. Senators Jeff Markley, Robert Menendez, Chuck Schumer and Sherrod Brown (the “Senators”) expressed the need to change medical debt reporting practices in a letter sent to CFPB director Richard Cordray on August 9, 2012.

The Senators argued that current medical debt reporting practices “can translate into large and unforeseen costs for consumers.” Additionally, while other forms of consumer debt are premised on a consumer’s ability to pay, the same is untrue for medical debt. Due to the interplay between insurance coverage and health providers’ billing practices, consumers’ medical bills can be sent to collections before consumers know they owe a debt. As a result, the Senators argue that “medical debts are less accurate predictors of a consumer’s creditworthiness than other debts making their presence on the credit report unfair to consumers and unhelpful to lenders.”

As a solution to the problems associated with medical debt reporting, the Senators proposed the Medical Debt Responsibility Act: an amendment to the Fair Credit Reporting Act which would require consumer reporting agencies to remove medical debts from a consumer’s report within 45 days after the debt has been paid or settled. The Medical Debt Responsibility Act has passed the House of Representatives, and has the support of the American Medical Association, the Mortgage Bankers Association and the National Credit Reporting Agency. 

Regulatory Scorecard

Please click here 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 group leader, Don Lampe at 704-335-2736, Arthur B. Axelson at 202-906-8607, or 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 t 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.}