CFPB Sending HMDA Warning Letter

The CFPB announced that it is issuing warning letters to 44 mortgage lenders and mortgage brokers stating that it “has information that appears to show that your company may not be in compliance with certain provisions of the Home Mortgage Disclosure Act (HMDA) and its implementing regulation, Regulation C.”

According to the CFPB’s press release, the CFPB identified the 44 companies by reviewing available bank and nonbank mortgage data. The press release includes a link to a sample warning letter.

The letters urge recipients to review their practices to ensure HMDA compliance and encourage them to advise the CFPB of the steps they have taken or will take to ensure compliance. Alternatively, if a recipient believes it is not subject to HMDA, the CFPB encourages the recipient to provide an explanation for its position.

In October 2015, the CFPB issued a final rule amending Regulation C. The changes, which, in part, implement the Dodd-Frank Act’s amendments to HMDA, expanded the scope of data required to be collected and reported, changed the scope of HMDA’s coverage of both institutions and transactions, and adopted new processes for disclosing data. Most of the new and revised requirements take effect on either January 1, 2018 or January 1, 2019.

- Richard J. Andreano, Jr.


CFPB Issues Fall 2016 Supervisory Highlights; Ballard to Hold Dec. 2 Webinar

In its Fall 2016 Supervisory Highlights, which covers supervision work generally completed between May and August 2016, the CFPB highlights violations found by its examiners involving origination and servicing of auto financing, debt collection, mortgage origination and servicing, student loan servicing, and fair lending.

On December 2, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Fall 2016 Supervisory Highlights: Looking Beyond the Headlines.” A link to register is available here.

The report states that recent non-public supervisory actions have resulted in restitution of approximately $11.3 million to more than 225,000 consumers. The report also indicates that the CFPB’s supervisory activities “have either led to or supported” two recent public enforcement action described in the report that resulted in over $28 million in consumer remediation and $8 million in civil money penalties.

The CFPB’s “supervisory observations” include the following:

  • Servicing of auto financing. CFPB examiners concluded that it was an unfair practice to detain or refuse to return personal property found in a repossessed vehicle until the consumer paid a fee or where the consumer requested return of the property, regardless of what the consumer agreed to in the contract. Even when the consumer agreements and state law provided support for lawfully charging the fee, examiners concluded there were no circumstances in which it was lawful to refuse to return property until after the fee was paid, instead of simply adding the fee to the borrower’s balance as companies do with other repossession fees. Examiners also found that in some instances, one or more companies were engaging in the unfair practice of charging a borrower for storing personal property found in a repossessed vehicle when the consumer agreement disclosed that the property would be stored, but not that the borrower would need to pay for the storage. The report indicates that in upcoming exams, CFPB examiners “will be looking closely at how companies engage in repossession activities, including whether property is being improperly withheld from consumers, what fees are charged, how they are charged, and the context of how consumers are being treated to determine whether the practices were lawful.”

  • Debt collection.
    • Fees. CFPB examiners determined that a “convenience fee” charged by one or more debt collectors to process payments by phone and online violated the FDCPA where the consumer’s contract did not expressly permit convenience fees and applicable state law was silent on whether such fees are permissible. CFPB examiners also found that debt collectors had made false representations in violation of the FDCPA by demanding unlawful fees, stating that the fees were “nonnegotiable,” or withholding information from consumers about other methods to make payments that would not incur the fee after the consumer requested such information. CFPB examiners also found that one or more debt collectors violated the FDCPA by charging collection fees in states where collection fees were prohibited or in states that capped collection fees at a threshold lower than the fees that were charged. The report notes that examiners “also observed a [compliance management system (CMS)] weakness at one or more collectors that had not maintained any records showing the relationship between the amount of the collection fee and the cost of collection.”
    • Collection calls; third party communications. CFPB examiners determined that collection calls made by one or more debt collectors involved false representations or deception in violation of the FDCPA where collectors (1) purported to assess consumers’ creditworthiness, credit scores, or credit reports when collectors could not assess overall borrower creditworthiness, (2) represented that an immediate payment was necessary to prevent a negative impact on a consumer’s credit, (3) impersonated consumers while using a creditor’s consumer-facing automated telephone system to obtain information about a consumer’s debt, or (4) told consumers that the ability to settle an account was revoked or would expire. At one or more debt collectors, examiners also identified several instances where collectors violated the FDCPA by disclosing the consumer’s debt to a third party (which the CFPB stated was often the result of inadequate identity verification during telephone calls) or by an employee’s disclosure of the debt collection company’s name to a third party without first being asked for that information by the third party.
    • FCRA. CFPB examiners determined that “one or more entities” failed to provide adequate guidance and training to staff regarding differentiating FCRA disputes from general customer inquiries, complaints, or FDCPA debt validation requests. One or more of such entities were directed to develop and implement “reasonable policies and procedures to ensure that direct and indirect disputes are appropriately logged, categorized, and resolved” and/or “a training program appropriately tailored to employees responsible for logging, categorizing, and handling FCRA direct and indirect disputes.” Examiners also determined that one or more debt collectors violated the FCRA by not investigating indirect disputes that lacked detail or not accompanied by attachments with relevant information from the consumer or, for disputes categorized as frivolous, sending notices that did not indicate what the consumer needed to provide in order for the collector to complete the investigation.
    • Regulation E. Examiners found that one or more debt collectors violated Regulation E by failing to provide consumers with a copy of the terms of an authorization for preauthorized electronic fund transfers. Some of these debt collectors had instead sent consumers a payment confirmation notice before each electronic fund transfer. The CFPB stated that such notices did not satisfy the Regulation E requirement to provide a copy of the terms of the authorization because the notices did not describe the recurring nature of the preauthorized transfers from the consumer’s account, such as by describing the timing and amount of the recurring transfers.
  • Mortgage origination. CFPB examiners found that one or more entities offering mortgage loan programs that accepted alternative income documentation for salaried consumers as part of their underwriting requirements had violated Regulation Z ability to repay (ATR) requirements. Such entities indicated that they relied primarily on the consumer’s assets when making an ATR determination, but also established a maximum monthly debt to income (DTI) ratio in their underwriting policies and procedures. CFPB examiners “found that the income disclosed on the application to calculate the consumer’s monthly DTI ratio was not verified, but instead was tested for reasonableness using an internet-based tool that aggregates employer data and estimates income based upon each consumer’s residence zip code address, job title, and years in their current occupation.” CFPB examiners also found that one or more federally-regulated depository institutions were using employees of a staffing agency to originate loans who were improperly registered in the National Multistate Licensing System and Registry as employees of the depository institutions.

  • Student loan servicing. In addition to finding that one or more servicers were engaging in an unfair practice in violation of the Dodd-Frank Act UDAAP prohibition by denying, or failing to approve, applications for income-driven repayment (IDR) plans that should have been approved on a regular basis, CFPB examiners cited servicers for the unfair practice of failing to provide an effective choice on how payments should be allocated among multiple loans. Such servicers had failed to provide an effective choice through such practices as not giving borrowers the ability to allocate payments to individual loans in certain circumstances, not effectively disclosing that borrowers had the ability to provide payment instructions, or not effectively disclosing important information (like the allocation methodology used when instructions are not provided). The CFPB also cited a student loan servicer for engaging in a deceptive practice in violation of the Dodd-Frank Act UDAAP prohibition in connection with loans considered to be “paid ahead.” CFPB examiners concluded that one or more servicers’ billing statements could have misled reasonable borrowers to believe additional payments during or after a paid-ahead period would be applied largely to principal. According to the CFPB, the statements, which noted that nothing was due in months that the borrower was paid ahead, misled consumers as to how much interest would accrue or had accrued, and how that would affect the application of consumers’ payments when the borrower began making payments. The CFPB directed one or more servicers to hire independent consultants to conduct user testing of the servicer’s communications to improve how the communications describe the basic principles of the servicer’s payment allocation methodologies, the consumer’s ability to provide payment instructions, and the accrual of interest during a paid-ahead period. The CFPB refers servicers to the policy direction on student loan servicing issued in July 2016 by the Department of Education for guidance on IDR application processing, billing statements, and allocation methodologies. (Issues related to IDR plan applications were highlighted in the midyear report of the CFPB’s Student Loan Ombudsman released in August 2016.)

  • Fair lending.
    • LEP consumers. CFPB examiners “observed situations” in which financial institutions’ treatment of limited English proficiency (LEP) and non-English-speaking consumers posed fair lending risk, such as marketing only some credit card products to Spanish-speaking consumers, while marketing additional credit card products to English-speaking consumers. The CFPB noted that one or more such institutions lacked documentation describing how they decided to exclude those products from Spanish language marketing, thereby “raising questions about the adequacy of their compliance management systems related to fair lending.” According to the CFPB, to mitigate any compliance risks related to these practices, one or more financial institutions revised their marketing materials to notify consumers in Spanish of the availability of other credit card products and included clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle. The CFPB observed that such institutions “were not required to provide Spanish language services to address this risk beyond the Spanish language services they were already providing.” The report includes a list of “common features of a well-developed” CMS that considers treatment of LEP and non-English-speaking consumers.
    • Redlining. The report lists factors considered by the CFPB in assessing redlining risk in examinations and describes how the CFPB conducts its analysis of redlining risk, such as its use of HMDA and census data to assess an institution’s lending patterns and its comparison of an institution to peer institutions. The report indicates that in their initial analysis, CFPB examiners will compare an institution’s lending patterns to other lenders in the same MSA to determine whether the institution received significantly fewer applications from minority areas relative to other lenders in the MSA. Examiners may also compare an institution to a more refined group of peers which can be defined in various ways, such as lenders that received a similar number of applications, originated a similar number of loans in the MSA, or offered a similar product mix. Examiners have also considered an institution’s own identification of its peers in particular markets.
  • Examination procedures and guidance. The CFPB references recent updates to its reverse mortgage, student loan, and Military Loan Act examination procedures, as well as its recent amendment of its service provider bulletin. According to the CFPB, some small service providers reported that entities have imposed the same due diligence requirements on them as for their largest service providers. The CFPB stated that this may have resulted from some entities having interpreted its 2012 bulletin to mean they had to use the same due diligence requirements for all service providers no matter the risk for consumer harm. The amendment was intended to clarify that a risk management program can be tailored to the size, market, and level of risk for consumer harm presented by the service provider.

- John L. Culhane, Jr.


Cordray Remarks to MBA Signal Continued CFPB Focus on Servicing, Likely Petition for Rehearing in PHH Case

In his remarks at the Mortgage Bankers Association’s annual meeting in Boston on October 25, Director Cordray signaled that mortgage servicing will continue to be a focus of CFPB supervisory and enforcement activity, with the CFPB taking a rigorous approach to compliance.  

While noting that the CFPB has seen “some progress” in compliance with CFPB mortgage servicing rules,” most notably efforts by certain servicers to adequately staff up effective compliance management programs,” Director Cordray stated that “many troubling issues persist.” In particular, he pointed to “[o]utdated and deficient servicing technology [that]continues to put many consumers at risk,” and said “[t]his problem is made worse by a lack of training to use their technology effectively.” He also observed that “[t]hese shortcomings can become chronic when servicers do not implement proper system testing and auditing processes.” Director Cordray warned servicers that “[t]o spur” improved compliance, the CFPB “will, in appropriate circumstances, be insisting on specific and credible plans from servicers describing how their information technology systems will be upgraded and improved to resolve these issues effectively.”

Director Cordray gave a more positive message when discussing lender compliance with the final TILA-RESPA Integrated Disclosure rule. He commented that he was “happy to report that our initial examinations seem to indicate, just as we expected, that lenders did in fact make good faith efforts to comply with the rules and generally we are finding that consumers are receiving timely and accurate Loan Estimates and Closing Disclosures.”

We have previously commented that, in our view, the CFPB is likely to seeking a rehearing of the D.C. Circuit’s decision in PHH Corporation v. CFPB by the November 25th deadline. In his remarks, Director Cordray appeared to confirm that a CFPB petition for rehearing is likely. He stated that “[t]he case is not final at this point” and that the CFPB “has made clear that it respectfully disagrees with the panel’s decision and is considering its options for seeking further review.”

Director Cordray also emphasized the need for companies to give “careful attention” to customer complaints. He reminded companies of the CFPB’s use of complaints, stating that “[b]y closely analyzing complaint patterns, we can identify spikes in specific complaint types, emerging trends, issues with new and evolving products, and patterns across geographic areas, companies and consumer demographics.” He told companies that they should “be doing the same thing, not only with our complaints and the feedback you receive directly from your own customers, but also by reviewing complaints made about others in the same markets.”

- Richard J. Andreano, Jr.


Envelope’s Display of Barcode With Embedded Account Number Does Not Violate FDCPA, Florida Federal Court Rules

A federal district court in Florida has ruled that a debt collector did not violate the Fair Debt Collection Practices Act (FDCPA) by sending a collection letter in an envelope that allegedly revealed a barcode in which the plaintiff's account number was embedded.

In Martell v. ARS National Services, Inc., the defendant allegedly mailed a collection letter to the plaintiff in an envelope containing a glassine window through which a barcode was visible that the plaintiff claimed was his account number with the defendant. (The defendant averred that the barcode was the internal tracking number assigned by a third-party mail vendor.) The plaintiff alleged that this disclosure of the account number violated Section 1692f(8), which prohibits "using any language or symbol" other than a debt collector's name and address on an envelope.

The district court observed that courts have recognized a "benign language" exception to Section 1692f(8) for language or symbols on an envelope so long as they do not suggest the letter's purpose of debt collection or the recipient's status as a debtor. Noting that the 11th Circuit had not yet addressed whether Section 1692f(8) contains a benign language exception, the court stated that it was "persuaded by the host of courts finding that the presence of a barcode and its embedded account number on an envelope do not violate the FDCPA." (The court commented that it was also persuaded that the 11th Circuit would adopt the exception, particularly in light of the U.S. Supreme Court's Spokeo decision, which held that a plaintiff must show actual harm from a violation of the Fair Credit Reporting Act to have standing under Article III of the U.S. Constitution to sue for statutory damages in federal court.) In addition to an Eighth Circuit 2004 decision recognizing a benign language exception, the district court cited to several other federal district court decisions that have recognized the exception, including a 2015 New York federal district court decision.

In ruling that the plaintiff had failed to state a FDCPA claim and entering judgment on the pleadings in the defendant’s favor, the district court declined to follow the Third Circuit's 2014 decision in Douglass v. Convergent Outsourcing, which held that the disclosure of a consumer's account number through the transparent window of a debt collector's envelope violated Section 1692f(8). While declining to decide whether Section 1692f(8) contains a benign language exception, the Third Circuit held that, even if such an exception exists, the consumer's account number was not benign because it could be used to identify the plaintiff.

The district court called the Third Circuit’s concern "misplaced" because it was "illogical for the [FDCPA] to be concerned with the eventuality that an enterprising third party would obtain, investigate, and decipher an account number's meaning when simply googling the return address would show that the recipient received a debt collection letter." Instead, the district court found that "an account number embedded in a barcode, as a string of alphanumeric characters, does nothing to implicate or identify plaintiff as a debtor for purposes of Section 1692f(8)."

- the Consumer Financial Services Group


Bourne Valley Redux

The dispute between lenders and the purchasers at homeowners’ association foreclosure sale regarding superiority of title has embroiled the State of Nevada since at least as early as 2012. Since the issue rose in volume and prominence in Nevada, major decisions from both the Nevada Supreme Court and various federal district courts have both clarified and clouded the issue. Recent events, at least at first glance, could continue the trend of clarifying and clouding the issue.

Recently, in August 2016, the Ninth Circuit Court of Appeals, in a 2-1 decision, found that the pre-2015 version of NRS Chapter 116 facially unconstitutional as it violated the Due Process Clause of the 14th Amendment of the U.S. Constitution because it failed to require notice to junior lienholders. See Bourne Valley Court Trust v. Wells Fargo Bank, N.A., 832 F. 3d 1154 (9th Cir. 2016). A prior summary of the opinion by Ballard Spahr may be found here. Bourne Valley appeared to resolve the issue, at least in federal court.

However, Bourne Valley Court Trust filed a number of post-opinion motions/petitions before the Ninth Circuit. Pending resolution of the post-opinion filings, numerous federal courts sua sponte stayed all HOA lien cases on their docket and even went so far as to state in the stay orders that they disagreed with the reasoning in the Bourne Valley opinion. Additionally, some state courts indicated that the Bourne Valley case would not be binding on them. Therefore, even guidance from a U.S. court of appeals did not provide the clarity expected.

The most important post-opinion filing by Bourne Valley Court Trust was a petition for rehearing or rehearing en banc. Three amici filed amicus briefs in support of the petition, including one from the Nevada Legislature whose statute the Ninth Circuit found facially violated due process rights. The Ninth Circuit ordered Wells Fargo Bank, N.A. to file a response to the petition for rehearing or rehearing en banc, and Wells Fargo Bank, N.A. timely filed its response.

The Ninth Circuit summarily denied the petition for rehearing and rehearing en banc on November 4, 2016. Specifically, the panel, by the same 2-1 margin, denied both a panel rehearing and denied the en banc rehearing because “no active judge has requested a vote on whether to rehear the matter en banc.” Therefore, the issue appears resolved, at least in federal court, such that no association foreclosure sale conducted prior to October 2015 (in October 2015 the statute was amended to clearly require notice to junior lienholders, including a first position deed of trust) extinguished any first position deed of trust because the statutory scheme granting associations non-judicial foreclosure rights violated the 14th Amendment. 

However, as has consistently plagued this area of the law, two upcoming dates could cloud what should have been clarity. First, on September 8, 2016,—after the date the Ninth Circuit released the Bourne Valley opinion—the Nevada Supreme Court heard oral arguments on the same issue of whether the pre-2015 version of NRS Chapter is facially unconstitutional under either the Nevada or the U.S. Constitution. The Nevada Supreme Court decision could become particularly important because some state court judges have already taken the position that Bourne Valley, despite its sound reasoning, does not bind them. This means that the outcome of superiority between purchasers at an association foreclosure sale and the beneficiary of a first deed of trust may depend on the state or federal forum. There is no timeline for the Nevada Supreme Court to release an opinion in the case hearing the facial unconstitutionality issue—Saticoy Bay LLC Series 350 Durango 104 v. Wells Fargo Home Mort., Case No. 68630. 

Second, the lack of a timeline on the state side must be buttressed against one very important deadline on the federal side—the deadline to file a writ of certiorari to the U.S. Supreme Court does not expire until February 2017. One important factor considered by the U.S. Supreme Court when determining whether to grant cert is if a state court of final authority has split from a U.S. court of appeals on an important federal issue. If the Nevada Supreme Court were to reach the opposite result as the Ninth Circuit and find the statute constitutional then it could strengthen a writ for certiorari. 

Thus, while the issue appears resolved in federal courts, time will tell if the issue becomes finally resolved in all forums in the near future.

- Russell J. Burke


Election Results Portend Significant Changes for CFPB; Ballard Spahr to Conduct Nov. 30 Webinar

As a result of Donald J. Trump’s election as President, coupled with the Democrats’ failure to wrest control of the House or Senate from the Republicans, the CFPB can be expected to undergo significant changes that are likely to have the effect of reducing the agency’s impact.

On November 30, 2016, from 2 p.m. to 3 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Election Post-Mortem: What It Means for the CFPB, the Industry, and Consumers.” The webinar registration form is available here.

The most visible expected change is Mr. Trump’s replacement of Director Richard Cordray. How soon that occurs post-inauguration may depend on whether the CFPB seeks further judicial review of the D.C. Circuit’s decision in CFPB v. PHH Corporation and, if so, the outcome of such review. In its decision, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure was unconstitutional. To remedy the constitutional defect, the court severed the removal-only-for-cause provision from the Dodd-Frank Act so that the President can now “remove the Director at will at any time.” Unless and until the PHH decision takes effect (or Congress amends the Dodd-Frank Act), Mr. Trump could only remove Director Cordray “for cause” before the Director’s term ends in 2018.

Once appointed by Mr. Trump, a new Director can be expected to take aim at the CFPB’s “rulemaking by enforcement” approach that has been the target of Republican criticism by decreasing CFPB enforcement activity while using CFPB rulemaking as a way to limit the CFPB’s exercise of its enforcement authority. For example, a new Director might seek the CFPB’s adoption of a rule to define the practices that are considered “abusive” for purposes of the CFPB’s authority to prohibit unfair, deceptive, or abusive acts or practices. A new Director’s efforts to promote rulemaking over enforcement might also include seeking the repeal of the CFPB’s auto finance fair lending guidance. (One of the criticisms leveled at the guidance is that it should not have been adopted outside the rulemaking process.)

In addition, if the CFPB’s proposed payday lending and arbitration rules have not been finalized when a new Director is appointed, a new Director might seek to withdraw or amend the proposals. Also, since the CFPB has not yet issued a proposed debt collection rule but has issued only an advance notice of proposed rulemaking, it is possible a proposed rule, if any, will not be issued until a new Director is in place and therefore might be more industry-friendly. (These potential scenarios could also motivate Director Cordray to accelerate the three rulemakings.)

The election results also substantially increase the likelihood that Congress will enact some of the reforms to the CFPB’s structure, funding, and operation that have been the subject of numerous bills introduced by Republicans over the approximately five years the CFPB has been operational. Such bills include “The Financial CHOICE Act of 2016,” the Dodd-Frank Act replacement bill that was approved this past September by the House Financial Services Committee. Most notably, the CHOICE Act, like previous Republican bills, would replace the CFPB’s current single director with a bipartisan, five-member commission and fund the agency through the appropriations process rather than through transfers from the Federal Reserve. The effects of these changes are likely to include a longer timeline for CFPB rulemaking, a less partisan-driven CFPB agenda, and greater Congressional influence on CFPB decision-making.

- Alan S. Kaplinsky


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.