Mortgage Banking Update - February 11, 2021
In This Issue:
- Expected Changes at CFPB Under New Leadership Highlighted in Ballard Spahr Webinar
- Ballard Spahr Launches New Blog on Workplace Developments
- Acting CFPB Director Uejio Outlines Priorities and Announces Plans for More Aggressive Enforcement and Supervision
- Acting Director Uejio Outlines Regulatory Priorities and Seeks Options for Putting QM and Debt Collection Rules on Hold
- Businesses Now Face ADA Risk Related to COVID-19 Mandatory Employee Mask-Wearing Policies
- CFPB to Ramp Up MLA Supervision and Enforcement
- President Biden Issues Executive Order Directing HUD to Review Fair Housing Act Disparate Impact Rule
- CFPB and Federal Banking Agencies Issue Final Rules on Role of Supervisory Guidance
- Podcast: A Look at the Recommendations of the CFPB’s Taskforce on Federal Consumer Financial Law, With Professor Todd Zywicki, Taskforce Chairman: Part II
- CFPB Issues Special Edition of Supervisory Highlights on COVID-19 Prioritized Assessments
- CFPB Issues Fall 2020 Semi-Annual Report to Congress
- This Week’s Podcast: Consumer Financial Services Litigation: Looking Back at 2020 and Ahead in 2021
- California DFPI Invites Comments on Rulemaking for New Consumer Financial Protection Law
- Did You Know?
For our recent webinar, “The Times at the CFPB are A-Changing: Perspectives on the CFPB Under Acting Director Uejio and Director Chopra,” we were joined by special guest former CFPB Director Richard Cordray. The webinar looked at the changes that the CFPB is likely to undergo under the leadership of Messrs. Chopra and Uejio and how the two men are likely to approach the use of the CFPB’s regulatory, enforcement, and supervisory authorities.
Alan Kaplinsky, a member of the firm’s Consumer Financial Services Group, moderated the webinar. Also participating from Ballard Spahr were Chris Willis, Co-Chair of the firm’s Consumer Financial Services Group, John Culhane, a partner in the Group, and Heather Klein, an associate in the Group.
Before introducing the webinar participants, Alan mentioned the work that Ballard attorneys are already doing for clients to help them prepare for the “new CFPB” under Acting Director Uejio and Director Chopra. He indicated that we are assisting companies that are subject to the CFPB’s supervisory and enforcement authority or only its enforcement authority by identifying the areas relevant to their businesses on which the “new CFPB” is likely to focus and helping them conduct internal reviews of their policies, procedures, customer communications and practices so they can proactively address any deficiencies.
Having worked with both Messrs. Uejio and Chopra during his tenure as CFPB Director, Mr. Cordray shared his thoughts on how each of them is likely to approach his new role at the CFPB. He indicated that Mr. Uejio’s prior experience at the CFPB has allowed him to become well-versed not only in operational issues such as personnel and budget but also as to policy issues.
Mr. Cordray expects Mr. Uejio to put the CFPB on a path that is more in line with the agency’s vision for carrying out its mission that prevailed under Mr. Cordray’s leadership. Consistent with Mr. Uejio’s own statement to CFPB staff, Mr. Cordray expects Mr. Uejio’s priorities to include providing assistance to consumers experiencing financial difficulty as a result of the pandemic and taking actions to promote racial equity and fairness.
With regard to Mr. Chopra, President Biden’s nominee for Director, Mr. Cordray indicated first that he expects Mr. Chopra to be quickly confirmed by the Senate, with confirmation occurring by the end of February to mid-March. Mr. Cordray described Mr. Chopra as a “creative and talented public servant” whose views are aligned with how the CFPB operated under Mr. Cordray’s leadership. At the same time, Mr. Cordray called Mr. Chopra “his own person” and expects him to take the CFPB in new directions. He expects Mr. Chopra to vigorously pursue ways for the CFPB to support consumers financially injured by the pandemic. (Mr. Cordray referenced an April 2020 white paper he co-authored that outlined immediate actions the CFPB could take to address the pandemic.) He also identified student loans as another likely priority for Mr. Chopra.
Mr. Cordray indicated that he considers Mr. Chopra to be well-versed in all key CFPB issues and skilled at building relationships across government, both federal and state. As a result, he expects to see more cooperation between the CFPB and other federal agencies as well as state agencies and attorneys general. With regard to rulemaking, Mr. Cordray indicated that he would be surprised if Mr. Chopra did not attempt to restore ability-to-repay requirements to the CFPB’s small dollar loan rule and that he believes there will be sustained efforts directed at arbitration reform that could involve both the CFPB and Congress.
Other key takeaways from the webinar include the following:
- Heather Klein discussed the possible implications of positions taken by Mr. Chopra as FTC Commissioner for his new role as CFPB Director. Heather indicated that in his dissents to FTC settlements and other statements, Mr. Chopra has criticized the FTC for failing to fully use its available authority to pursue wrongdoing and to effectively penalize larger companies and their individual managers or board members. Based on these comments, Heather indicated that Mr. Chopra can be expected to attempt to maximize the use of the CFPB’s statutory authorities, including in some cases favoring the resolution of matters through public litigation over speedy resolutions through consent orders as a way to discourage improper behavior in the marketplace. Based on his criticism of consumer reporting agency data security practices, Heather raised the possibility that under Mr. Chopra’s leadership, the CFPB might use its supervisory authority over larger consumer reporting agencies and its UDAAP authority to probe the data security practices of consumer reporting agencies. Heather also indicated that Mr. Chopra’s comments suggest that as CFPB Director he would support additional regulation of first party creditor collection practices and the robust use of disparate impact analysis in fair lending matters.
- John Culhane discussed how Mr. Chopra might approach student lending issues based on his tenure as CFPB Student Loan Ombudsman and the three annual reports that were issued by the Ombudsman’s Office during his tenure. John observed that in those reports, student loan servicers were frequently equated with mortgage loan servicers and, in industry’s view, unfairly criticized for engaging in unlawful conduct based in substantial reliance on anecdotal, unverified information from student loan complaints. John indicated that as CFPB Director, he expects Mr. Chopra will want the CFPB to quickly enter into a Memorandum of Understanding with the Department of Education and will encourage the submission of consumer complaints to the CFPB. John also indicated that Mr. Chopra’s priority issues are likely to include the administration of federal benefits, the delivery of military benefits and compliance with the Servicemembers Civil Relief Act, co-signer issues and pandemic relief, collections, and fair lending, particularly with regard to servicing outcomes. John also noted that as FTC Commissioner, Mr. Chopra submitted a comment letter to the CFPB on its proposed debt collection rule in which he expressed concern that student loan lenders or servicers might unbundle accounts to increase the number of collection calls they are permitted to make to a borrower. He indicated that as CFPB Director, Mr. Chopra might seek evidence that that lenders or servicers are engaging in this practice.
- Chris Willis discussed how the CFPB’s approach to enforcement under Director Chopra’s leadership is likely to differ from its approach under former Director Kraninger’s leadership. Chris indicated that he expects more civil investigative demands to be issued and fewer cases resulting from issues discovered in examinations to be resolved through the confidential supervisory process, with more cases referred instead for public enforcement. He also indicated that he expects a shift away from bringing cases against smaller entities often with limited financial means to more cases being brought against larger, mainstream financial services companies that result in larger monetary relief and penalties. Chris shared his view that fair lending is likely to be invigorated under Director Chopra’s new leadership, with the CFPB addressing not only traditional fair lending issues such as redlining and judgmental underwriting, but also looking at fair lending issues arising from the use of new technologies such as alternative data and machine learning for various purposes such as fraud, underwriting, pricing, and collections.
We are pleased to announce that Ballard Spahr has launched HR Law Watch, a new blog focused on workplace developments. The blog will provide updates of interest to public and private employers related to federal, state, and local government guidance and compliance, legislation, legal trends, and other developments.
HR Law Watch is produced by the members of Ballard’s Labor and Employment Group—a nationwide team of more than 40 attorneys. Please visit the blog and subscribe to receive regular updates.
A statement sent by Acting CFPB Director Uejio to CFPB staff makes clear that he plans to be more than just a caretaker for Rohit Chopra, President Biden’s nominee for CFPB Director, and instead intends to make significant changes at the Bureau even before Mr. Chopra is confirmed by the Senate and sworn in. Mr. Uejio shared his statement in a blog post published last week.
Mr. Uejio advised staff that his statement was intended to “convey a change in direction.” Most notably, he stated that he plans to take steps to “revers[e] policies of the last administration that weakened enforcement and supervision.” Those plans include “rescind[ing] public statements conveying a relaxed approach to enforcement of the laws in our care.”
He also announced an immediate change in supervision, stating that it is now “the official policy of the CFPB to supervise lenders with regard to the Military Lending Act.” Under the leadership of former Acting Director Mulvaney, the CFPB ended routine examinations for MLA compliance. Mr. Mulvaney did so based on the absence of language in the Dodd-Frank Act or the MLA giving the CFPB authority to conduct MLA examinations. Under former Director Kraninger’s leadership, the CFPB sent a proposal to Congress that would give it clear authority to conduct such examinations. (However, even in the absence of such examinations, the CFPB brought several enforcement actions against companies it alleged had been violating the MLA.)
Mr. Uejio identified racial equity as one of his priorities for the CFPB, observing that “as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality.” He designated fair lending enforcement “a top priority” and stated that he will “elevate and expand existing investigations and exams and add new ones to ensure we have a healthy docket intended to address racial equity.” He also indicated plans for the CFPB to “look more broadly, beyond fair lending, to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”
In addition to racial equity, Mr. Uejio identified COVID-19 financial relief for consumers as a priority. He indicated that the CFPB will immediately focus its supervision and enforcement tools “on overseeing the companies responsible for COVID relief.” Mr. Uejio expressed concern regarding the findings described in the CFPB’s Supervisory Highlights special edition on COVID-19 Prioritized Assessments (PAs) and gave examples of findings that, in his view, demonstrate that “companies are failing to properly administer relief through the crisis.”
To address this concern, Mr. Uejio indicated that the CFPB “will take aggressive action to ensure that regulated companies follow the law and meet their obligations to assist consumers during the COVID-19 pandemic. He announced that has taken the following actions:
- CFPB enforcement staff has been directed “to expedite enforcement investigations relating to COVID-19 so that we can take action now to ensure that industry gets the message that violations of law during this time of need will not be tolerated.”
- CFPB supervision staff has been directed to (1) “always determine the full scope of issues found in its exams, systemically remediate all of those who are harmed, and change policies, procedures, and practices to address the root causes of harms,” and (2) without conducting new follow-up exams, follow up on PAs that did not already take this approach. (Mr. Uejio advised companies that have not already received instructions from examiners to “expect to receive letters in the mail soon.”)
- Christopher J. Willis & John L. Culhane, Jr.
In a blog post published at the end of last week, Acting CFPB Director Uejio shared with the public the statement that he sent to the staff of the Bureau’s Division of Research, Markets, and Regulations (RMR) outlining his regulatory priorities and directing staff to “explore options for preserving the status quo with respect to QM and debt collection rules.”
Following on the heels of a previous blog post in which Mr. Uejio publicly shared his statement to the staff of the Bureau’s Division of Supervision, Enforcement, and Fair Lending, the new blog post reinforces Mr. Uejio’s intention to make significant changes at the Bureau even before Rohit Chopra, President Biden’s nominee for CFPB Director, is confirmed by the Senate and sworn in.
On February 23, 2021, from 12:00 p.m. to 1:30 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Preparing for CFPB Examinations and Enforcement Under the Biden Administration: What You Need to Know.” Click here for more information and to register.
Mr. Uejio’s direction to RMR to “explore options for preserving the status quo with respect to QM and debt collection rules” is intended to be a way “to preserve, where possible, maximum policy flexibility for the President’s nominee once confirmed.” It is not clear by what means Mr. Uejio is seeking “to preserve the status quo.” Any steps taken by the CFPB to delay the effective dates of these rules will be subject to applicable requirements of the Administrative Procedure Act. The final debt collection rule (Parts I and II) is effective on November 30, 2021 and the final QM rules are effective on March 1, 2021, with a mandatory compliance date of July 1, 2021 for the new general QM rule.
As he did in his previous blog post, Mr. Uejio indicated that his policy priorities are relief for consumers facing financial hardship due to the pandemic and racial equity.” In addition to looking to RMR “for a robust research agenda that examines the impact of specific industry practices on consumers’ daily budget and overall bottom line in order to target effective policy interventions,” Mr. Uejio plans to “assess regulatory actions taken by the previous leadership and adjusting as necessary and appropriate those not in line with our consumer protection mission and mandate.”
Mr. Uejio directed RMR to take the following “immediate steps” and indicated that he would authorize use of the CFPB’s data collection authority under Dodd-Frank Act Section 1022(c)(4) to obtain relevant data:
- Prepare an analysis on housing insecurity, including mortgage foreclosures, mobile home repossessions, and landlord-tenant evictions
- Prepare an analysis of the most pressing consumer finance barriers to racial equity to inform research and rulemaking priorities
- Explicitly include the racial equity impact in policy proposals
- Resume data collections postponed by the Bureau in March 2020 (HMDA quarterly reporting, CARD Act data collection, Section 1071 cost of compliance data, and Property Assessed Clean Energy financing data Act. (With regard to the Section 1071 rulemaking, Mr. Uejio indicated that he has “pledged RMR the support it needs to implement [section 1071] without delay.”)
In June 2020, the CFPB issued an interim final rule to provide an exemption from certain Regulation X loss mitigation requirements in connection with offering certain permanent loss mitigation options to borrowers who are completing a COVID-19-related forbearance. The CFPB is currently engaged in further rulemaking that is likely to expand the scope of those exemptions. In his statement, Mr. Uejio directed RMR to “focus the mortgage servicing rulemaking on pandemic response to avert, to the extent possible, a foreclosure crisis when the COVID-19 forbearances end in March and April.”
- Christopher J. Willis & Richard J. Andreano, Jr.
A class action lawsuit filed in September 2020 against Nike alleging that its policy requiring retail employees to wear Nike-branded, opaque masks discriminated against deaf and hard of hearing consumers under Title III of the Americans with Disabilities Act (“ADA”) deserves attention from retail banks and non-bank financial services companies with brick-and-mortar facilities open to the public. The case’s important takeaway is that compliance with COVID-19 safety guidance mandating masks can also create obligations to accommodate individuals with disabilities under the ADA and similar state laws.
The named plaintiff alleged that Nike’s policy discriminated against deaf and hard of hearing consumers because they cannot read the salesperson’s lips to communicate. Last week, the plaintiff filed an unopposed motion seeking approval of a settlement (currently pending court approval) under which Nike would be required to (i) provide guidance to its employees on how to properly accommodate deaf or hearing-impaired consumers; (ii) post notices in its California stores related to accommodations available for such individuals; (iii) provide its California employees with clear facemasks; and (iv) provide writing instruments for consumers who are deaf or hearing-impaired to communicate with sales staff, if needed. Nike would also be required to pay Bunn $5,000 as the named plaintiff and pay her attorney’s fees in the amount of $85,000.
Under Title III of the ADA, any place of “public accommodation” (which specifically includes banks) must make their goods, services and facilities accessible to individuals with disabilities, and – if needed – provide accommodations for such individuals upon request to ensure effective communication. Typically, requests for accommodation are made by individuals with disabilities and a business develops a customized solution for that individual, but the Nike case suggests that employees should be better trained to accommodate customers, including how to effectively communicate with deaf individuals while masks are mandated during the COVID-19 pandemic.
Retail banks and non-bank financial services companies with brick-and-mortar facilities open to the public may wish to consider implementing the steps Nike has agreed to take in the proposed settlement agreement as a way to mitigate risk. Although many financial institutions likely already provide ADA training to front-line staff (e.g., tellers) and pens/pencils to consumers who visit their facilities, institutions may want to consider enhancing ADA training, posting a notice in branch locations, and providing clear facemasks for employees. The Nike case may also have broader implications. For example, financial services companies that are not consumer-facing may need to consider additional accommodations for deaf/hearing-impaired employees in the workplace.
For more information on this pending case, please see our legal alert below:
- Lori J. Sommerfield & Michelle M. McGeogh
In a blog post published on January 28, 2021 sharing a statement sent to CFPB staff, Acting Director David Uejio announced several new priorities for the CFPB’s Supervision, Enforcement and Fair Lending Division under the Biden Administration. In addition to prioritizing COVID-19 relief and racial equity, the CFPB will take new aim at Military Lending Act (MLA) compliance.
Acting Director Uejio criticized the prior administration’s approach to the MLA, which he indicated resulted in weakened enforcement and supervision. In 2018, the CFPB stopped supervising creditors for MLA compliance on the ground that “proactive oversight is not explicitly laid out in the legislation,” a position that was supported by an analysis of the CFPA. In an immediate departure from that position, Mr. Uejio announced that the CFPB’s official policy will be to resume supervisory examinations of lenders for MLA compliance. And while there has never been any question regarding the CFPB enforcement authority over the MLA, Mr. Uejio also announced plans to retract any CFPB public statements indicating a “relaxed approach” to enforcement.
Even during 2020 under former Director Kraninger’s leadership, the CFPB appeared to ramp up enforcement focused on military servicemember protection. The CFPB engaged in a major investigatory sweep resulting in 25 new enforcement actions related to violations of Regulation N by mortgage companies offering mortgages guaranteed by the Department of Veterans Affairs (see our blog posts here, here, here, and here). The CFPB also announced two enforcement actions for violations of the MLA in late 2020 (see our blog post here).
- Sarah T. Reise
In a memorandum issued on January 26, 2021, President Biden has ordered the Secretary of the U.S. Department of Housing and Urban Development (“HUD”) to “as soon as practicable, take all steps necessary to examine the effects of” the final rule issued by HUD in September 2020 (“2020 Rule”) revising its 2013 Fair Housing Act (“FHA”) disparate impact standards (“2013 Rule”). President Biden has named Matt Ammon Acting HUD Secretary and has nominated Congresswoman Marcia Fudge to serve as HUD Secretary.
In the memorandum, titled “Memorandum on Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies,” President Biden declares that it is the policy of his Administration for the federal government to:
work with communities to end housing discrimination, to provide redress to those who have experienced housing discrimination, to eliminate racial bias and other forms of discrimination in all stages of home-buying and renting, to lift barriers that restrict housing and neighborhood choice, to promote diverse and inclusive communities, to ensure sufficient physically accessible housing, and to secure equal access to housing opportunity for all.
With regard to the 2020 Rule, the memorandum provides that:
- The effects of the 2020 Rule that the HUD Secretary must examine include “the effect that amending the [2013 Rule] has had on HUD’s statutory duty to ensure compliance with the Fair Housing Act.”
- Based on this examination, the Secretary must take any necessary steps, as appropriate and consistent with applicable law, to implement the FHA’s requirements that HUD administer in a manner that affirmatively further fair housing and HUD’s overall duty to administer the FHA including by preventing practices “with an unjustified discriminatory effect.”
The 2020 Rule has been widely criticized by consumer advocates and HUD’s proposal of the 2020 Rule met with strong criticism from Democratic lawmakers. As a result, the 2020 Rule will likely face an uphill battle to remain intact when reviewed by new HUD leadership.
Although set to become effective on October 26, 2020, the 2020 Rule’s effective date has been stayed pursuant to a preliminary injunction entered by a Massachusetts federal district court. As we have previously reported, the Massachusetts lawsuit is one of three lawsuits challenging the 2020 Rule under the Administrative Procedure Act that are currently pending in federal district court. The Massachusetts court’s order, entered on October 25, 2020, also enjoins HUD from enforcing the 2020 Rule and keeps the 2013 Rule in place until further order of the court.
In Inclusive Communities, which was decided in 2015, the U. S. Supreme Court ruled that disparate impact claims are cognizable under the FHA. Such claims allege that a policy or practice that is neutral on its face nevertheless violates the FHA because it has a discriminatory effect on a prohibited basis. The FHA prohibits discrimination based on characteristics such as race, sex, disability, and familial status, among others. Discrimination claims can be brought under the FHA against lenders, landlords, and others involved in residential real estate-related transactions.
In their complaint, the Massachusetts plaintiffs contend that contrary to HUD’s assertion that the 2020 Rule “merely brings the 2013 Rule into alignment with the Supreme Court’s decision in Inclusive Communities,” the 2020 Rule “is directly contrary to Inclusive Communities; introduces novel pleading and proof requirements, and new defenses, which upset accepted practice and undermine enforcement of the FHA.” The two other lawsuits, one in California and the other in Connecticut, also call into question the premise that Inclusive Communities required the changes made by the 2020 Rule and allege that the 2020 Rule’s pleading and burden-shifting standard is arbitrary, capricious, and contrary to law.
President Biden’s memorandum does not establish a deadline by which HUD must complete its review of the 2020 Rule. However, HUD is likely to face pressure to take a position on how it intends to proceed from the plaintiff in the lawsuit currently pending in the D.C. federal district court challenging the 2013 Rule. Initially filed in 2013 by the National Association of Mutual Insurance Companies (“NAMIC”) and the American Insurance Association (“AIA”), the plaintiffs filed an amended complaint in April 2016 in which they allege that the 2013 Rule is inconsistent with Inclusive Communities. In June 2016, the plaintiffs filed a summary judgment motion seeking to invalidate the 2013 Rule to the extent it applies to insurers’ ratemaking and underwriting decisions.
Since June 2018, the lawsuit has been stayed in anticipation of HUD’s issuance of revisions to the 2013 Rule. (In March 2019, AIA was terminated as a plaintiff.) In the most recent joint status report filed with the court on December 14, 2020, NAMIC stated that if as of the next status report (due to be filed on February 12, 2021) the Biden Administration does not intend to defend the 2020 Rule, NAMIC will ask the court to set an argument date for its summary judgment motion at the court’s earliest convenience.
The use of disparate impact analysis has also been a controversial issue for the CFPB. Under the leadership of former Director Cordray, the CFPB embraced the use of disparate impact analysis for establishing discrimination under the Equal Credit Opportunity Act (“ECOA”) and Regulation B and brought several enforcement actions premised on the use of disparate impact analysis. However, under the leadership of former Acting Director Mulvany, the CFPB indicated that it planned to reexamine its use of disparate impact analysis in light of Inclusive Communities. In July 2020, under the leadership of former Director Kraninger, the CFPB issued a request for information (“RFI”) seeking public input on a number of issues relating to expanding credit access and discrimination in credit transactions. Among the issues on which the CFPB sought comment in the RFI was its approach to disparate impact analysis under the ECOA and Regulation B. (The RFI’s extended comment period closed on December 1, 2020.) Given the Biden Administration’s goal of addressing racial economic inequality, rather than move away from the use of disparate impact analysis, the CFPB under the leadership of Rohit Chopra, President Biden’s nominee for CFPB Director, can be expected to renew its use of disparate impact analysis under the ECOA and Regulation B.
- Christopher J. Willis, Richard J. Andreano, Jr. & Lori J. Sommerfield
In September 2018, the agencies issued an “Interagency Statement Clarifying the Role of Supervisory Guidance.” In response to the Statement, the agencies received a petition requesting a formal rulemaking on the subject. The final rules codify the Statement, with clarifying changes, as an appendix to a new subpart added to the regulations of each agency. Each of the new subparts states that the subpart “reiterates the distinctions between regulations and guidance, as stated in the [Interagency Statement]” and that the Statement “is binding on the [agency].”
Key items in the final rules are:
- The following description of the difference between supervisory guidance and laws or regulations:
Unlike a law or regulation, supervisory guidance does not have the force and effect of law, and [the agencies do] not take enforcement actions based on supervisory guidance. Rather, supervisory guidance outlines the [agencies’] supervisory expectations or priorities and articulates the [agencies’] general view regarding appropriate practices for a given subject area.
- The agencies intend to limit the use of numerical thresholds or other “bright-line” tests in describing expectations in supervisory guidance and numerical thresholds will generally be used as exemplary only and not suggestive of requirements.
- Examiners will not criticize (through the use of matters requiring attention, matters requiring immediate attention, matters requiring board attention, documents of resolution, and supervisory recommendations) a supervised financial institution for, and agencies will not issue an enforcement action on the basis of, a “violation” of or “non-compliance” with supervisory guidance.
The final rules provide that examiners may reference supervisory guidance “to provide examples of safe and sound conduct, appropriate consumer protection and risk management practices, and other actions for addressing compliance with laws or regulations.” (The CFPB’s final rule substitutes “appropriate consumer protection” for “safe and sound conduct.”) However, the agencies indicated in their discussions of the final rules that they do not “deem examples in supervisory guidance to categorically establish safe harbors.” According to the agencies:
[E]xamples offered in supervisory guidance can provide insight about practices that, in general, may lead to compliance with regulations and statutes. The examples in guidance, however, are generalized. When an institution chooses to implement such examples, examiners must consider the facts and circumstances of that institution in assessing the application of those examples. In addition, the underlying legal principle of supervisory guidance is that it does not create binding legal obligation for either the public or an agency. (emphasis added).
As a result, while supervised entities can use supervisory guidance to develop appropriate compliance practices, supervisory guidance does not provide a safe harbor from agency criticism or enforcement.
On January 20, President Biden’s Chief of Staff Ronald Klain issued a memorandum to the heads of executive departments and agencies setting forth the terms of a regulatory freeze. The memorandum requires a rule that has been sent to the Federal Register but not yet published to be immediately withdrawn from the Office of the Federal Register and approved by a department or agency head appointed by President Biden. The final rules on the role of supervisory guidance were issued on January 19, 2021 and have not yet been published in the Federal Register. Accordingly, assuming the CFPB would be considered an executive agency as a result of the U.S. Supreme Court’s Seila Law decision making the CFPB Director removable at will by the President, Mr. Klain’s memorandum would require the CFPB to withdraw its rule for approval by Acting Director Uejio. However, it is not clear that the memorandum would apply to independent agencies such as the OCC or the other banking agencies.
In Part II of our two-part podcast, we look at the recommendations in the Taskforce’s report concerning the use of principles-based (rather than prescriptive) regulations and CFPB licensing of non-depository institutions providing lending, money transmission or payment services. We share our reactions to the recommendations, consider their practical implications for the industry, and discuss how the CFPB under new leadership may react to the Taskforce’s report.
Ballard Spahr attorney Alan Kaplinsky hosts the conversation with Professor Zywicki and Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Practice Group.
- Alan S. Kaplinsky & Christopher J. Willis
The CFPB has issued “Supervisory Highlights COVID-19 Prioritized Assessments Special Edition.”
The report indicates that in May 2020, the Bureau rescheduled about half of its planned examinations and instead conducted prioritized assessments (PAs) in response to the COVID-19 pandemic. The Bureau describes PAs as “higher-level inquiries than traditional examinations [that are] designed to obtain real-time information from a broad group of supervised entities that operate in markets posing elevated risk of consumer harm due to pandemic-related issues.” According to the Bureau, PAs are not intended to identify legal violations but rather to spot and assess risks and communicate such risks to supervised entities so they can be addressed to prevent consumer harm.
In conducting the PAs, the Bureau sent targeted information requests to “a significant number” of entities to obtain information necessary to assess risk of consumer harm and violations of federal consumer financial law. Each targeted information request was specific to the product market, that market’s risks to consumers, and the institution, and focused generally on the time period from early May 2020 through September 2020. After completing the PAs, the Bureau sent close-out letters to the entities involved in which it identified observed risks and made supervisory recommendations.
PA observations described in the report include the following:
- Mortgage servicing. The Bureau describes the significant challenges faced by servicers stemming from the need to implement the CARES Act protections for homeowners and make other operational changes in response to investor guidance. Issues observed by examiners raising the risk of consumer harm involved:
- Providing incomplete or inaccurate information to consumers about forbearance
- Taking actions that were erroneous or inconsistent with a borrower’s enrollment in a CARES Act forbearance, such as sending collections and default notices, assessing late fees, and initiating foreclosures
- Cancelling or providing inaccurate information about borrowers’ preauthorized electronic funds transfers
- Failing to timely process forbearance requests
- Enrolling borrowers in automatic forbearances without the borrowers’ knowledge or approval or otherwise placing borrowers in unrequested forbearances
- Inappropriate handling of loss mitigation applications
- Auto loan servicing. The Bureau reports that many servicers expanded existing payment assistance programs to help borrowers who were having trouble making payments as a result of the pandemic and generally suspended repossessions between mid-March and early May 2020. Issues observed by examiners raising the risk of consumer harm involved:
- Providing inadequate information to consumers about how the accrual of interest during deferment periods would impact the final loan payment
- Continuing to withdraw funds for monthly payments after agreeing to deferments
- Failing to process payment assistance requests
- Threatening repossession when, in fact, repossession had been suspended
- Student loan servicing. The Bureau describes the significant challenges faced by servicers stemming from implementation of the CARES Act protections for federally-owned loans and making payment relief options available to borrowers with private student loans or commercially-held FFELP loans. Issues observed by examiners raising the risk of consumer harm involved:
- Providing incorrect or incomplete information about available payment relief options
- Providing inaccurate information related to the number of payments eligible for repayment, rehabilitation, or forgiveness programs
- Making payment allocation errors when applying voluntary payments to accounts enrolled in CARES Act forbearances
- Failing to prevent preauthorized electronic fund transfers following forbearance approval for loans that are not federally-owned
- Providing inaccurate information about the information needed to evaluate forbearance applications for loans that are not federally-owned
- Confirming enrollment in forbearances of commercial FFELP borrowers who were, in fact, ineligible for forbearances
- Credit card account management. The Bureau reports that card issuers generally provided some form of relief to consumers experiencing hardships as a result of the pandemic while experiencing operational challenges due to the pandemic. Issues observed by examiners raising the risk of consumer harm involved:
- Problems implementing relief program due to reliance on manual processes to handle high volumes of relief requests
- Providing inaccurate information about the need to pay past due amounts to enroll in payment deferment programs when, in fact, this was not a requirement for enrollment
- Delays in the suspension of preauthorized transfers upon enrolling consumers in relief programs
- Failing to resolve billing disputes by the regulatory deadline due to increased volume in error notices and merchant closures
- Consumer reporting and furnishing. The Bureau describes the significant challenges faced by servicers stemming from the FCRA amendments made by the CARES Act regarding the treatment of payment accommodations. Issues observed by examiners raising the risk of consumer harm involved:
- Delayed processing of accommodations resulting in some consumers who were current being reported as delinquent or having their delinquency status improperly advanced
- Insufficient furnishing policies and procedures causing the furnishing of inaccurate information related to home pickups of returned leased vehicles
- Untimely dispute investigations resulting from staffing challenges
- Debt collection. The Bureau discusses the pandemic measures implemented by some states that impacted debt collection, such as prohibitions on wage garnishments and bank attachments. The Bureau indicates that its examiners reviewed the potential for FDCPA compliance risks associated with such state restrictions. Specifically, the Bureau stated that when evaluating whether an action taken to enforce a judgment violates the FDCPA prohibition of “unfair or unconscionable” debt collection practices, “one fact the Bureau may consider is whether applicable law permits resort to garnishment or attachment of a consumer’s assets in a particular set of circumstances.” Other issues observed by examiners raising the risk of consumer harm involved:
- Delays in processing suspensions of administrative wage garnishments prohibited by state laws or voluntarily imposed by certain student loan servicers
- Delays in processing payments caused by the transition to remote work by collectors
- Deposits. The Bureau discusses the use of direct deposit to distribute Economic Impact Payments (EIPs) authorized by the CARES Act and for the receipt of increased state unemployment insurance benefits. Issues observed by examiners raising the risk of consumer harm involved:
- Failing to fully implement state protections of EIPs and unemployment insurance benefits
- Failing to clearly communicate to consumers how and when provisional credits used to waive setoff rights would be revoked
- Failing to implement policies and procedures that clearly and consistently operationalized account fee waivers and refunds
- Prepaid accounts. The Bureau discusses the use of prepaid cards by many states to disburse unemployment insurance benefits and the use of prepaid cards to distribute EIPs, which resulted in an unexpected spike in demand for prepaid accounts. An issue observed by examiners raising the risk of consumer harm involved the mailing of prepaid account information to consumers without required disclosures and privacy notices. This was attributed to insufficient supplies due to the surge in demand.
- Small business lending. The Bureau looked at fair lending risks arising from participation in the Paycheck Protection Program (PPP) by large insured depository institutions and insured credit unions (over which the Bureau has supervisory authority). Examiners found that in implementing the PPP, multiple lenders went beyond CARES Act requirements and SBA directives by restricting access to PPP loans to businesses that had a pre-existing relationship with the bank and, in some cases, to businesses that did not have a pre-existing relationship but became bank customers before applying for a PPP loan. Examiners determined that an existing relationship restriction, while neutral on its face, could have a disparate impact on a prohibited basis and therefore violate the ECOA and Regulation B. The Bureau indicates that lenders provided business justifications for such a restriction, such as “Know Your Customer” requirements and/or fraud prevention, as well as operational reasons such as managing extreme demand. The Bureau states that examiners did not conduct a full analysis of any institution’s restriction or make any determination about whether an institution’s use of such a restriction complies with the ECOA or Regulation B.
- Christopher J. Willis & John L. Culhane, Jr.
The CFPB has issued its Fall 2020 Semi-Annual Report to Congress covering the period April 1, 2020 through September 30, 2020.
With Director Kraninger having submitted her resignation to President Biden last week, the report represents the CFPB’s fifth and final semi-annual report under Director Kraninger’s leadership. Somewhat ironically, although the prior four reports did not provide aggregate numbers for consumer relief and civil money penalties obtained by the Bureau, the new report states that in calendar year 2020, “the Bureau filed the second-highest number of actions in the Bureau’s history, secured approximately $875 million dollars in customer relief and penalties, and opened investigations of banks and nonbanks in all of the Bureau’s markets.”
The new report indicates that the Bureau had 1,504 employees as of September 30, 2020, representing an increase of 74 employees from the number of employees as of September 30, 2019 (1,430).
The report’s section on significant problems faced by consumers in shopping for or obtaining consumer financial products or services includes a discussion of the effects of the COVID-19 pandemic on consumer credit and COVID-related scams targeted at older consumers.
In addition to discussing ongoing or past developments that we have covered in previous blog posts, the report includes the following noteworthy information:
- The Bureau’s Fair Lending Supervision program initiated two supervisory activities onsite during the period covered by the report, which was fewer than the number of such activities initiated during the period covered by the prior semi-annual report. However, in response to the pandemic, the Bureau initiated a significant number of Prioritized Assessments (PAs). As a result of the PAs, the Bureau initiated significantly more fair lending supervisory events during the period covered by the report than during the prior reporting period. The Bureau issued fewer matters requiring attention or memoranda of understanding than in the prior period. In addition, the Bureau provided supervisory recommendations “pertaining to supervisory concerns related to weak or nonexistent fair lending policies and procedures, risk assessments, and fair lending training.”
- During the period covered by the report, the Bureau filed one fair lending public enforcement action and referred three ECOA matters to the DOJ. The referrals involved “redlining in mortgage origination based on race and national origin, discrimination in mortgage origination based on receipt of public assistance income, and discrimination in auto origination based on race and national origin.” The report states that the Bureau “has a number of ongoing and newly opened fair lending investigations of institutions.”
- The report’s assessment of compliance and common TILA and EFTA violations reported for the 2019 calendar year by the FFIEC agencies that conduct TILA and EFTA compliance examinations indicates that more institutions were cited for violations of Regulation Z than Regulation E in 2019. The report describes the most frequently cited Regulation Z and Regulation E violations during 2019.
President Biden’s inauguration on January 20 has quickly brought leadership change to the CFPB with the appointment of David Uejio to serve as Acting Director and the nomination of Rohit Chopra to serve as Director. As a result, the Bureau’s plans for rulemaking and other initiatives described in the Semi-Annual Report can be expected to be reassessed by new leadership. On Tuesday, February 2, 2021, from 12:30 p.m. to 1:30 p.m. ET, Ballard’s Consumer Financial Services Group will hold a webinar, “The Times at the CFPB are A-Changing: Perspectives on the CFPB Under Acting Director Uejio and Director Chopra.” Click here to register.
- Christopher J. Willis
After discussing the pandemic’s impact on 2020 litigation, we share our expectations for 2021, including pandemic-related and other types of claims most likely to be alleged in private litigation and enforcement actions, how litigation could be impacted by possible legislative changes, and the potential implications of a more aggressive CFPB for case resolution. We also discuss two federal appellate decisions of significance to class action defendants.
Ballard Spahr attorney Alan Kaplinsky hosts the conversation with Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Practice Group, and Dan McKenna, Practice Leader of Consumer Financial Services Litigation at the firm.
Click here to listen to the podcast.
The California DFPI issued an invitation for stakeholders to provide input on rulemaking to implement the recently-effective California Consumer Financial Protection Law (CCFPL). Comments are due by March 8, 2021.
As the invitation notes, pursuant to Cal. Fin. Code. Sec. 90001, the DFPI has broad authority to establish rules to implement the CCFPL. Although the DFPI invited input on any potential areas for rulemaking, it identified certain areas where rulemaking may be “appropriate, desirable or necessary at some point.” The invitation then identified specific areas and provided examples of the types of issues that comments might address:
- Definitions – Whether definitions in addition to those in the CCFPL are needed; whether and how any CCFPL definitions are unclear; and whether any definition results in ambiguity as to the CCFPL’s coverage.
- Exemptions – Whether regulations should be issued to clarify the scope of exemptions.
- Registration Requirements – What industries should be prioritized for registration, and why; what rules should be established to facilitate oversight of such industries, including record keeping requirements, requirements to ensure that covered persons are legitimate, and what data should be required for registrant annual reports and why.
- Complaint Handling – What procedures should be established to ensure that businesses provide timely responses to consumer complaints and inquiries; what timelines should be established and whether timelines should vary based on type of business or product; what requirements should be established to ensure a reasonable investigation and corrective steps by a business in response to a complaint or inquiry; whether businesses should be required to establish specific mailing or email addresses, or internet portals, for the submission of inquiries and complaints; and whether the DFPI should interpret or clarify through regulation any CCFPL provisions regarding complaints, such as the provision under Fin. Code Sec. 90008(d)(2)(D) permitting businesses not to disclose “nonpublic or confidential information, including confidential supervisory information.”
- Unlawful, Unfair, Deceptive and Abusive Acts and Practices (Consumer) – Whether there are specific acts or practices that are unlawful, unfair, deceptive or abusive, and a description of such act or practice and an explanation of why it is unlawful, unfair, deceptive or abusive; whether such acts or practices should be identified as unlawful, unfair, deceptive or abusive through regulation, and a description of the harm the act or practice causes, its frequency, information concerning its potential causes, and what requirements should be adopted to prevent it. (The CFPB has historically shied away from rulemaking to define UDAAP, but this could be an indication that the DFPI might move in a different direction.)
- Unfair, Deceptive and Abusive Acts and Practices (Commercial) – Whether there are specific acts or practices in the market for financial products or services to small business recipients, nonprofits, and family farms that are unfair, deceptive or abusive; a description of any such act or practice; an explanation of why it is unfair, deceptive, or abusive; and whether a regulation should be adopted to define it as unfair, deceptive, or abusive. (We view the vigorous application of UDAAP to small business lending by the DFPI as a significant possibility, which will mark a sea change for this type of credit product.)
- Data Collection and Reporting for Commercial Financing – Whether providers of commercial financing and other financial products and services to small business recipients, nonprofits, and family farms should be required to collect and report data to the DFPI, and If so, what data should the DFPI require to be collected and why. (We wonder whether the DFPI is considering a data collection rule like the one the CFPB is working on under § 1071 of Dodd-Frank.)
- Disclosures – Whether rules should be prescribed to ensure that the features of a product or service are fully, accurately, and effectively disclosed in a way that permits consumers to understand the costs, benefits, and risks of the product or service; for any such product or service, its description, what disclosures should be required, and why those disclosures will help.
- Clarifying the Applicability of California Credit Cost Provisions – Whether the DFPI should issue regulations clarifying the applicability of state credit cost limitations, including rate and fee caps, to consumer financial products and services offered by covered persons, and if so, how should the regulations clarify the applicability of those limitations.
The invitation also states that, for any recommendation relating to rulemaking, stakeholders may provide a description of the economic impact (if known) of the recommendation for California businesses and consumers.
Given the CCFPL’s significance for the consumer financial services industry, we will soon be launching the California Consumer Financial Protection Law Resource Center on Consumer Finance Monitor. The attorneys in Ballard Spahr’s Consumer Financial Services Group, including attorneys in the firm’s Los Angeles, California office, are closely monitoring all regulatory, supervisory, and enforcement developments relating to the DFPI’s implementation and exercise of its new jurisdiction and authorities. The resource center will provide one location where members of the consumer financial services industry can access information about these developments.
MLO National Test Updates to Begin April 5
The Mortgage Loan Originator (MLO) National Test for licensing will be updated to give new distribution weights to each of the five major content areas that are tested. The weight of questions in each content area will be adjusted slightly, none by more than 3%.
This change comes as a result of a job analysis study conducted last year, sponsored by the State Regulatory Registry (SRR), which surveyed current, state-licensed MLOs to determine whether the licensure exam is testing areas of knowledge that are best related to the tasks of the profession.
The new content weights for the National Test will be administered beginning on April 5, 2021.
NMLS Requests Agenda Items for Spring Ombudsman Meeting
The upcoming Nationwide Multistate Licensing System & Registry (NMLS) Ombudsman Meeting will be held virtually on April 1, 2021. The meeting will provide an opportunity for industry members to raise issues and topics for discussion with state regulators concerning NMLS, state licensing, and federal registration.
Agenda items may be submitted by e-mailing firstname.lastname@example.org and must be sent by March 5. The agenda items and relevant information must be provided on the company’s letterhead. Individuals chosen to discuss submitted topics must attend the virtual meeting to present their submissions.
- Aileen Ng