Consumer Compliance Outlook
News from Washington: Regulatory Updates
On April 24, 2013, the CFPB issued a report on payday lending and deposit advance loans. The report was based on data from more than 15 million storefront payday loans and depository institutions that offer deposit advance products. The report notes that both products are designed to address a cash flow shortage for consumers between paychecks or receipt of other income. The report found that these transactions generally have three features: they are issued in small-dollar amounts, must be repaid quickly, and require a borrower to repay the full amount or give lenders access to repayment through a claim on the borrower’s deposit account. A key finding of the report is that because repayment is required within a short time (typically 14 days), rollovers are often necessary, making the transactions costly and burdensome for consumers. The CFPB report also notes that the loans usually involve little or no underwriting. As a result, the CFPB found that these transactions often evolve into expensive, long-term loans. The CFPB’s report is available at: tinyurl.com/payday-report. The CFPB also issued a fact sheet about this type of lending, which is available at tinyurl.com/pd-facts.
On April 10, 2013, the CFPB issued a compliance guide for its recent final rule implementing the ability-to-repay and qualified mortgage provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). The CFPB’s guide, which was issued pursuant to the requirements of the Small Business Regulatory Enforcement Fairness Act of 1996, is available at: tinyurl.com/qm-atr. When the compliance guide was published, the CFPB had a rule-making proposal pending to amend the rule to address certain issues raised by the industry. Subsequently, on May 29, 2013, the CFPB published the final rule for the proposed amendments.
On March 21, 2013, the CFPB issued Bulletin 2013-02 to provide guidance on compliance with the Equal Credit Opportunity Act (ECOA) for indirect auto lenders under the CFPB’s jurisdiction. Such lending occurs when a motor vehicle dealer finances a consumer’s purchase after confirming the terms on which the indirect lender is willing to purchase the credit contract from the dealer. The CFPB’s guidance focuses on the indirect lender’s practice of providing the dealer with a minimum “buy rate” for loans meeting preestablished underwriting criteria. Lenders generally allow dealers to increase the interest rate above the “buy rate” and agree to share a portion of the additional compensation with the dealer. The CFPB’s guidance concentrates on indirect lenders’ potential liability under ECOA if dealer markups result in discriminatory pricing disparities.
The CFPB’s guidance notes that an indirect auto lender is a “creditor” under ECOA and Regulation B if it participates in the credit decision and that the standard practices of indirect auto lenders likely constitute participation in the credit decision, stating: “For example, an indirect auto lender is likely a creditor under the ECOA when it evaluates an applicant’s information, establishes a buy rate, and then communicates that buy rate to the dealer, indicating that it will purchase the obligation at the designated buy rate if the transaction is consummated. In addition, when a lender provides rate sheets to a dealer establishing buy rates and allows the dealer to mark up those buy rates, the lender may be a creditor under the ECOA when it later purchases a contract from such a dealer. These two examples are illustrative of common industry practices; indirect auto lenders may also be creditors under other circumstances.” The CFPB’s bulletin states that if dealer markups and lender compensation practices result in pricing disparities for protected-class borrowers, lenders could be liable under the legal doctrines of disparate treatment and disparate impact. To mitigate this risk, the bulletin recommends:
- imposing controls on dealer markup and compensation policies or otherwise revising dealer markup and compensation policies and monitoring and addressing the effects of those policies to address unexplained pricing disparities on prohibited bases; or
- eliminating dealer discretion to mark up buy rates and fairly compensating dealers using another mechanism, such as a flat fee per transaction, that does not result in discrimination.
The bulletin also discusses the features of a strong fair lending compliance program and best practices. The bulletin is available at tinyurl.com/cfpb-indirect-auto.
On March 18, 2013, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency requested comment on proposed revisions to Interagency Questions and Answers (Q&As) that provide additional guidance on the agencies’ Community Reinvestment Act (CRA) regulations. The proposed revisions focus primarily on community development, which is considered as part of the CRA performance tests for large institutions, intermediate small institutions, and wholesale and limited purpose institutions. Small institutions may use community development activity to receive consideration toward an outstanding CRA rating. The proposed amendments are intended to 1) clarify how the agencies consider community development activities that benefit a broader statewide or regional area that includes an institution’s assessment area; 2) provide guidance related to CRA consideration of, and documentation associated with, investments in nationwide funds; 3) clarify the consideration of certain community development services; 4) address the treatment of qualified investments with organizations that use only a portion of the investment to support a community development purpose; and 5) clarify that community development lending should be evaluated in such a way that it may have a positive, neutral, or negative impact on the large institution lending test rating. The comment period closed on May 17, 2013. The press release is available at www.federalreserve.gov/newsevents/press/bcreg/20130318a.htm.
On February 21, 2013, the CFPB announced it was collecting information to develop policy options that would make repayment of private student loans more manageable for borrowers struggling with repayment. The Dodd-Frank Act created the position of private education loan ombudsman in the CFPB and requires the ombudsman to compile and analyze data on borrower complaints regarding private education loans and to make appropriate recommendations to the CFPB’s director, the secretary of the Treasury, the secretary of education, and Congress. The CFPB has found that borrowers with high payments lack alternative repayment and refinance options. The information being collected will help the CFPB make recommendations to policymakers on how to restructure student loan repayments to assist borrowers who are having difficulties. The CFPB sought input on a variety of issues related to repayment affordability, including 1) how student loan burdens might impact the broader economy and hinder access to mortgage credit and automobile loans, 2) how distressed borrowers manage their student loan obligations, 3) what options currently exist for borrowers to lower their monthly payments on private student loans, 4) examples of successful alternate payment programs in other markets and which features could apply to student loans, and 5) the most effective mechanisms for communicating with distressed borrowers. The comment period closed April 8, 2013. The announcement is available at tinyurl.com/cfpb-student.
On February 13, 2013, the CFPB announced its plan to help facilitate the mortgage industry’s compliance with new mortgage regulations that become effective in January 2014. The CFPB issued the regulations in January 2013 to implement provisions in Title XIV of the Dodd-Frank Act. The mortgage rules include new requirements concerning underwriting standards, originator compensation, appraisals, escrow accounts, loan servicing, and high-cost mortgages. To support implementation of the new regulations, the CFPB will 1) coordinate with other agencies, 2) publish plain-language guides, 3) publish updates to its official interpretations, 4) publish readiness guides for the industry, and 5) promote consumer education. The press release is available at tinyurl.com/cfpb-mortgage-plan. The CFPB has also created a mortgage resource web page, which is available at tinyurl.com/cfpb-implement.
On February 11, 2013, the CFPB issued a bulletin regarding the legal obligation to protect consumers when loans are transferred between mortgage servicers. The CFPB stated it will make servicing transfer problems a focus of its supervisory activities and will take appropriate actions, including remediation of harm to consumers. The CFPB will examine 1) how the servicer has prepared for the transfer of servicing rights or responsibilities, 2) how the new servicer handles the files it receives through a transfer, and 3) what policies servicers have in place to prevent harm to borrowers with loans that are already subject to loss mitigation procedures. The press release is available at tinyurl.com/cfpb-service.
On February 8, 2013, the U.S. Department of Housing and Urban Development (HUD) issued a final rule to implement the Fair Housing Act’s (FHA’s) Discriminatory Effects Standard. The FHA prohibits discrimination in the sale, rental, or financing of dwellings and in other housing-related activities on the basis of race, color, religion, sex, disability, familial status, or national origin. HUD has interpreted the act to prohibit practices with an unjustified discriminatory effect even if the discrimination was unintentional. The rule clarifies that the FHA applies to practices that have a disparate impact on classes of individuals protected by the FHA. The new rule expressly permits practices to be challenged based on claims that the practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns. The rule became effective March 18, 2013, and is available at: tinyurl.com/hud-disparate. On a related note, the U.S. Supreme Court recently accepted a case for review that will determine if the FHA’s statutory language encompasses disparate impact claims: Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. The court’s decision, which will be issued during its 2013-14 term, could affect HUD’s rule.