Consumer Compliance Outlook
News from Washington: Regulatory Updates
On March 25, 2014, the CFPB issued a research report on payday lending. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has supervisory authority over payday lenders.
The report’s key findings include the following:
- More than 80 percent of payday loans are rolled over within 14 days.
- Three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed.
- One out of five new payday loans cost the borrower more than the amount borrowed.
- Four out of five payday borrowers either default or renew a payday loan over the course of a year.
- Only 15 percent of borrowers repay all of their payday debts when due without reborrowing within 14 days.
- Of new loans, 15 percent of them are followed by a loan sequence at least 10 loans long — roughly half of all loans are made in the course of a sequence at least 10 loans long.
- Few borrowers amortize their loans. Instead, for more than 80 percent of loans analyzed, the last loan in a sequence of loans is the same size as, or larger than, the first loan in the sequence.
- Monthly borrowers are more likely to stay in debt for 11 months or longer.
- Most borrowing involves multiple renewals following an initial loan, rather than multiple distinct borrowing episodes separated by more than 14 days.
On February 27, 2014, the CFPB reported that it handled roughly 31,000 complaints between October 22, 2012, and February 1, 2014, from consumers concerning information creditors furnished to CRAs. The top three concerns include incorrect information on a credit report, complaints about the investigation conducted by the CRA, and difficulty obtaining a credit report or score. The report reiterates that if a consumer files a dispute directly with a furnisher and is not satisfied with the results, the consumer may submit a complaint to the CFPB, which sends it to the furnisher for a response. If the consumer remains dissatisfied with the furnisher’s response to the CFPB, he or she may dispute the response with the CFPB within 30 days. The CFPB previously issued a bulletin on September 4, 2013, to furnishers of consumer credit information highlighting their obligations under the Fair Credit Reporting Act. The bulletin stated that the CFPB will continue to review furnisher compliance with these requirements during examinations and investigations.
On February 27, 2014, the CFPB published a supervisory bulletin warning companies that furnish information to CRAs not to avoid investigating consumer disputes. In some cases, the CFPB has observed that when a consumer disputes furnished information, the furnisher will not conduct an investigation and will instruct the CRA instead to delete the item it furnished. The CFPB cautions that a furnisher should not assume that simply deleting an item will generally constitute a reasonable investigation. The CFPB reported that this practice can harm consumers because once a dispute is filed, if the furnisher determines the information it furnished was inaccurate, it must notify all companies that received the information, including other CRAs. But if the furnisher simply deletes the disputed information without notifying those companies, the companies will not be aware it is inaccurate. An investigation could also uncover broader problems in the furnisher’s system or process, such as software flaws, that impact the accuracy of the information furnishers provide to CRAs.
On February 24, 2014, the Board announced it will be publishing a semiannual report with aggregate data and other information concerning banking applications. The report is expected to be released in the second half of 2014 and will include statistics on the length of time taken to process applications and notices; the number of approvals, denials, and withdrawals; and the primary reasons for withdrawals. The Board evaluates applications for proposed acquisitions or requests to establish branches in light of statutory factors, financial condition, performance under the Community Reinvestment Act, and managerial experience. If issues are identified that result in a recommendation that the Board deny an application, staff informs the filer of the particular issues.
The new semiannual report is designed to increase transparency to the public of the application process by providing more detailed information about the basis for withdrawn applications. In cases where the application is approved or denied, an announcement is made to the public. The Board also released guidance describing common issues it has identified that led to the recent withdrawal of applications, including less-than-satisfactory supervisory rating(s) for safety and soundness, consumer compliance, or the Community Reinvestment Act; inadequate compliance with the Bank Secrecy Act; and concerns regarding the financial condition or management of the proposed organization.
On February 7, 2014, the CFPB announced it is in the early stages of the rule-making process to amend Regulation C to implement HMDA amendments in the Dodd-Frank Act and to make other changes to help the public and financial regulators better understand borrowers’ access to mortgage credit. As required by the Small Business Regulatory Enforcement Fairness Act, the CFPB is first seeking early feedback from small lenders. The changes the CFPB is considering include:
- adding the new HMDA data fields required by the Dodd-Frank Act, including (among others) the length of the loan term, total points and fees, the length of any teaser or introductory interest rates, and the applicant or borrower’s age and credit score
- exercising its discretionary authority under the Dodd-Frank Act to add other new HMDA fields the CFPB believes will be beneficial, including mandatory reporting of denial reasons; debt-to-income ratios; qualified mortgage status; combined loan-to-value ratios; automatic underwriting systems results; total origination charges; total discount points; risk-adjusted, prediscounted interest rate; base interest rate; manufactured housing data; and the loan’s affordable housing program status
The CFPB is also seeking feedback on ways to streamline reporting, to standardize the threshold for HMDA reporting, to improve data entry and collection, and to provide better access to HMDA data.
On January 30, 2014, the CFPB issued its “Supervisory Highlights” report for Winter 2013. In particular, the report highlights several unfair and deceptive practices examiners identified in the mortgage servicing market in 2013, prior to the effective date of the new Dodd-Frank Act servicing rules, including:
- unfair and deceptive practices relating to servicing transfers — The rights to manage a loan are frequently bought and sold among servicers. Two servicers failed to honor existing permanent or trial loan modifications after a servicing transfer, as a result of which borrowers were charged or told to pay the wrong amount.
- unfairly requiring waivers of consumer rights — Two servicers required borrowers to waive existing claims as a condition for obtaining a forbearance or loan modification agreement without regard to individual circumstances.
- poor payment processing — Examiners found a servicer misrepresented how biweekly payment plans work. As a result, consumers did not obtain the savings they expected. Another servicer told borrowers they would receive refunds from their escrow accounts, when in fact they would not.
- failing to furnish correct information to CRAs — Mortgage servicers generally provide data to CRAs. CFPB examiners found cases where servicers were misreporting short sales as foreclosures, which have a more significant negative impact on a consumer’s credit report and score.
On January 23, 2014, the CFPB issued a proposed rule to include certain nonbank international money transfer providers in its nonbank supervision program. The Dodd-Frank Act authorizes the CFPB to supervise nonbanks in the specific markets of residential mortgage origination, payday lending, and private education lending. It also authorizes the supervision of “larger participants” in other markets for financial services. The Dodd-Frank Act directs the CFPB to conduct a rulemaking to define “larger participants.” Under the proposed rule, a nonbank international money transfer provider that offers more than 1 million international money transfers annually would be a “larger participant” subject to the CFPB’s supervisory authority. The CFPB estimates the proposed rule would bring new oversight to about 25 of the largest providers in the market. The CFPB also has the authority to exercise supervisory authority over nonbank providers of financial goods and services that do not meet the definition of “larger participant” if the CFPB has reasonable cause to believe they pose a risk to consumers based on consumer complaints or other sources. See 12 U.S.C. §5514(a)(1)(C).