Consumer Compliance Outlook: Fourth Issue 2020

News from Washington: Regulatory Updates

The Consumer Financial Protection Bureau (Bureau) issues a no action letter (NAL) to Bank of America (BOA) for its small-dollar credit product.

On November 5, 2020, the Bureau approved BOA’s application for a NAL for Balance Assist, its small-dollar credit product. The Bureau’s 2019 NAL policy allows the Bureau to issue a formal letter indicating that it will not initiate a supervisory or enforcement action against a company for providing a product or service based on the specific facts and circumstances in the company’s NAL application. BOA’s application was based on a NAL the Bureau issued in May 2020 to the Bank Policy Institute (BPI), a banking trade group, for a template for certain small-dollar credit products. The template application outlined a number of product features and guardrails, including prohibiting rollovers, balloon payments, late fees, or prepayment penalties. BOA’s application represented that the NAL for Balance Assist conformed to the features and guardrails in the BPI template. BOA’s application indicated that Balance Assist allows a customer to borrow up to $500 at a total cost of $5 with repayment in three equal monthly installments. BOA’s application also generally describes eligibility criteria for the product.

The Bureau issues a final rule creating implementing regulations for the Fair Debt Collection Practices Act (FDCPA).

On November 30, 2020, the Bureau published a final rule in the Federal Register to create implementing regulations for the FDCPA, which regulates debt collectors’ practices in collecting consumer debts. Currently, the FDCPA lacks implementing regulations to clarify its requirements. The Dodd‒Frank Act specifically provided the Bureau with FDCPA rulemaking authority. The Bureau has now used this authority to create comprehensive implementing regulations, including official commentaries that elaborate on provisions of the rule. The final rule focuses on communications between debt collectors and consumers and addresses communication methods that were not operable in 1977 when the FDCPA was enacted, such as various types of electronic communications. The final rule delineates restrictions on debt collector communications with consumers, provides examples of conduct that would be considered harassing, abusive, or oppressive in violation of the FDCPA, and sets a cap on phone calls that establishes a rebuttable presumption for a debt collector’s compliance (or noncompliance) with the FDCPA’s telephone call provisions. The rule also addresses a range of other issues including, but not limited to, debt collector communications when the debtor is deceased, debt transfers, and record-keeping requirements.

The FDCPA generally only applies to debt collectors collecting debts on behalf of another and not to creditors collecting their own accounts. See 15 U.S.C. §1692a(6)(A). However, the final rule has provisions that may affect creditors. For example, the new 12 C.F.R. §1006.6(b) provides that debt collectors may communicate with a consumer by email, using an address the creditor provided, if the creditor notifies the consumer about this and satisfies certain other requirements. The rule is effective on November 30, 2021. The Bureau expects to issue a second final rule in late 2020 focusing on FDCPA consumer disclosures.

Agencies propose regulation to codify their 2018 statement on the role of supervisory guidance.

On November 5, 2020, the Board of Governors of the Federal Reserve System, the Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration published a rulemaking proposal in the Federal Register outlining and confirming the agencies’ use of supervisory guidance for regulated institutions. The proposal would codify, with certain clarifications, the concepts set forth in the September 2018 Interagency Statement Clarifying the Role of Supervisory Guidance (statement), which clarified the distinction between laws and regulations and supervisory guidance. See Federal Reserve Supervision and Regulation letter SR 18-5/Consumer Affairs letter CA 18-7. The proposal would confirm that, unlike a law or regulation, supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions or issue supervisory criticisms based on noncompliance with supervisory guidance. Instead, supervisory guidance outlines supervisory expectations and priorities, or articulates views about appropriate practices for a given subject area. The comment period closed on January 4, 2021.

The Bureau issues a final rule to extend the January 10, 2021, sunset date of the Government-Sponsored Enterprise (GSE) Qualified Mortgage (QM) provision (GSE Patch) and a related rulemaking proposal to amend the definition of the General QM.

On October 20, 2020, the Bureau published a final rule in the Federal Register to extend the January 10, 2021, expiration date for the temporary QM provision known as the GSE Patch until the mandatory compliance date of any final amendments to the definition of a General QM. In 2013, the Bureau temporarily created the GSE Patch to provide QM status to residential mortgages eligible for purchase or guarantee by either of the GSEs. This temporary QM provision provided more flexible underwriting standards than the General QM provision (i.e., no quantitative debt-to-income (DTI) limit) and therefore helped to facilitate credit availability when the Bureau first implemented the ability-to-repay (ATR) requirement of the Dodd‒Frank Act, for which QM is one way to comply. The Bureau’s final ATR and QM rule in 2013 provided that the GSE Patch would expire on January 10, 2021, or when the GSEs exit conservatorship, whichever occurred earlier.

However, in 2019, the Bureau’s statutorily required, five-year assessment of its ATR and QM rule found that GSE Patch loans still accounted for a large share of mortgage originations in the market. The Bureau expressed concern that many loans would either not be made or made at a higher price after the GSE Patch expired. Thus, this final rule provides that the GSE Patch will not expire until the mandatory compliance date of any final amendments made to the General QM provision or when the GSEs exit conservatorship, whichever occurs first. The Bureau’s proposed amendment to the General QM is discussed next.

Proposal to Amend the Definition of a General QM.

On July 10, 2020, the Bureau published a rulemaking proposal in the Federal Register to amend the definition of a General QM, which provides, among other requirements, that a borrower’s DTI cannot exceed 43 percent. In accordance with the final rule to extend the sunset date for the GSE patch, the Bureau proposes to eliminate the 43 percent DTI limit in the General QM and replace it with priced-based thresholds that would be tiered by loan amount and lien position. The Bureau expressed concern that the scheduled expiration of the GSE patch would significantly reduce access to responsible, affordable credit for creditworthy borrowers whose DTI exceeds 43 percent. The Bureau found that a loan’s price, measured by the spread between the loan’s annual percentage rate (APR) and the average prime offer rate (APOR) for a comparable transaction, provides an alternative measure of creditworthiness and can be a strong indicator of a borrower’s ability to repay the loan than DTI alone. Accordingly, the Bureau proposes to eliminate the 43 percent DTI limit and replace it with a price-based approach. The proposal also eliminates the requirement that a creditor use Appendix Q of Regulation Z to consider and verify a consumer’s income and debt obligations and replaces it with other standards.

Under the proposal, a first-lien loan would generally qualify for QM status (assuming the other existing general requirements for a General QM are satisfied, such as the product‑feature restrictions and points and fees limits) if the loan’s APR exceeds APOR for a comparable transaction by less than 2 percentage points as of the date the interest rate was set. Higher thresholds would apply to subordinate lien loans and loans with smaller loan amounts. In addition, the proposal would retain the existing framework for determining whether a QM receives a safe harbor or rebuttable presumption for complying with the ATR requirement: First-lien loans with an APR that exceeds APOR by less than 150 basis points, or by less than 350 basis points for a subordinate-lien loan, would be deemed to conclusively comply with the ATR requirement (i.e., safe harbor), while loans with spreads in excess of this threshold would have rebuttable presumption of compliance with the ATR requirement. The comment period closed on September 8, 2020.

The Bureau proposes to create a new category of QMs based on a loan’s seasoning.

On August 28, 2020, the Bureau published a proposed rulemaking in the Federal Register to create a new category of QMs based on the seasoning of the loan. Under the proposal, a mortgage loan would qualify as a Seasoned QM if it meets the following requirements:

The Seasoned QM is intended, in part, to help prevent disruption in the residential mortgage market when the GSE QM Patch expires by providing another type of QM. The comment period on this proposal closed on October 1, 2020.

The Bureau issues a report assessing the TILA-RESPA Integrated Disclosure rule.

On October 1, 2020, the Bureau issued a comprehensive report assessing the effectiveness of the Truth in Lending Act and the Real Estate Settlement Procedures Act integrated disclosure rule (commonly known as TRID). This report was issued pursuant to §1022(d) of the Dodd‒Frank Act, which requires the Bureau to publish a report assessing “significant rules” (a term the Dodd‒Frank Act does not define) within five years of their effective dates. Since TRID became effective in October 2015, consumers receive a Loan Estimate form at application and a Closing Disclosure form at closing. Key findings include, among others: