ACGA’s CFPB Insight For the End of April/Early May

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For the End of April/Early May

Regulatory News

I. Agency Taking Action Against Payday & Deposit Advance Loans

II. CFPB Amends Card Act Rule to Make it Easier for Stay-at-Home Spouses and

Partners to Get Credit Cards

III. Report: Financial Advising Industry Confusing Seniors

IV. Four Enforcement Actions Levied Against Mortgage Insurers

V. Money Transfers/Remittances: Next On The Plate

VI. Agency Proposed (and Industry-Friendly) Changes to Ability-to-Repay/QM Rules

VII. NYC Mayor Bloomberg, Cordray Partner On Consumer Financial Protection

Capitol Oversight

I. House, Senate Play Good-Cop, Bad Cop

II. House Financial Services Committee Examines Regulatory Burdens On Community

Banks

III. CFPB Outlines Arbitration Clause Policing To Republican Members

IV. Congressional Research Service Issues Report on Constitutionality of Cordray

Appointment and Implications for the Bureau

Events

I. May 8th

Student Loan Field Hearing In Miami-Dade: A New Student Loan Initiative

In The Works?

II. FDIC Holding Three Teleconferences on CFPB Mortgage Rules

Other CFPB Statements & Speeches

I. Cordray Addresses the CFPB’s Consumer Education Products at the Federal

Reserve Bank of Chicago Financial Literacy & Education Summit

II. Antonakes Provides Insight into the Agency’s Approach to Supervision &

Enforcement

III. Cordray Discusses CFPB Efforts to Integrate Financial Literacy in Schools at the

Investing in Our Future Conference

IV. Antonakes Discusses Payday Loans, Administrative & Legal Enforcement

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Regulatory News

I. Agency Taking Action Against Payday & Deposit Advance Loans

Recently, the CFPB issued a report which cited the “loose lending standards, high costs, and

risky loan structures” of payday and deposit advance loans as contributing to a cycle of

consumer indebtedness. In a statement accompanying the report, CFPB Director Richard

Cordray described these products—including those increasingly offered by banks and other

depository institutions—as “debt traps,” and added that the results of the CFPB’s study were

“startling” and that such financial products are “leaving them [consumers] worse off.”

The study, conducted over the last year, examined data describing more than 15 million such

loans from a variety of depository institutions and storefront payday lenders and was self-

described as “a clear statement of CFPB concerns.” The agency promised that it would follow up

on this study with a forthcoming study examining the growing presence of these loans online, as

well as another study examining bank and credit union deposit account overdraft programs.

Among the CFPB’s conclusions are that limited underwriting and the single payment structure of

these loans help contribute to “trapping consumers in debt.” The agency also concluded that

“lenders often do not take a borrower’s ability to repay into consideration” and that “credit

score and financial obligations are generally not taken into account.”

The CFPB also criticized these loans for their costs to consumers calculated sample Annual

Percentage Rates (APRs) for typical loans. For instance, the agency determined that a payday

loan outstanding for two weeks with a $15 fee per $100 borrowed has an APR of 391%, while a

deposit advance loan with a $10 fee per $100 borrowed on a 12-day loan has an APR of 304%.

In addition to voicing concerns about the underwriting, costs, and short payment period for these

loans, the CFPB also took issue with the marketing of deposit advance loans, determining that

such loans are often advertised as a means of avoiding the high cost of overdraft fees while 65%

of deposit advance loan consumers do, according to the agency, in fact incur these fees.

In a perhaps ominous statement to the small dollar loan industry, the CFPB promised to

work with other banking regulators on the topic and noted pointedly that it “has authority to

identify as unlawful unfair, deceptive, or abusive acts or practices in connection with the offering

of such consumer financial products and services. Such consumer financial products and

services include deposit advance products and payday loans, whether provided by banks or by

other institutions such as storefront and Internet payday lenders. The CFPB expects to use its

authorities to provide protections to consumers once further analysis of the short-term, high-cost

loan market is complete.”

The CFPB study was shortly accompanied by statements made by the FDIC and OCC allying

themselves with the CFPB’s concerns governing deposit advance products. Shortly thereafter,

the Federal Reserve sent out this guidance letter to supervisors at its member banks warning

them of the potential risks of offering deposit advance products.

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The full Payday Loans and Deposit Advance Products report may be found here.

A summary factsheet about the payday and deposit advance loans study may be found here.

Cordray’s full remarks in a press call on the study may be found here.

II. CFPB Amends Card Act Rule to Make it Easier for Stay-at-Home Spouses and Partners

to Get Credit Cards

The CFPB has revised existing regulations governing the extension of credit in order to make it

easier for spouses or partners who do not work outside of the home to qualify for credit cards. In

effect, the amendments to the extension of credit rules necessitated by the Credit Card

Accountability Responsibility & Disclosure Act of 2009 (“CARD Act”) allow credit card issuers

to consider income a 21-year or older stay-at-home applicant shares with a spouse or partner.

The amendments allow credit card issuers to consider third-party income if the applicant has a

reasonable expectation of access to it. Although the rules technically apply to all sources of third-

party income regardless of marital status, the amendments are primarily believed to advantage

non-working spouses and partners or those receiving alimony or child support.

According to the agency, Census data indicates that over 16 million married people do not work

outside the home—a figure equating to approximately one out of three married couples.

Credit card issuers will have six months to comply with the new regulation.

The final rule is available here.

III. Report: Financial Advising Industry Confusing Seniors

The CFPB’s Office of Financial Protection for Older Americans (a.k.a. the Office for Older

Americans) has published a report highlighting perceived problems with so-called “senior

designation” credentials used by many financial advisers to market their services to seniors. The

report was crafted with input from both the SEC and the Financial Industry Regulatory Authority

(FINRA).

According to the report—entitled “Senior Designations for Financial Advisers: Reducing

Consumer Confusion and Risks,”—there are more than 50 different senior designations which

purport to indicate that a financial advisor has training or expertise in the financial needs of older

consumers. These designations vary widely in terms of the training or expertise required to

obtain them. The agency noted that “A particular problem associated with senior designations is

the participation of some designees in ‘free lunch seminars.’ These events are often marketed as

educational seminars, when in fact they are staged sales events to sell investment and other

financial products.”

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Citing a FINRA study, concluding that seniors are more likely to rely on the advice of a

professional who uses a senior designation, the agency further noted that some senior

designations may also be acquired simply by paying for them.

In prepared remarks, Cordray opined that the “report underscores the need for consistent high-

level standards of training and conduct for those advisers who want to acquire a bona fide

senior designation.” The CFPB further noted that “No single authority is responsible for

ensuring that those who use senior designations do not mislead or harm consumers.”

The report includes recommendations directed at both Congress and the SEC to simplify and

police the use of senior designation credentials.

Based on its findings, the Bureau’s recommendations include:

Implementing rigorous training standards to obtain senior designations: state and

federal regulators should implement rigorous criteria for acquiring senior designations,

including specific standards for education, training, and accreditation.

Setting strict standards of conduct for those using senior designations: state and

federal regulators should set consistent and strict standards of conduct for those using

senior designations. Such standards could include prohibiting senior designees from

characterizing sales events as educational seminars, and selling financial products and

services at events that are advertised or described as educational or informational events.

Increasing supervision and enforcement: state and federal regulators should increase

existing supervision of and enforcement authority against misleading conduct by a holder

of a senior designation.

The complete report on senior designations may be found here.

Cordray’s full remarks on the CFPB’s recommendations governing senior advisor designations

may be found here.

The Assistant Director of the Office for Older Americans, Skip Humphrey, explained several of

the Bureau’s recommendations in great detail:

Establishment of a centralized SEC database. “We recommend that the SEC consider establishing a centralized tool that makes it easy for seniors to verify their financial

adviser’s designation. There are already several good resources to help consumers verify

the background of their financial adviser, or to learn more about professional credentials

in general. But these resources weren’t designed to make it easy for seniors to verify a

specific adviser’s senior designation and to compare different designations.”

Consumer Verification of Credentials. “We are also recommending that Congress and SEC consider requiring financial advisers using senior designations to provide their

clients with information that will enable the clients to verify their adviser’s credentials.”

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Minimum Standards. Standards could include a minimum amount of training and education, as well as accreditation requirements, as well as prohibiting—in states without

existing laws—the misleading use of senior designations, and misleading advertising.

Full Remarks by Hubert “Skip” Humphrey, Assistant Director of the CFPB’s Office of Older

Americans may be found here.

IV. Four Enforcement Actions Levied Against Mortgage Insurers

Citing potential violations of the Real Estate Settlement Procedures Act (RESPA)—specifically,

the payment of illegal kickback to mortgage lenders—the CFPB has initiated four enforcement

actions against mortgage insurers totaling more than $15 million in penalties. Specifically, the

CFPB alleges that the named mortgage insurers provided kickbacks to mortgage lenders by

purchasing reinsurance that was essentially worthless but was designed to make a profit for the

lenders.

The alleged kickbacks at issue were paid to the lenders through “captive reinsurance

arrangements”—that is, a subsidiary set up by a lender to provide reinsurance to mortgage

servicers.

The four companies subject to the CFPB’s enforcement are Genworth Mortgage Insurance

Corporation, United Guaranty Corporation, Radian Guaranty Inc., and Mortgage Guaranty

Insurance Corporation—the four largest mortgage insurance companies in the nation.

Enforcement Action In accordance with the proposed settlement, the four mortgage insurance companies have agreed

to change their practices and pay fines to the CFPB. Specifically, they have agreed to the

following:

Ceasing from Captive Reinsurance arrangements for 10 years: If entered by the

court, the proposed orders will prevent these four mortgage insurers from engaging in this

practice going forward. The mortgage insurers are prohibited from entering into any new

captive mortgage reinsurance arrangements with affiliates of mortgage lenders, and from

obtaining captive reinsurance on any new mortgages, for a period of ten years. As pre-

existing reinsurance arrangements come to a close, the mortgage insurers will forfeit any

right to the funds not directly related to collecting on reinsurance claims. The mortgage

insurers will also be prohibited from paying illegal kickbacks or otherwise violating the

Real Estate Settlement Procedures Act. Any violation of these prohibitions could result in

additional fines.

Payment of more than $15 million in penalties: The four mortgage insurers will pay

the CFPB a total of $15.4 million in penalties. According to the agency, the amount of

the penalties reflects a number of factors, including each mortgage insurers’ finances, the

pervasiveness of their conduct, relative culpability, and cooperation with the Bureau.

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Compliance monitoring and reporting: These companies will be subject to monitoring

by the CFPB and required to make reports to the CFPB in order to ensure their

compliance with the provisions of the orders.

Mortgage insurance is typically required to protect lenders against the risk of default when

homeowners borrow more than 80% of the value of their home. Generally, the lender, not the

borrower, selects the mortgage insurer and the borrower pays the insurance premium every

month in addition to the mortgage payment.

The proposed consent orders have been signed by the CFPB and the named companies and have

been filed with the United States District Court for the Southern District of Florida court.

However, they will have the full force of law when signed by the presiding judge. The full text of

each of the proposed Consent Orders is available below:

Genworth Mortgage Insurance Corporation: http://files.consumerfinance.gov/f/201304_cfpb_Doc5_Genworth-Final-Order.pdf

Mortgage Guaranty Insurance Corporation: http://files.consumerfinance.gov/f/201304_cfpb_Doc5_MGIC-Final-Order.pdf

Radian Guaranty Inc.:

http://files.consumerfinance.gov/f/201304_cfpb_Doc5_Radian-Final-Order.pdf

United Guaranty Corporation: http://files.consumerfinance.gov/f/201304_cfpb_Doc5_UGI-Final-Order.pdf

The text of the CFPB’s complaints against the companies is available below:

Genworth Mortgage Insurance Corporation: http://files.consumerfinance.gov/f/201304_cfpb_Genworth-Complaint.pdf

Mortgage Guaranty Insurance Corporation: http://files.consumerfinance.gov/f/201304_cfpb_MGIC-Complaint.pdf

Radian Guaranty Inc.: http://files.consumerfinance.gov/f/201304_cfpb_Radian-Complaint.pdf

United Guaranty Corporation: http://files.consumerfinance.gov/f/201304_cfpb_UGI-Complaint.pdf

In a press call, Cordray noted that “Our investigation indicates that lenders sought to leverage

their control over the business to capture…revenues for themselves. Based on our investigation,

we believe that the exertion of this pressure led these mortgage insurance companies to funnel

many millions of dollars to lenders for well over a decade. The payments were dressed up as

supposedly relating to a “reinsurance” product provided by new subsidiaries created by the

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lenders. “Reinsurance” is simply further insurance provided to insurance companies themselves

as a means of hedging the risks they have taken on. Here, however, we believe that the payments

made as supposed “reinsurance” premiums did not correspond to a proportionate transfer of

insurance risk between the parties. In essence, then, the lenders were extracting financial

kickbacks from the mortgage insurers in exchange for referring business to them.”

Cordray’s full remarks may be found here.

V. Money Transfers/Remittances: Next On The Plate

Following on the heels of a recent rule governing international money transfers (also known as

remittances), the CFPB is expanding its data collection efforts regarding any electronic money

transfers, suggesting that the agency will seek to promulgate more regulations affecting the

industry. The Electronic Funds Transfer Act (EFTA) governs these transactions for account

holders as well as senders of international remittances. Authority over EFTA was transferred

from the Fed to the CFPB in Dodd-Frank. EFTA includes a private right of action for consumers.

Specifically, the CFPB is asking consumers to submit complaints—including those in languages

other than English—and has identified potential problems with the remittance industry,

including:

Money was not available when promised

Wrong amount charged or received (Transfer amounts, fees, exchange rates, taxes, etc.)

Incorrect/missing disclosures or info

Other transaction issues (Unauthorized transaction, cancellation, refund, etc.)

Other service issues (Advertising or marketing, pricing, privacy, etc.)

Fraud or scams

The current remittance rule goes into effect on October 28th.

VI. Agency Proposed (and Industry-Friendly) Changes to Ability-to-Repay/QM Rules

In a concession to industry concerns with its Ability-to-Repay and mortgage servicing rules, the

CFPB is proposing amending the rulemakings to address problems with using Appendix Q in

determining whether a consumer satisfied the maximum 43% debt-to-income ratio for obtaining

a qualified mortgage (QM). Although Appendix Q provides guidance in interpreting whether a

consumer’s income satisfies QM underwriting standards, it was in large part developed by HUD

before the transfer of certain powers to the CFPB and not written specifically with the Bureau’s

QM rulemaking in mind. The proposed amendments would clarify that provisions of Appendix

Q should be interpreted as general guidance, but in a flexible manner depending on a consumer’s

particular situation.

Specifically, the agency has proposed:

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Removing the requirement that a lender obtain an employer's confirmation of

continued employment as well as removing the requirement that a lender attempt to

ascertain the probability of continued employment. While lenders would still be

required to obtain verification of employment, they could assume that such employment

will be continued unless the employer indicates otherwise.

Allowing lenders to assume that overtime or bonus income will continue if a

consumer has earned such income in the previous two years and an employer does not

affirmatively indicate that such income will cease.

Allowing a lender to rely on a verification letter from the Social Security

Administration rather than requiring a borrower to demonstrate Social Security income

through the use of a federal tax return.

Loosening restrictions on a borrower’s use of rental income from boarders in

qualifying for a loan.

In its proposed amendments, the Bureau also seeks to clarify that mortgage servicing rules

promulgated under the Real Estate Settlement Procedures Act (RESPA) do not preempt the field

of state servicing laws.

VII. NYC Mayor Bloomberg, Cordray Partner On Consumer Financial Protection

In addition to its partnerships with the cities of Chicago and Newark, the CFPB has not entered

into a partnership with New York City and Mayor Michael Bloomberg’s Cities for Financial

Empowerment (CFE) Fund. The purpose of the partnership is to assist cities in enhancing their

local consumer protection efforts.

The CFE Fund, which is funded by Bloomberg Philanthropies, is embarking on a three-year pilot

program in five cities (Denver, Lansing, Nashville, Philadelphia, and San Antonio) with the aim

of providing consumer protection advice and education to citizens, particularly those with low-

income. Through the partnership with the CFPB, the CFE Fund hopes to identify other cities and

locals in which to expand and how best to assist local governments in identifying and using

available consumer protection enforcement powers.

Other likely expansion opportunities include members of the Cities for Financial Empowerment

Coalition—which works closely with the CFE Fund. These cities/local governments include

Hawai'i County, Los Angeles, Louisville, Miami, Newark, Providence, San Francisco, Savannah,

and Seattle.

Capitol Hill Oversight

I. House, Senate Play Good-Cop, Bad Cop

The Senate Banking Committee conducted a CFPB oversight hearing using the CFPB’s semi-

annual report to Congress as a conceit to question CFPB Director Cordray of issues. Questions

focused on recent mortgage origination and servicing rules (predominantly as they apply to rural

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and underserved areas), CFPB oversight over credit card and student loan servicing companies,

and CFPB data collection activities which could potentially result in the unintended release of

personally identifiable consumer information.

While few sparks flew during this morning’s Senate Banking Committee oversight hearing with

Senators demurring from questioning the legality of Cordray’s recess appointment head-on,

across the Hill, House Financial Services Committee Chairman Jeb Hensarling (R-TX) upped the

ante over Cordray’s legal standing as a recess appointee issuing a statement maintaining that the

House Financial Services Committee can “By law…receive … testimony only from a director

who is appointed in accordance with the Constitution.”

Chairman Hensarling coupled his statement with a letter addressed to “Mr. Cordray” (as opposed

to “Director Cordray”) explaining his position, as well as sending a virtually identical letter

addressed to the CFPB’s General Counsel, Meredith Fuchs, informing the CFPB that the

Committee intends “to continue to conduct vigorous oversight of the CFPB’s activities, and will

expect the CFPB’s cooperation in those efforts, including making other employees available to

testify…” The Senate’s hearing this morning was accompanied by another press release from the

House Financial Services Committee consisting of quotes from lawyers and policy experts

calling into question the validity of Cordray’s appointment.

While the Banking Committee’s oversight hearing was relatively staid, several salient areas of

concern to Committee members emerged:

Housing. Chairman Johnson (D-SD) expressed his concern—echoed by several other Senators

on both sides of the aisle—regarding the CFPB’s numerous rulemakings concerning mortgage

origination and servicing. Specifically, Chairman Johnson asked repeatedly whether CFPB

regulations are unduly constraining the availability of credit in rural and underserved areas.

Notably, Senator Hagan (D-NC), up for re-election next year pointedly expressed her concern

that the CFPB’s definition of rural areas is flawed, failing, she cited, to categorize as rural

several counties in North Carolina. In response to the concerns of Chairman Johnson, Senator

Hagan, and others, Cordray promised that the CFPB would continue collecting data and listen to

concerns about its various mortgage-related rulemakings and make adjustments in the future.

Cordray, however, defended the CFPB’s mortgage origination and servicing rules, stating that

the agency had expanded upon the Federal Reserve’s original definition of rural markets (before

the CFPB inherited responsibility for the rulemaking) and that the agency’s rulemaking should

have come as no surprise to industry participants given the number of documented abuses in the

sector.

The Future: Contemplated Enforcement Actions. Cordray promised several times during the

hearing that the CFPB would continue to look “aggressively” at student loan origination and

servicing complaints, particularly underwriting practices. Cordray also promised that the CFPB

would be scrutinizing debt collection agencies, credit reporting bureaus and credit card

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companies (although he noted that since implementation of the CARD Act that consumer

complaints against credit card companies had fallen precipitously).

Cordray’s full testimony may be found here.

II. House Financial Services Committee Examines Regulatory Burdens On Community

Banks

Recently, the House Financial Services Committee’s Subcommittee on Financial Institutions &

Consumer Credit held a hearing entitled “Examining Community Bank Regulatory Burdens.”

Although the hearing covered a wide range of regulatory burdens imposed under the Dodd-Frank

Act and other laws, a substantial portion of the hearing focused on the burdens imposed on

community banks by the CFPB.

Highlights of the testimony are reproduced below:

Ken Burgess, Chairman of First Bancshares of Texas, testified on behalf of the American

Bankers Association. The focus of his testimony centered on specific industry concerns with the

CFPB’s Ability-to-Repay/QM rules and other mortgage-related rules:

“At the core of community bank's concerns over the new regulations is timing. Most of the new

rules required under the Dodd-Frank Act, including the Ability to Repay/Qualified Mortgage

rule, new rules on Loan Originator Compensation and appraisal rules are statutorily mandated

to take effect in January of 2014. Even as we speak, legal experts are dissecting the rules to

understand our potential liability, and bank compliance officers, compliance software vendors

and bank management are working to comprehend the 3,200 (and still growing) pages of new

regulation, craft policies, construct employee training programs and undertake other necessary

compliance activities in order to be in compliance by very early next year. Adding complexity

and cost to the situation is the expectation that CFPB will soon release new RESPA/TILA merger

rules which, even if relatively straightforward and modest, will still have the impact of forcing a

further rewrite of forms, compliance manuals and training regimes as RESPA and TILA are the

underpinnings of all mortgage lending. Community banks are struggling to keep up, and some

are facing the reality that they will either have to curtail their lending until they can be certain

they are in compliance, and thus face losing market share, or worse, are considering exiting the

mortgage business altogether. Driving these quality lenders from the marketplace is the exact

opposite result of what advocates for mortgage reform intended. We do not come before you

today asking that that reform be stopped, but we do ask that Congress and the regulators work to

ensure that compliance timelines be made more reasonable.”

“The Ability to Repay/Qualified Mortgage rule required CFPB to provide Qualified Mortgage

status to balloon loans, but only those made by a select set of small lenders in rural or

underserved areas. The rule proposed by the CFPB adheres to this statutory limitation, but the

result is far too narrow and will curtail the use of balloon loans as a tool best suited to some

borrowers. Balloon loans have traditionally been made to borrowers with specific

characteristics or for properties with specific characteristics which make the loan ineligible for

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sale into the secondary market, and thus held in portfolio by the originating lender. Borrowers

who are not U.S. citizens on a short-term work visa or properties, for which a comparable

appraisal is not available, are examples of situations where a balloon loan may be the best, most

affordable option for a borrower. These situations arise not just in rural and underserved areas,

and such loans are extended by banks of all sizes, not just small banks located in rural and

underserved areas. ABA has shared with the CFPB a list of fifteen specific property or borrower

characteristics for which balloon loans should be allowed (and eligible for QM status)

regardless of geography or size of institution making the loan…While CFPB may adopt the ABA

proposal, they will have to use their exemptive authority to do so beyond the scope of the

requirements of the Dodd-Frank Act. A better approach would be for Congress to amend the

balloon loan QM provisions to allow for such treatment under the statute.”

“We would also ask Congress to revisit the issue of loan originator compensation and the

calculation of points and fees under the Qualified Mortgage rule. The addition of this fee to the

points and fees calculation will have a very large impact in terms of disqualifying loans from the

QM categories, which in turn means that these loans will likely not be extended. ABA believes

that the elimination of such loans is entirely unnecessary, and does not serve to enhance

consumer protection in any way. Because the Dodd-Frank Act generally prohibits any form of

loan originator compensation based on the terms of the loan, there is no need to add further

layers of protection through the inclusion of loan originator compensation in the points and fees

triggers of the Qualified Mortgage provisions. Although language in Dodd-Frank can be read to

instruct this duplicative inclusion, we ask that Congress act to remove loan originator

compensation from the points and fees calculation as being neither warranted nor necessary.”

Mr. Charles Kim, Executive Vice President & Chief Financial Officer of Commerce Bancshares,

testified on behalf of the Consumer Bankers Association. While his testimony discussed the

interplay of qualified mortgage rules in the context of further capital regulations being

contemplated as part of Basel III negotiations, Kim also mentioned the frustration of many banks

in trying to craft small dollar loan products for consumers with uncertainties caused by a

changing regulatory landscape.

Small Dollar/Payday Loans: “Conflicting or inconsistent requirements among different

regulations…can create an uneven playing field and provide unfair advantages to certain

players. For example, we experience that with the varying state rules for short-term small dollar

loan products. As there are no ‘safe harbors,’ we can be restricted from offering good solutions

at competitive pricing while a competitor ‘right next door’ does not have the same restrictions…

changing rules that can be retroactively applied create a disadvantage for the consumer as it

makes banks either not offer a solution or not want to spend time thinking of ways to provide new

solutions. For instance, consumers want and need access to funds for short-term gaps and will

find ways to get it. Limitations can either cause consumers to be penalized with restrictions they

do not want, or to look elsewhere for more punitive and expensive solutions from less palatable

sources…”

A link to the hearing and the full testimony of all witnesses may be found here.

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III. CFPB Outlines Arbitration Clause Policing To Republican Members

In a letter last week to top Republican members of the House Judiciary and Financial Services

Committees, David Silberman, the CFPB’s Associate Director for Research, Markets, &

Regulations, notified concerned lawmakers about the agency’s plans regarding potential

regulations governing mandatory arbitration clauses in consumer financial products contracts.

In his letter, Silberman stated that an initial agency study of arbitration clauses would focus on

two issues: 1) the prevalence (and content) of contractual arbitration clauses; and 2) the variety

of consumer disputes settled either under arbitration clauses or through the courts.

However, in a public request for information on arbitration issued last year, the CFPB also

signaled its intent to explore considerably more areas than the prevalence of arbitration clauses

or what types of disputes consumers bring under them. While the agency may be focusing on the

first two topics in an initial report, the CFPB is likely to expand upon that report over the course

of the next year to include:

Claims brought by financial services companies against consumers in arbitration;

How consumers and companies are affected by actual arbitrations; and

How consumers and companies are affected by arbitration clauses outside of actual

arbitrations.

The CFPB notes that after completion of the study, it “ will assess whether imposing conditions

or prohibitions on arbitration clauses would better protect consumers and serve the public

interest.” While the CFPB’s work in the area is proceeding slowly, at the Senate Banking

Committee’s recent CFPB oversight hearing, Cordray expressed his belief that some parts of the

agency’s ongoing work in the sphere of arbitration clauses would be released publicly this year.

The full request for information on arbitration clauses may be found here.

IV. Congressional Research Service Issues Report on Constitutionality of Cordray

Appointment and Implications for the Bureau

The CFPB has consistently denied that the decision in Noel Canning v. NLRB—which held that

President Obama exceeded his appointment powers in recess appointing two members to the

National Labor Relations Board—applies to the legality of Richard Cordray’s appointment

which was done in the same manner on the same day.

Recently, the Congressional Research Service (CRS)—a non-partisan research service for

Members of Congress—investigated the potential effects on the CFPB if the ruling in Canning is

upheld and applied to the Bureau. The report contains bad news for those hoping that the

Canning decision could be applied to the CFPB and undo its various and extensive rulemakings.

The reason for this stems from the unique way in which the Dodd-Frank Act organized the

transfer of powers from various agencies to the Bureau.

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In short, the report noted that if Cordray’s appointment were held to be invalid by the courts,

then the Treasury Secretary would be presumed to have retained responsibility for the CFPB’s

transfer of powers. That would make the Treasury Secretary effectively the Acting Director of

the CFPB (except for those new powers given to the Bureau under the Dodd-Frank Act which

did not originate in a transfer of powers from other agencies).

Given this strange legal landscape, the Congressional Research Service noted two things: 1) that

the Treasury Secretary could “cure” the legal ambiguity surrounding CFPB rulemakings

promulgated under powers transferred to it by ratifying those rulemakings; and 2) that the only

major rules which the CFPB appears to have undertaken which the Treasury Secretary could not

ratify are those regulations relating to larger participants in the debt collection and credit

reporting markets. While the CRS report is not legally binding it is nonetheless a valuable and

non-partisan legal opinion.

Events

I. May 8th

Student Loan Field Hearing In Miami-Dade: A New Student Loan Initiative In

The Works?

Following on the heels of a recent proposed rule to supervise larger nonbank servicers of student

loans, as well as the recent CFPB’s public request for information on its plans to develop a

“student loan affordability plan,” the agency has announced a May 8th

Miami-Dade field hearing

on student loan borrowers. Because past field hearings have been used by the agency as an

opportunity to unveil new initiatives, and because Cordray himself will give the remarks, one can

expect a new announcement governing the student loan servicing industry will be forthcoming.

II. FDIC Holding Three Teleconferences on CFPB Mortgage Rules

In a sign that even the FDIC is concerned over the confusion surrounding implementation of the

CFPB’s new mortgage rules, the FDIC has scheduled three teleconferences to help officers and

employees of FDIC-supervised depository institutions understand how implementation will

occur. The calls cover the following areas:

Time: May 2, 2013; Topic: the CFPB’s Ability-to-Repay/QM Rules, as well as rules governing escrow accounts, and provisions of the loan originator compensation rule

prohibiting mandatory arbitration clauses and the financing of single premium credit

insurance.

Time: May 15, 2013; Topic: the CFPB’s mortgage servicing final rule.

Time: June 6, 2013; Topic: the CFPB’s rules on loan originator compensation and the expansion of the Home Ownership and Equity Protection Act (HOEPA).

The teleconferences will each take place from 2-3:30 PM, Eastern Time. Although the

teleconferences are free, advance registration is required.

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Other CFPB Statements & Speeches

I. Cordray Addresses the CFPB’s Consumer Education Products at the Federal Reserve

Bank of Chicago Financial Literacy & Education Summit

At a recent Federal Reserve Bank summit on financial literacy, Cordray discussed efforts,

present and future, at the agency to develop and disseminate information concerning an array of

financial products, arguing that available information in the marketplace is often “skewed” and

that the Bureau would provide “impartial” information: “We are acutely aware that consumers of

all ages need sound information and advice to bolster their financial knowledge and capability.

But where can they find these tools? One place may be the marketplace itself, but the drawback

is that whatever they find in that arena is likely to be skewed by the financial self-interest of

other parties. So people need trusted and impartial resources, and it is difficult to know where to

turn. We intend to make the Consumer Bureau itself a source for such information…We have

begun to develop modules to address these critical decision points, beginning with our “Paying

for College” module already available at our website, consumerfinance.gov….we believe that

our new agency, the Consumer Financial Protection Bureau, is uniquely positioned to help

bridge the gap between people’s actual financial capability and the complex financial decisions

they have to make…Through supervision and enforcement, we are providing comprehensive

oversight over the entire market of mortgage lenders and mortgage servicers, which was subject

to incomplete and partial regulation until Congress created the CFPB. We are getting a high

volume of mortgage complaints from individual consumers. We are embarked on a “Know

Before You Owe” project to simplify disclosures and make these products more accessible to

consumers looking to buy a home. And later this year we will be rolling out a module for our

web site on “Owning a Home” to help people through that process…

Cordray’s full remarks may be found here.

II. Antonakes Provides Insight into the Agency’s Approach to Supervision & Enforcement

In his speech before the American Bankers Association, the CFPB’s Acting Deputy Director,

Steve Antonakes, addressed what was undoubtedly on the minds of everyone in the room: how

the CFPB’s supervision of financial institutions will proceed as the examination process heats up

over the coming months.

First, Antonakes explained that the agency would seek to tailor its regulatory requirements to the

nature, size, and complexity of various financial entities. Second, Antonakes promised that the

agency would publish plain-language summaries of its rules, starting with recent mortgage and

mortgage serving rules. Third, Antonakes promised that the CFPB would develop a common

examination procedure so that rules will be enforced consistently—a statement which appears to

be somewhat in conflict with his promise that rules will be tailored to the size, type, and

complexity of specific institutions.

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But the next two parts of his speech best illuminated the CFPB’s own thinking on how it

understands and intends to proceed with respect to its supervisory functions.

On the difference between the agency’s bank examinations compared to those conducted

by other banking regulators: “There are two key differences in our approach that I would like

to highlight. First given the mission of the Bureau, our focus is on potential risk to consumers

rather than risk to institutions. Second, eventually, our oversight work will become increasingly

product-centric….Accordingly, we have begun to implement a prioritization framework that

allocates our examination, investigation, and fair lending resources across product types. This

strategy intentionally moves us away from static examination cycles.

Quantitative and Qualitative Factors: “In terms of our supervisory approach, it encompasses

an assessment of potential consumer risk, as well as a number of quantitative and qualitative

factors. These factors include: (1) the size of the overall market in which a regulated entity’s

product line operates; (2) the potential for consumer risk related to a particular product market;

(3) a regulated entity’s level of activity in the marketplace, or more specifically, its market

share; and (4) field and market intelligence that encompasses a range of issues including, but

not limited to, the quality of a regulated entity’s management, the existence of other regulatory

actions, default rates, and consumer complaints.”

Antonakes’ full remarks may be found here.

III. Cordray Discusses CFPB Efforts to Integrate Financial Literacy in Schools at the

Investing in Our Future Conference

In a speech at a recent CFPB-hosted conference focused on promoting financial literacy among

youth, Cordray unveiled a CFPB white paper highlighting approaches to teaching financial

literacy in schools as well as through other outreach efforts targeting young adults.

Cordray’s full remarks may be found here, while the white paper focused on integrating financial

literacy into school curricula may be found here.

IV. Antonakes Discusses Payday Loans, Administrative & Legal Enforcement

In his speech before the Attorneys General Education Program, Antonakes summarized the

agency’s work regarding small dollar and payday loans and its approach to supervision and

enforcement.

On payday loans: “…while payday and deposit advance products are structured as products

designed to meet short-term credit needs, the report found that many consumers are at risk of

using them to make up for chronic cash-flow shortages. This turns what is described as a costly

short-term bridge into a very expensive, long-term loan. Our findings thus raise substantial

consumer protection concerns. The Bureau intends to continue its inquiry into small-dollar

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lending products to better understand the factors contributing to their sustained use. As we look

to next steps, we will be determining how to exercise our authorities to best protect consumers

while preserving access to responsible credit.”

On enforcement: “We have the choice of pursuing our enforcement actions through two

different tracks: administrative proceedings or actions in the federal courts across the country.

We have independent litigating authority, so we don’t need to rely on the Justice Department to

bring actions on our behalf. And since the remedies available to us are the same through the

administrative and court tracks, we are able to choose the forum that best fits the circumstances

of each case. Indeed, in order to provide the best outcome for American consumers, we have a

range of remedies available to us when legal violations are uncovered. Our available remedies

are both monetary and non-monetary and include: asset freezes, monetary restitution and

damages, and civil money penalties.”

Antonakes’ full remarks may be found here.

—End—