On February 6, 2019, the CFPB issued a proposal to reconsider the mandatory underwriting provisions of its pending 2017 rule governing payday, vehicle title, and certain high-cost installment loans (the Payday/Small Dollar Lending Rule, or the Rule).

The CFPB proposed and finalized its 2017 Payday/Small Dollar Lending Rule under former Director Richard Cordray. Compliance with that Rule was set to become mandatory in August 2019. However, in October 2018, the CFPB (under its new leadership of former Acting Director Mick Mulvaney) announced that it planned to revisit the Rule’s underwriting provisions (known as the ability-to-repay provisions), and it expected to issue proposed rules addressing those provisions in January 2019. The Rule also became subject to a legal challenge, and in November 2018 a federal court issued an order staying that August 2019 compliance date pending further order.

The 2017 Rule had identified two practices as unfair and abusive: (1) making a covered short-term loan or longer-term balloon payment loan without determining that the consumer has the ability to repay the loan; and (2) absent express consumer authorization, making attempts to withdraw payments from a consumer’s account after two consecutive payments have failed. Under that 2017 Rule, creditors would have been required to underwrite payday, vehicle title, and certain high-cost installment loans (i.e., determine borrowers’ ability to repay). The Rule also would have required creditors to furnish information regarding covered short-term loans and covered longer-term balloon loans to “registered information systems.” See our previous coverage of the Rule here and here. Continue Reading CFPB Announces Proposal to Revoke (Most of) the Payday/Small Dollar Lending Rule

While most of the federal government remained shuttered in mid-January, the Consumer Financial Protection Bureau (CFPB or the Bureau) was on the job, thinking about the Military Lending Act (MLA or the Act). On January 17, 2019, the Bureau’s Director, Kathleen Kraninger, issued a statement asking Congress to “explicitly grant the Bureau authority to conduct examinations specifically intended to review compliance with the MLA.” Director Kraninger’s predecessor, Mick Mulvaney, reportedly halted MLA-related examinations last year, citing the lack of statutory authority . It appears from the Director’s request that the CFPB may not conduct MLA compliance examinations without new legislation.

The MLA—enacted in 2006 and implemented by the Department of Defense—provides enhanced protection to active duty service members, their spouses, and their dependents when they obtain certain types of loan products. One of the main protections prevents creditors from imposing more than a 36% Military Annual Percentage Rate (an annualized rate including interest and other fees) on a covered individual for certain products. The Act also prohibits certain loan terms, such as mandatory arbitration clauses or prepayment penalties.

Congress granted the Bureau enforcement authority for the MLA’s requirements in 2013. At the time, the Bureau interpreted the scope of that new authority to include supervision—the authority to proactively examine covered institutions for violations of the Act. In its Supervisory Highlights for Winter 2013, the Bureau stated that it would ensure adherence to the MLA through both enforcement and supervision activity, and noted that it had updated its short-term, small-dollar loan examination procedures with guidance on how to identify MLA violations. The Bureau then issued a set of standalone examination procedures for MLA compliance in 2016. The Bureau has taken one enforcement action based on MLA violations—a consent order issued in 2013.

The Bureau has not issued any formal guidance regarding MLA-related supervisory activity since 2016. However, in August 2018, it was widely reported that then-Acting Director Mulvaney planned to suspend MLA-related examinations. The basis for the suspension was reportedly that, although the MLA legislation granted the Bureau enforcement authority, the Act did not grant supervisory authority. In other words, the Bureau planned to continue to exercise its enforcement authority as violations of the MLA came to its attention, but CFPB examiners would not proactively monitor covered institutions for violations.

Subsequent to those reports, Democratic members of the House Committee on Financial Services (HCFS)—including current HCFS Chair Maxine Waters—sent a letter to Director Kraninger requesting that she commit to resuming MLA-related supervisory activity. The Director responded by issuing the above-mentioned request for legislation explicitly granting the Bureau supervisory authority over the MLA. Based on the wording of Director Kraninger’s request, it appears that the Bureau may not conduct “examinations specifically intended to review compliance with the MLA” until it receives explicit legislative authority from Congress.

In conjunction with her request, Director Kraninger submitted to lawmakers proposed legislation that would grant the Bureau supervisory authority for the MLA’s requirements. A week prior to the Director’s request, Representative Andy Barr introduced House Resolution 442, which would also grant the requested authority. The prospects for either proposal are unclear in a divided Congress.

Mayer Brown’s Alex Lakatos will serve as a contributor to the new fintechpolicy.org website.  His most recent contribution is a video series on the intersection of ethics, fintech, and artificial intelligence.

Check out the latest episodes (each episode is a time-friendly 1 or 2 minutes), and note that new episodes will be released about once a week until the series is complete.

Possibly hinting toward a revival of fair lending enforcement following a recent lull, the OCC’s Ombudsman recently declined a bank’s appeal of the OCC’s decision to refer the bank to both DOJ and HUD for potential Fair Housing Act violations.

The OCC’s Ombudsman oversees an infrequently used program for banks that desire to appeal agency decisions and actions.  In 2018, a bank appealed the determination of the OCC’s supervisory office that the bank may have engaged in a pattern or practice of discrimination on the basis of race, national origin, or sex in violation of the Fair Housing Act.

The Ombudsman reviewed the bank’s appeal under Section 2-204 of Executive Order 12892 and DOJ guidance from 1996 describing the circumstances that qualify as a “pattern or practice” meriting a referral.  Under Executive Order 12892, when the OCC receives “information from a consumer compliance examination…suggesting a violation of the Fair Housing Act,” it must forward that information to HUD. If the information indicates a possible pattern or practice of discrimination in violation of the Act, the OCC must also forward it to DOJ. After examining the information, HUD may choose to pursue an administrative enforcement action and DOJ may choose to pursue legal action.

Significantly, in ruling on the bank’s appeal, the Ombudsman determined that the OCC is only required to have information suggesting a possible pattern or practice of Act violations in order to forward that information to HUD  or DOJ pursuant to Executive Order 12892.  In other words, the OCC is not required to meet evidentiary standards that would otherwise be applicable in court. According to the Ombudsman’s decision, DOJ conducts its own investigation of information forwarded by the OCC and directs bank regulatory agencies that they need not have “overwhelming proof” of an “extensive pattern or practice of discrimination” before making a referral.

Appeals to the Ombudsman rarely involve fair lending matters. The last bank appeal involving fair lending occurred in 2011, and involved a community bank that the OCC believed had engaged in racial redlining. The Ombudsman agreed with the supervisory office’s referral in that case as well. More recently, banks have used the Ombudsman’s office to challenge various matters requiring attention in examination reports, with many focusing on ratings assigned during Shared National Credit examinations.

It’s difficult to predict whether this recent Ombudsman ruling is  a harbinger of more vigorous fair lending supervision.  Banks should take note, however, that the OCC is conducting Fair Housing Act examinations and willing to refer matters to HUD and DOJ based solely on information “suggesting a possible pattern or practice” of violations.

 

The Consumer Financial Protection Bureau issued final policy guidance on December 21, 2018, explaining how it will make available to the public data submitted by financial institutions under the Home Mortgage Disclosure Act (HMDA). The CFPB comprehensively revised HMDA reporting requirements in 2015, and extensive new data collection requirements became effective this year, with a reporting deadline of March 2019. With three months to go before that deadline, the CFPB could not have waited much longer to announce how it will publicly disclose the HMDA data while still protecting sensitive information.

Under the new HMDA requirements, reporting financial institutions must notify the public that the institutions’ data may be obtained on the CFPB’s website. The CFPB is then responsible for protecting applicant and borrower privacy, even as privacy risks evolve. The industry has expressed concern about the breadth of the data the CFPB will be collecting under the new HMDA reporting requirements, and about the increased reidentification risks that could arise upon making the data public (that is, the risk that someone could link an identified individual to his or her HMDA data). Commenters emphasized that if borrowers or applicants could be identified from the HMDA data, predators could target consumers for identity theft, fraudulently pose as the borrower’s lender, or otherwise misuse the data.

However, the CFPB declined to follow the commenters’ requests to exclude from the public all the new data required to be reported under the 2015 HMDA final rule. The CFPB recognized the inherent reidentification risk, but determined that the benefits of certain data disclosure outweigh that risk. The CFPB determined that most of the HMDA data is not sensitive and does not substantially facilitate reidentification or create a risk of harm. The CFPB reportedly employed a balancing test, requiring that HMDA data be excluded from public disclosure or modified when the release of the unmodified data would create risks to applicant and borrower privacy interests that are not justified by the benefits to the public of that release.

Accordingly, at least for 2018 data, the CFPB will modify the HMDA loan-level data to exclude the following fields: Continue Reading CFPB Issues Final Guidance on Public Disclosure of HMDA Data

The California legislature was active in 2018, enacting several new requirements and provisions applicable to the financial services industry. Those requirements include an important and comprehensive privacy regime (the California Consumer Privacy Act of 2018, or CCPA), which establishes new protections for personal information that covered commercial enterprises collect. The CCPA becomes effective January 1, 2020, with implementing regulations due July 1, 2020.

However, many new California provisions become effective on January 1, 2019, including new foreclosure protections (and the reinstatement of certain protections from the California Homeowner Bill of Rights) and the exclusion of reverse mortgage loans from certain successor-in-interest protections. A new requirement to provide mortgage loan modification disclosures in the language in which they are negotiated (e.g., in Spanish, Chinese, Tagalog, Vietnamese, or Korean) becomes effective for covered entities once the regulator develops those disclosures.

California also imposed new restrictions and requirements applicable to debt collectors and a new licensing obligation for servicers of student loans, and expanded certain financial protections for servicemembers.

Read more about California’s active legislature in Mayer Brown’s recent Legal Update.

Oversight of the Consumer Financial Protection Bureau (Bureau) by the U.S. House of Representatives is expected to become more aggressive when the 116th Congress convenes in January 2019. On December 11, 2018, members of the new Democratic House majority nominated Representative Maxine Waters to chair the House Financial Services Committee, which oversees the Bureau. During Rep. Waters’ time as ranking member on the Committee, she heavily criticized many of the changes Acting Director Mick Mulvaney made at the Bureau. Mayer Brown summarized those changes in a recent Legal Update.

As chair, Rep. Waters will set the Committee agenda, enabling her to turn her criticism into more direct pressure on the Bureau and its new Director Kathleen Kraninger. Proposed legislation sponsored by the incoming chair may hold some clues to the actions the Committee may take.

In September 2018, Rep. Waters introduced the Consumers First Act. The bill is largely designed to restore the Bureau to how it looked and functioned before Acting Director Mulvaney’s tenure. Some of its major topics include the following: Continue Reading House Oversight of CFPB Expected to Become More Aggressive Under Chair Waters

Mayer Brown’s Alex Lakatos will join the Consumer Financial Services Committee of the American Bar Association’s Business Law Section when it meets in Miami January 10-13, 2019.

On January 12, Lakatos will participate on a panel to discuss fair lending issues with the use of artificial intelligence and big data.

The Consumer Financial Protection Bureau recently proposed amendments to its earlier policy for issuing no-action letters, and proposed a process for participating in a so-called regulatory “sandbox,” which would provide certainty in or exemptions from complying with certain federal consumer protection laws. Comments on the proposals are due by February 19, 2019.

Read more in Mayer Brown’s Legal Update.

The Bureau of Consumer Financial Protection now has the third Director in its history. On December 6, the Senate confirmed Kathleen (“Kathy”) Kraninger on a 50-49 party-line vote to a five-year term as Director, ending Mick Mulvaney’s year-long tenure as Acting Director. Mulvaney’s tenure was marked by elements of both change and continuity from the agency’s first Director, Richard Cordray, as we discuss here. The most marked departures from the Cordray era relate to the number of enforcement actions brought by the agency and the retreat from the payday lending rule that the agency had finalized at the end of Cordray’s tenure.

The independence of the Director, which Democrats have tenaciously fought for, may now come back to haunt them, as Kraninger’s term runs to December 2023—nearly three years into the next presidential administration. As then-Judge Kavanaugh pointed out at the oral argument in the PHH case before the D.C. Circuit (in a line that drew laughter from the audience for its not-so-veiled reference to Elizabeth Warren), “the new President, might be a different party, might have run on a platform of consumer protection, might be the person who created the Consumer Protection Agency, and will not have the authority to do anything about that for three years.” Of course, there are still pending challenges to the constitutionality of the agency, and maybe the result of those challenges—or other political realities—will lead to the creation of a Commission to run the agency. But for now, Director Kraninger is in charge. As has been the case throughout the Bureau’s history, the political spotlight will continue to shine on it.