News broke last week of a major reorganization at the Consumer Financial Protection Bureau (CFPB or Bureau), with headlines focusing on how the shakeup will hamper investigations and limit the Office of Enforcement’s autonomy. To better understand what happened, it’s helpful to have a little bit of perspective on the CFPB’s authorities and organization. While it’s too soon to know how the reorganization will impact the agency’s enforcement docket, it is not at all clear that it will have the limiting impact that some expect.

The CFPB was created as a somewhat unique regulator, combining the traditional tools of prudential regulators like the Federal Reserve or Office of the Comptroller of the Currency (supervision and examination) and those of law enforcement agencies like the Federal Trade Commission (investigation and litigation). While the prudential regulators also have enforcement authority, that authority is generally limited to entities over which the agency has supervisory authority (and related individuals and service providers). And that enforcement authority is exercised only after an examination by supervisory personnel; that is, it is the culmination of the supervisory process, not an independent process. By contrast, the CFPB’s enforcement jurisdiction is much broader than the defined set of covered persons over whom it has supervisory jurisdiction, extending to any company or individual that is subject to one of eighteen different statutes or who offers or provides a consumer financial product or service. While some CFPB enforcement actions arise out of examinations, the vast majority to date have been outgrowths of organic enforcement investigations that were not tied to examinations.

At bottom, these two tools—supervision and enforcement—are just different legal authorities by which the agency can gather information from institutions subject to its jurisdiction to determine if legal violations occurred. For a brand new agency, that raises a difficult question – which of these tools do you use in any given circumstance to determine if a particular institution is violating the law? Do you send in examiners or enforcement attorneys?

That question wasn’t answered immediately at the agency’s creation. Instead, the offices of Supervision and Enforcement each focused on hiring staff and building out processes for the exercise of their respective functions. The Bureau adopted a structure, the Division of Supervision, Enforcement and Fair Lending (SEFL), that was supposed to allow for the integration of the agency’s supervision and enforcement functions and allow for strategic “tool choice” decisions—when to use supervisory tools and when to use law enforcement tools, both for gathering information (examinations versus civil investigative demands) and resolving matters (non-public supervisory resolutions that cannot involve civil money penalties versus public enforcement resolutions that almost always did involve civil money penalties). But while the structure envisioned an Associate Director for all of SEFL, as a compromise to Enforcement’s hard-fought insistence that it report directly to the Director of the agency, that position was initially left vacant. And even after it was first filled, it was with the understanding that the SEFL Associate Director would not exert substantive authority over enforcement matters – he would have no role in the decision to open investigations, and would play no substantive role in the decision to settle or sue at the end of an investigation. Those settle-or-sue decisions belonged to the Director, and while the memos seeking such authority passed through SEFL leadership, SEFL leadership had little if any role in crafting the memos.

The Bureau did eventually develop a “tool choice” process by which it decided whether a particular issue should be reviewed in the first instance by Supervision (examination) or Enforcement (investigation). But that process boiled down to this: Supervision created its examination schedule for the year (through its strategic planning process), and any institution/issue not on the exam schedule was fair game for an enforcement investigation (the opening of which would be guided by Enforcement’s strategic planning process). The Bureau also developed a process by which SEFL collectively decided if certain legal violations identified in the course of an examination should be resolved through supervision or enforcement (the “ARC process”). (The agency has not yet developed a reverse process, by which issues uncovered in an enforcement investigation can be referred to Supervision for resolution.) But Enforcement and Supervision otherwise remained separate offices, and SEFL leadership was focused much more heavily on management of the Supervision side of the house, given Enforcement’s historical direct line to the Director.

That brings us to today and the recent re-organization. In sum, the re-organization appears intended to truly integrate SEFL and empower SEFL leadership. In that regard, it has correctly been described as disempowering the traditional independence of the CFPB’s Enforcement office. But it is not clear whether the motivations are to disempower Enforcement as opposed to empowering SEFL and further rationalizing and integrating the CFPB’s use of its two primary tools—supervision and enforcement.

The key part of the reorganization combines what had been the Office of Supervision Policy (OSP) and the Enforcement Policy and Strategy Team (PST) into the Office of SEFL Policy and Strategy (OSPS). OSP had been the office charged with ensuring consistency of approach within the Bureau’s supervision program. It was intended to ensure that a particular set of facts was treated consistently whether uncovered by an examiner in the Northeast, or the West. But its remit did not extend to Enforcement. The PST, in turn, was tasked with helping ensure consistency of approach within Enforcement (e.g., that Enforcement take consistent approaches in similar cases). But no other process existed to ensure consistent Bureau approaches across Supervision and Enforcement. The result, as we’ve written about before, was occasional disparate outcomes that depended not on the underlying facts but on whether CFPB Supervision or Enforcement was involved. The creation of OSPS should help mitigate that, as a single office, organized by industry issues (e.g., origination, servicing, debt collection, etc.), will be involved in reviewing both supervisory and enforcement resolutions.

OSPS will also play an integrative role on the strategic planning front. As noted above, Supervision and Enforcement previously had separate strategic planning processes (though both processes were integrated within the Bureau’s broader strategic planning process). OSPS will take over the role for both parts of SEFL. It is not entirely clear how that will play out, given the historically differing approaches to strategic planning, but the goal appears to be to ensure a more integrated approach to the Bureau’s “tool choice” decisions.

One other particular aspect of the reorganization has drawn fire: the fact that OSPS—and not Enforcement—will now have to sign off on the approval of new enforcement investigations. While this decision can be seen as part of the integration of the tool choice approach discussed above—for the opening of such an investigation is making a tool choice decision in a particular case—this is a significant shift of authority away from Enforcement, which previously retained the authority to open new investigations (with notice to Supervision). As with many things, the true impact of this change will be in the details. A truly empowered OSPS that carefully scrutinizes and second guesses proposed investigations would represent a significant change for Enforcement. On the other hand, an OSPS that generally defers to Enforcement’s judgment and only rarely turns down a proposed investigation would represent much less of a change. In this regard, we note that the CFPB recently released data about the number of new investigations it has opened in each fiscal year (through FY 2019). Those figures show a precipitous drop in the number of new investigations from 70 and 63, respectively, in the last two years of Richard Cordray’s tenure as Director, to 15 and 20, respectively, in Mick Mulvaney’s tenure and Kathleen Kraninger’s first year in office. If those numbers stayed constant in FY2020, it appears that the change in enforcement has already occurred, and the reorganization may have less immediate impact.

It is also important to remember that personnel matter. While there is no doubt that organizational decisions such as these have real impacts on how agencies operate (indeed, Acting Director Mulvaney’s decision to move the Office of Fair Lending out of SEFL has coincided with a precipitous decline in CFPB fair lending activity), the personnel who fill the roles at issue also play an important role in how things shake out. The new OSPS will be headed by the former head of OSP, Peggy Twohig. Some may view this as Supervision winning the battle between Supervision and Enforcement. But it’s important to remember that although Ms. Twohig (who hired me into the CFPB in its early days) helped build the Supervision program at the CFPB and headed up OSP, she first spent many years as an enforcement attorney and supervisor at the FTC. She is neither a lifelong examiner nor a die-hard enforcement attorney; rather, she has experienced the benefits and limitations of each of these tools. She therefore brings a unique blend of experience to a role that is intended to integrate these two different tools in the service of the agency’s ultimate goals, and appears uniquely situated to do so.

Much of what the CFPB’s current leadership does is (understandably) viewed with suspicion by consumer advocates and supporters of the agency. And it may be that this re-organization is intended to further weaken the Office of Enforcement. But on its face, it appears to be a reasonable next step in the evolution of SEFL into a truly integrated Division of the agency, allowing for more thoughtful tool choice decisions and a more consistent approach to enforcing the law.

On September 25, California Governor Newsom signed Senate Bill 908, enacting the Debt Collection Licensing Act (the “DCLA”), placing California with the majority of states that require consumer debt collectors to be licensed. Subject to a few exemptions, persons engaging in the business of debt collection in California (including debt buyers) will be required to submit a license application before January 1, 2022. Senate Bill 908 is just one of a number of consumer protection bills enacted in California in recent days, including a bill creating the state’s “mini-CFPB.”

Continue Reading California Becomes the Latest State to License Debt Collectors

Mayer Brown is pleased to announce that Krista Cooley, a partner in our Financial Services Regulatory and Enforcement group, has recently expanded her existing practice to take the lead in managing our state licensing practice.  Krista is an experienced Consumer Financial Services attorney with over 19 years of experience.  In this role, Krista advises clients on compliance with the requirements of federal and state laws governing the licensing, approvals and practices of brokers, lenders, purchasers and servicers of mortgages and other consumer loan products, as well as sales finance companies, money service businesses and collection agencies. She also assists clients in navigating the complex state and federal licensing and approval process in connection with, among others, new business lines, legal entity conversions, restructuring and change of control transactions.

Stacey Riggin, one of our Government Affairs Advisors, and Dana Lopez, our Licensing Manager, work closely with Krista and will continue to oversee our team of five regulatory compliance analysts, each of whom has over ten years of experience working together on licensing matters.  Our team has decades of experience in managing nationwide licensing projects and assisting clients in obtaining approval with state and federal government agencies to engage in a variety of financial services related activities.  Our team also coordinates regulatory approvals needed to facilitate mergers, equity investments, stock and asset acquisitions, and servicing sales and transfers.

Continue Reading Mayer Brown Announces Consumer Finance Licensing Team Transition

The Real Estate Settlement Procedures Act is ambiguous, and compliance often turns on the facts of arrangements. For that reason, settlement service providers have been asking the Consumer Financial Protection Bureau for guidance since it took responsibility for RESPA nearly 10 years ago. These calls were amplified when Section 8 of RESPA was an early target of the CFPB’s enforcement actions. On October 7, 2020, the CFPB released a series of Frequently Asked Questions designed to address the elements of Section 8 of RESPA, as well as to answer specific questions regarding the permissibility of gifts, promotional activities, and marketing services agreements. At the same time, the CFPB rescinded a Compliance Bulletin on RESPA and marketing services agreements that was issued under Director Richard Cordray and long criticized by industry participants.

Read more about the CFPB’s RESPA FAQs and issues that may need further clarification in Mayer Brown’s Legal Update.

Yesterday, we issued the inaugural edition of Mayer Brown’s Fair Lending Newsletter. Our goal in publishing this newsletter is to provide you with a quarterly resource covering the most notable fair-lending developments of the past three months. In this edition, we cover various topics, from the current state of fair lending at federal government agencies to recent regulatory developments affecting banks and other consumer financial services companies. Read the newsletter at:

On September 29, 2020, the CFPB, FTC, and state and federal law enforcement agencies announced a new initiative, called Operation Corrupt Collector, to address certain abusive and threatening debt collection practices, including “phantom” debt collection. If the partnership sounds familiar, it is. Operation Corrupt Collector was essentially announced almost exactly five years after the FTC announced Operation Collection Protection. Though the programs have different names, the goals appear to be the same: bring cases against debt collectors who engage in abusive debt collection practices.

Continue Reading New Name, Same Initiative? Federal and State Regulators Partner (again) to Limit Abusive Debt Collection Practices

On Monday, October 5, the Consumer Financial Protection Bureau (Bureau) issued a policy statement on early termination of consent orders. Recognizing that there may be “exceptional circumstances” where it is appropriate to terminate a consent order before its expiration date, the policy statement explains the process by which an entity subject to a consent order can apply for early termination and the criteria that the Bureau will consider in assessing such an application.

As a threshold matter, the entity must (of course) have actually complied with the terms and conditions of the consent order. But certain persons and orders are de facto ineligible for early termination. If the consent order imposes a ban on participating in a certain industry or involves violations of an earlier Bureau order, for example, or when there has been any criminal action related to the violations in the order, then the order is excluded from the policy and cannot be terminated early. Additionally, because natural persons, unlike entities, cannot make the same demonstration about being in a “satisfactory” compliance position—and the Bureau believes it would be impractical to undertake a review of whether individuals are likely to comply with the law in the future—early termination is not an option for individuals who have settled with the Bureau.

Early termination under the policy is only going to be available for orders issued through the administrative process, Continue Reading Consumer Financial Protection Bureau Announces Policy on Early Termination of Consent Orders

On September 15, 2020, the CFPB published a detailed outline of proposed options it is considering to implement a rule under Section 1071 of the Dodd Frank Act. Ten years ago, Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require that financial institutions collect and report information concerning credit applications made by women- or minority-owned businesses and by small businesses. Although the CFPB was tasked with drafting rules to implement Section 1071, it did not take significant steps to meet that obligation until 2017, when it reported on some preliminary research, and then later in November 2019, when it held an information-gathering symposium.

As we previously noted, once Section 1071 is implemented, certain financial institutions will be required to collect information regarding the race, sex, and ethnicity of the principal owners of small businesses and women- and minority-owned businesses and submit this information to the CFPB, similar to what is currently required by the Home Mortgage Disclosure Act for mortgage loans. The CFPB’s outline released this week proposes several potential options for developing the small business lending data collection rule and is a precursor to any future proposed rulemaking. At this stage, the CFPB is seeking feedback on the direction of the rule. Feedback and comments on the scope of the rule can be sent to until December 14, 2020. The CFPB is also seeking feedback on the potential impacts on small business entities and has requested submission of such feedback by November 9, 2020.

Below, we summarize the key aspects of the Bureau’s outline and its proposals regarding the scope of the rule. Continue Reading CFPB Finally Makes Progress on Implementing Small Business Lending Data Collection Requirements

The California legislature ended its legislative session late on Monday, August 31, 2020, by passing two significant bills that will be of interest to the state’s mortgage servicers and other licensees—AB 3088 and AB 1864.

AB 3088 imposes new forbearance-related requirements on mortgage servicers related to the COVID-19 pandemic (in addition to significant protections for tenants in California beyond the scope of this summary). AB 1864 renames, reorganizes, and grants new authority to California’s primary financial services regulator to create a “mini-CFPB”—although many licensees are exempt from the new authority. Governor Newsom has signed AB 3088 into law, which took effect immediately as an urgency measure, and is expected to follow suit with AB 1864 in the near future.

Below we summarize those provisions from the bills that are particularly relevant to California mortgage licensees and federal- and state-chartered depository institutions servicing mortgage loans in California. Continue Reading California Enacts Two Bills with Significant Impacts on Mortgage Licensees in the State

The Consumer Financial Protection Bureau (CFPB) is proposing to allow a loan to become a Qualified Mortgage (QM) when it grows up. On August 18th, the CFPB issued a proposal that would amend the agency’s Ability-to-Repay (ATR) Rule to provide that a first-lien, fixed-rate loan meeting certain criteria, that the lender has held in its portfolio, could become a QM after 36 months of timely payments. Figuring that if a borrower has made payments on a loan, the lender must have made a reasonable determination of ability-to-repay, the proposal would open the safe harbor door to non-QMs (including those originated as such intentionally or inadvertently) and higher-priced QMs that otherwise receive only a rebuttable presumption of compliance with the Rule. The proposal also would, consequently, close the door on those borrowers’ ability to challenge the lender’s underwriting determination in a foreclosure, which otherwise would last far beyond the three-year period.

Specifically, the CFPB proposes that a covered loan for which an application is received on or after this rule becomes effective could become a “seasoned QM” and earn a conclusive safe harbor under the ATR Rule if:

  1. The loan is secured by a first lien;
  2. The loan has a fixed rate for the full loan term, with fully amortizing payments and no balloon payment;
  3. The loan term does not exceed 30 years; and
  4. The total points and fees do not exceed specified limits (generally 3%).

In addition, the creditor must have considered the consumer’s debt-to-income ratio (DTI) or residual income and verified the consumer’s debt obligations and income. In alignment with the CFPB’s pending rulemaking revising the general QM definition, the creditor would not have to use the Rule’s Appendix Q to determine the DTI. Also, as indicated above, a loan generally would be eligible as a seasoned QM only if the creditor holds it in portfolio until the end of the three-year seasoning period. Continue Reading A Coming of Age Story: CFPB Proposal to Allow Seasoned Loans to Grow Into QMs