Consumer Financial Protection Bureau (CFPB)

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On July 30, 2020, the National Community Reinvestment Coalition (“NCRC”) and several other consumer advocacy organizations filed suit against the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”), claiming that the Bureau’s recent Home Mortgage Disclosure Act (“HMDA”) rulemaking violates the Administrative Procedure Act (“APA”). The challenged rule increases the loan-volume reporting thresholds under Regulation C, which implements HMDA. Under the new rule, entities that originate fewer than 100 qualifying closed-end mortgage loans or fewer than 200 qualifying open-end lines of credit would not be required to collect and report data regarding their mortgage lending activities. The plaintiffs filed the complaint in the U.S. District Court for the District of Columbia and are requesting that the court vacate the new rule and require the Bureau to return to the prior thresholds.

HMDA requires mortgage lenders that originate a minimum number of mortgage loans to collect, report, and disclose certain information related to their mortgage origination and purchase activities. The law’s primary purpose is to provide the public with information on lending practices, including whether lenders are meeting the housing needs of certain communities or potentially engaging in discriminatory practices. HMDA data is a critical tool for plaintiffs and regulators assessing disparate impact claims. The appropriate framework for bringing disparate impact claims has been the subject of recent controversy, with key industry stakeholders asking the Department of Housing and Urban Development to hold off on finalizing its 2019 Proposed Disparate Impact Rule. Regardless of the specifics of the disparate impact legal framework, HMDA data remains a critical component for bringing (and defending) disparate impact claims in mortgage lending.   …
Continue Reading NCRC Files Suit Against CFPB over HMDA Reporting Thresholds

On July 28, 2020, the Consumer Financial Protection Bureau (CFPB or the Bureau) published a request for information (RFI) on opportunities for the Bureau to clarify the Equal Credit Opportunity Act’s (ECOA) implementing regulation, Regulation B, in a way that prevents credit discrimination and promotes credit access and innovation. The Bureau seeks feedback on a diverse set of topics, though the request is not limited to the below topics. Commenters are encouraged to address any aspects of ensuring fair access to credit and promoting innovation.

Arguably the most controversial topic in the RFI is the Bureau’s request for feedback on the appropriate framework for assessing disparate impact claims under ECOA. In 2019, the Department of Housing and Urban Development (HUD) published a proposed disparate impact rule that purports to align HUD’s 2013 disparate impact rule with the Supreme Court’s 2015 decision in Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., a landmark Fair Housing Act case. HUD’s proposed rule has been the subject of significant controversy, with consumer advocacy groups arguing that it goes beyond the Supreme Court’s decision and that the heightened pleading standards outlined in the proposed rule would impermissibly extinguish the viability of disparate impact claims in the future. And recently, several of the largest banks and non-bank mortgage lenders, along with several trade associations, have asked HUD to hold off on finalizing the rule and bring key stakeholders together to discuss the disparate impact framework. Nevertheless, HUD has indicated that it plans to move forward with the implementation of the rule. If the CFPB outlines a framework for assessing disparate impact claims under ECOA that is different than the framework HUD ultimately implements, this could lead to significant uncertainty for the mortgage industry, because it is subject to both ECOA and the Fair Housing Act.

The RFI also seeks comments on whether and how the Bureau should clarify its interpretation of ECOA and Regulation B to facilitate innovation in the context of Artificial Intelligence (AI) and machine learning (ML), such as by modifying adverse action notice requirements in connection with credit underwriting decisions based in part on models using AI or ML. This request comes just weeks after the CFPB published a blog post addressing how adverse action notice requirements under ECOA and Regulation B apply to AI-driven credit decisions. The blog post suggests that the existing official commentary to the Regulation B allows for some flexibility in how creditors explain decisions to applicants. But the CFPB is interested in understanding how creditors are determining the “principal reasons” for a denial, and how to best convey those reasons. Accordingly, in the blog post, the CFPB encouraged institutions to use its regulatory sandbox, trial disclosure program, and no-action letter process to explore creative ways of informing consumers of the reasons for denial when using complex AI/ML algorithms. The RFI is an opportunity for entities to suggest other ways for the Bureau to clarify its interpretation of ECOA.…
Continue Reading CFPB Seeks Input on Fair Lending Laws and Interpretations to Help Foster Innovation and Prevent Credit Discrimination

On July 15, 2020, the Consumer Financial Protection Bureau filed a lawsuit against Townstone Financial, Inc., a Chicago-based mortgage lender and mortgage broker, alleging that Townstone “redlined” African-American neighborhoods in the Chicago Metropolitan Statistical Area and discouraged prospective applicants from applying to Townstone for mortgage loans on the basis of race. This marks the first…

Nearly ten years after passage of the Dodd-Frank Act, the Supreme Court has finally put to bed the raging argument about whether it was constitutional for Congress to establish the Consumer Financial Protection Bureau (CFPB or Bureau) as an independent agency with a single Director removable by the President only for cause. In an anti-climactic end to nearly a decade of heated rhetoric, political battle and costly litigation, the Court held that the Bureau’s structure is unconstitutional but that it can continue to operate as an Executive branch agency, with the Director subject to the President’s removal authority. While that will certainly have implications for the agency’s leadership—and policy—in the future, it does little to change the current legal landscape for regulated entities (with the possible exception, discussed below, of the need to ratify rules the agency has previously issued).…
Continue Reading The Big Bang Fizzles: CFPB Unconstitutional But Not Inoperable

Earlier this week the CFPB released an interim final rule that allows mortgage servicers flexibility to offer additional short-term loss mitigation options to borrowers impacted by the COVID-19 pandemic.  The mortgage servicing rules include many requirements for the servicing of mortgage loans in default, including limitations on the types of loss mitigation that may be offered in certain instances.  The unique challenges facing servicers and borrowers in the wake of the pandemic, as well as the unique loss mitigation options being announced by federal housing agencies designed to assist borrowers negatively impacted by COVID-19 that do not fit neatly into the CFPB’s existing servicing requirements, have prompted the CFPB to amend those rules to provide servicers with additional flexibility. …
Continue Reading CFPB Provides Relief to Servicers Offering Loss Mitigation in Wake of Pandemic

As rumored, the Consumer Financial Protection Bureau (“CFPB”) is proposing to revise its general qualified mortgage definition by adopting a loan pricing test. Specifically, under the proposal, a residential mortgage loan would not constitute a qualified mortgage (“QM”) if its annual percentage rate (“APR”) exceeds the average prime offer rate (“APOR”) by 200 or more basis points. The CFPB also proposes to eliminate its QM debt-to-income (“DTI”) threshold of 43%, recognizing that the ceiling may have unduly restrained the ability of creditworthy borrowers to obtain affordable home financing. That would also mean the demise of Appendix Q, the agency’s much-maligned instructions for considering and documenting an applicant’s income and liabilities when calculating the DTI ratio.

The CFPB intends to extend the effectiveness of the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “GSE Patch”) until the effective date of its revisions to the general QM loan definition (unless of course those entities exit conservatorship before that date). That schedule will, the CFPB hopes, allow for the “smooth and orderly transition” away from the mortgage market’s persistent reliance on government support.

Background

Last July, the CFPB started its rulemaking process to eliminate the GSE Patch (scheduled to expire in January 2021) and address other QM revisions. For the past five years, that Patch has solidified the post-financial crisis presence by Fannie Mae and Freddie Mac in the market for mortgage loans with DTIs over 43%. The GSE Patch was necessary, the CFPB determined, to cover that portion of the mortgage market until private capital could return. The agency estimates that if the Patch were to expire without revisions to the general QM definition, many loans either would not be made or would be made at a higher price. The CFPB expects that the amendments in its current proposal to the general QM criteria will capture some portion of loans currently covered by the GSE Patch, and will help ensure that responsible, affordable mortgage credit remains available to those consumers.

Adopting a QM Pricing Threshold

Although several factors may influence a loan’s APR, the CFPB has determined that the APR remains a “strong indicator of a consumer’s ability to repay,” including across a “range of datasets, time periods, loan types, measures of rate spread, and measures of delinquency.” The concept of a pricing threshold has been on the CFPB’s white board for some time, although it was unclear where the agency would set it. Many had guessed the threshold would be 150 basis points, while some suggested it should be as high as 250 basis points. While the CFPB is proposing to set the threshold at 200 basis points for most first-lien transactions, the agency proposes higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions.

In addition, the CFPB proposes a special APR calculation for short-reset adjustable-rate mortgage loans (“ARMs”). Since those ARMs have enhanced potential to become unaffordable following consummation, for a loan for which the interest rate may change within the first five years after the date on which the first regular periodic payment will be due, the creditor would have to determine the loan’s APR, for QM rate spread purposes, by considering the maximum interest rate that may apply during that five-year period (as opposed to using the fully indexed rate).

Eliminating the 43% DTI Ceiling

Presently, for conventional loans, a QM may be based on the GSE Patch or, for non-conforming loans, it must not exceed a 43% DTI calculated in accordance with Appendix Q. Many commenters on the CFPB’s advanced notice of proposed rulemaking urged the agency to eliminate a DTI threshold, providing evidence that the metric is not predictive of default. In addition, the difficulty of determining what constitutes income available for mortgage payments is fraught with questions (particularly for borrowers who are self-employed or otherwise have nonstandard income streams). While the CFPB intended that Appendix Q would provide standards for considering and calculating income in a manner that provided compliance certainty both to originators and investors, the agency learned from “extensive stakeholder feedback and its own experience” that Appendix Q often is unworkable.…
Continue Reading CFPB Hatches a QM Proposal for GSE Patch

On Thursday, June 18, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced a new pilot program to issue advisory opinions (“Pilot AO Program”) on areas of regulatory or statutory uncertainty. The CFPB simultaneously issued a proposed procedural rule on a permanent advisory opinion program (“AO Program”). The Bureau intends to issue advisory opinions (“AOs”) to address ambiguities in legal requirements that are not suited to be addressed through other Bureau programs such as the Regulatory Inquiries Function and Compliance Aids. The proposed AO Program comes more than two years after industry participants requested such a program in response to the Bureau’s March 2018 Request for Information Regarding Bureau Guidance and Implementation Support.

The proposed AO Program is similar to those offered by other state and federal regulators and, if implemented properly, could provide much needed certainty for regulated entities and consumers alike. The AO Program is intended to address areas of regulatory and statutory uncertainty and provide publicly available guidance for similarly situated parties and affected persons. AOs will be issued as interpretive rules under the Administrative Procedures Act, published in the Federal Register, and signed by the Director of the CFPB. Where information submitted to the Bureau is information the requestor would not normally make public, however, the Bureau will treat it as confidential to the extent applicable under its confidentiality regulations. The CFPB will summarize the material facts of the request, and the AOs will apply to situations that conform to those facts. The AO will also indicate where a safe harbor may apply, such as those under certain consumer financial protection laws. The AO Program is not intended for situations that would require a regulatory change or to create bright-line rules where the regulation or statute is intended to require a fact-intensive analysis.

The AO Program will focus on four of the Bureau’s five statutory objectives under 12 U.S.C. 5511(b)—namely, that: (1) consumers are provided with timely and understandable information to make responsible decisions about financial transactions; (2) outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens; (3) Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition; and (4) markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.

Notably, the Bureau will not use the AO Program to address the statutory objective that “consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination,” stating that “other regulatory tools are often more suitable for addressing” these issues.

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Continue Reading Mind the Gap: CFPB Attempts to Address Regulatory Uncertainty With New Advisory Opinion Program

In a new era of double-digit unemployment resulting from the COVID-19 pandemic, it may be tough for a mortgage lender to predict the amount and stability of someone’s income in order to determine qualification for a home loan. Neither past nor even present levels of income may be reliable indicators of income levels going forward, at least in the short run or until the economic dislocations are substantially behind us. That is why Fannie Mae and Freddie Mac (the “government-sponsored enterprises,” or “GSEs”) recently issued enhanced documentation requirements and considerations for verifying and predicting the income of a self-employed applicant for a mortgage loan. While the GSEs’ documentation requirements apply via contract to approved lenders/sellers, whether those requirements will morph into legal requirements under the Dodd-Frank Act’s “ability to repay” requirements is something to watch in the coming months.

Revised GSE Underwriting Requirements for Eligible Loan Purchases

A determination of whether an applicant has the ability to repay a loan from his or her income or assets is a basic component of loan underwriting – as required both by federal (and sometimes state) law, and by a lender’s investors or insurers. In addition, federal regulations prohibit a lender of closed-end residential mortgage loans from relying on any income that is not verified by reliable documentation. Predicting whether that income will continue into the future takes skill when lending to self-employed borrowers under any circumstances, and is particularly tricky during this unique coronavirus economy. The now-waning government stay-at-home orders and other quarantining efforts may or may not have affected a particular borrower’s business operations, and the scale and duration of those effects going forward are difficult to predict.

In response to that uncertainty, on May 28, 2020 Fannie Mae and Freddie Mac issued guidance requiring that self-employed borrowers must submit a year-to-date (“YTD”) profit and loss statement (“P&L”) that reports business revenue, expenses and net income.…
Continue Reading Self-Employed Borrowers’ Income – Is the Past Necessarily Prologue?

The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) suffered an embarrassing setback in federal district court earlier this week, when a federal district judge denied the Bureau’s motion for entry of a consent judgment on the grounds that the proper party had not consented to entry of the judgment on behalf of the defendants. Back…

On May 14, 2020, the Consumer Financial Protection Bureau (“CFPB”) filed a proposed stipulated final judgment and order (the “Order”) against Chou Team Realty, LLC (“Monster Loans”) and several related individuals and entities to resolve alleged violations of the Fair Credit Reporting Act (“FCRA”), the Telemarketing Sales Rule (“TSR”), and the prohibition on unfair, deceptive,…