Consumer Financial Protection Bureau (CFPB)

Subscribe to Consumer Financial Protection Bureau (CFPB)

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 2020-SBREFA-1071@cfpb.gov 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

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