Many thought that with former Director Richard Cordray’s resignation, the Consumer Financial Protection Bureau (CFPB) would stop using its abusiveness authority in enforcement actions. After all, claims of abusiveness were the epitome of what critics derided as “regulation by enforcement,” as abusiveness was a new concept whose contours were not well defined. While that has largely proven true, there have been some exceptions. Last October, under then-Acting Director Mick Mulvaney, the CFPB issued a Consent Order against a payday lender that also offered check cashing services, which contained a single claim of abusiveness. That claim was based on the entity’s practice, when providing check-cashing services, of using check proceeds to pay off outstanding payday loan debts and providing only the remaining funds to the consumer. That, however, was the only abusiveness claim among the ten enforcement actions of the Mulvaney era (although the Mulvaney-led CFPB did continue to litigate abusiveness claims filed under Cordray).

Continue Reading Abusiveness Isn’t Dead Yet

If only the U.S. Treasury had a magic wand to ensure that the dozens of recommendations released last night in its long-awaited reform proposals for housing finance would become a reality; in that case, one could expect real-time results in the quest for an end to GSE conservatorship and the strengthening of the FHA. Instead, the two reports – one on FHA and Ginnie Mae and one on the GSEs – might simply be regarded as new acquisitions by the large public library devoted to the hundreds of dormant proposals for housing finance reform. It is not yet clear whether these two proposals would be shelved in the sections on fiction or non-fiction.

Don’t get me wrong. The reports are timely, thoughtful, and comprehensive, and housing finance geeks like me will pore over the details for several hours and debate among ourselves. The question is:  will the recommendations go anywhere? Underlying this question is the fact that the reports are replete with the word “should,” without any accompanying action plan or implementation plan to convert the normative “should” into the actual “will.”

The proposals include various admonitions that the Administration may act unilaterally with administrative actions to implement certain of the recommendations if Congress does not pick up the ball and run with it. But it is hard to see how realistic that is as we move into an election year. At this point, housing finance reform is not a potent election issue, and the complexities of reform are very multi-layered, much like in the health care reform debate. And like health care reform, many of the moving parts are inextricably tied together, making it harder for unilateral administrative action to be effective without accompanying legislative action.

It is hard to boil down the two detailed proposals into a one-pager, but I’ll try. Generally speaking, these are the themes that emerge from the two proposals:

  • Shrink the role of the federal government in its support of housing to more limited, well-defined missions.
    • Limit unfair and unnecessary competition with private capital
    • Clearly define, tailor and pay for the role the government will play
    • Synchronize the roles of the different government players to avoid overlaps
    • Permit the approval of private guarantors
    • Transition to this reduced role of government in a responsible manner
  • Run FHA, Ginnie Mae, and the GSEs like a business.
    • Impose sufficient capital, liquidity and reserves requirements
    • Improve risk management, including counterparty risk
    • Improve technology
    • Hire qualified staff
    • Set the amount of mortgage insurance premiums and guaranty fees to reflect the risk
    • Empower FHFA to supervise and oversee the GSEs
    • Review the safety and soundness of underwriting criteria
  • Recognize and rely on the interdependent relationship between the private sector and the government.
    • FHA needs private lenders and it should not play “gotcha” with opaque requirements or immaterial issues
    • In exchange for full faith and credit guarantee of P&I on MBS, require significant first loss private capital
    • Look to private investors to provide equity investments into the GSEs
  • Build in appropriate protections of consumers and small lenders.

Each of these bullet points and sub-bullet points could benefit from pages of further detail and explanation. Net-net, the proposals generally are consistent with the orthodoxy that espouses limiting the role of government, promoting and not crowding out private capital, and making sure the more limited government role is carried out in a responsible and accountable way.

Only time will tell whether these two proposals will get their own wing in the housing finance public library, or even their own building, but at least they are thorough and comprehensive and will find an enthusiastic audience among some of the library patrons. But don’t expect “should” to morph into “will” anytime soon, at least in a holistic way.

The Credit Card Accountability Responsibility and Disclosure Act (CARD Act) requires the CFPB to prepare a biennial report to Congress regarding the consumer credit card market. On August 27th, the CFPB issued its fourth such report (previous reports were issued in 2013, 2015 and 2017) which describes the CFPB’s findings regarding, among other things, the cost and availability of credit, credit card performance trends and innovations in the credit card marketplace. As you might expect, the CFPB compiles a huge amount of credit card data from several sources including federal agencies and credit card issuers. For those interested in the credit card market, the report contains a wealth of statistics and data points.

Some of the core findings from the report include:

  • “Total outstanding credit card balances have continued to grow and at year-end 2018 were nominally above pre-recession levels. Throughout the post-recession period, including the period since the Bureau’s 2017 Report, purchase volume has grown faster than outstanding balances. After falling to historical lows in the years following the recession, delinquency and charge-off rates have increased over the last two years. Late payment rates have increased for new originations of general purpose and private label cards, both overall and within different credit tiers.”
  • “The total cost of credit (TCC) on revolving accounts has increased over the last two years and in 2018 stood at 18.7 percent, which is the highest overall level observed in the Bureau’s biennial reports. Recent TCC increases are largely the result of increases in the indices underlying variable rates, such as the prime rate. General purpose cards, which generally have interest rates linked to the prime rate, have driven the increase across every credit tier. TCC has fallen over the last two years for private label cards, in part because relatively fewer of these cards have rates linked directly to index rates, offset by a decline in fees as a share of balances.”
  • “Most measures of credit card availability—overall and across credit score tiers—have remained stable or decreased slightly since the Bureau’s 2017 Report. Measured by application volume, consumer demand for credit cards peaked in 2016. Approval rates have also declined slightly since 2016. Driven by lower approval rates, annual growth in the number of credit card accounts opened and the amount of credit line on new accounts has also leveled off. Even so, total credit line across all consumer credit cards reached $4.3 trillion in 2018, nearly equal to its pre-recession high, largely due to the growth in unused line on accounts held by consumers with superprime scores.”

We expect market participants to use the data provided by the CFPB in the report as a benchmark for evaluating performance and regulatory trends for credit card programs.

On Tuesday (September 3, 2019), the U.S. District Court for the District of Columbia issued an order dismissing a lawsuit filed by the Conference of State Bank Supervisors (CSBS) seeking to block the Office of the Comptroller of the Currency (OCC) from issuing federal charters to fintech companies. As explained in a prior blog post, in April 2018, the same court dismissed a prior version of the lawsuit, finding that the CSBS did not have standing to sue because the OCC had not yet officially decided that it would issue fintech charters.  For the same reason, the court found that the CSBS’s claims were not ripe for adjudication. The CSBS re-filed the lawsuit in October 2018, and the OCC then moved to dismiss the re-filed lawsuit.

In Tuesday’s order, U.S. District Court Judge Dabney L. Friedrich found that the CSBS continued to lack standing to sue and that the CSBS’s claims were not ripe for adjudication. Judge Friedrich explained that the CSBS still had not alleged that any fintech company had applied for a charter, let alone that the OCC had issued any fintech charters.

The CSBS’s re-filed complaint highlighted two recent events: (1) the Senate confirmed Joseph Otting as Comptroller of the Currency in November 2017, and (2) the OCC finalized and released its policy on chartering fintech companies on July 31, 2018. In the policy, the OCC announced that it would begin accepting charter applications from fintech companies. However, Judge Friedrich found that the CSBS continued to lack standing to bring the lawsuit because the harms it alleged were “contingent on whether the OCC charters” a fintech company, and no company had even applied for a charter. For the same reason, the court found that the CSBS’s challenge was not yet ripe for adjudication.

As explained in a prior post, in May 2019, a federal district court in the Southern District of New York issued an order denying a motion to dismiss a similar lawsuit filed by the New York Department of Financial Services (DFS), which also sought to block the OCC from issuing fintech charters.  In that case, Judge Victor Marrero rejected the OCC’s argument that the challenge was premature. In a footnote in Tuesday’s order, Judge Friedrich “respectfully disagree[d]” with Judge Marrero’s decision to the extent the reasoning in the two opinions conflicted. The lawsuit by the DFS remains pending in New York federal court.


The saga over whether to include a controversial “preferred language” question on the new redesigned Uniform Residential Loan Application (URLA) continues. Last week, the Federal Housing Finance Agency (FHFA) changed course yet again and decided to remove the language preference question from the redesigned URLA. Instead, the question will be moved to a separate, optional consumer information form that will not be part of the URLA.

The preferred language question would ask all mortgage applicants (using the GSEs’ form) to indicate their language preference when completing the application. The history of this controversial question dates back several years. We previously commented on developments related to the preferred language question in July 2017 and October 2017. In August 2016, the FHFA decided not to move forward with a plan to include a language preference question in the redesigned URLA due, in part, to strong industry opposition. A year later, after requesting public comments on the preferred language question through a formal RFI process, the FHFA announced in October 2017 that it would include a modified version of the proposed preferred language question in the revised URLA. In an attempt to allay industry concerns about the operational and legal consequences of collecting information on applicants’ language preferences, the final version of the question included additional disclaimer language advising applicants that the loan transaction is likely to be conducted in English and that communications in the applicants’ preferred language may not be available. Mandatory use of the redesigned URLA was originally set for February 2020.

Under new leadership, the FHFA has changed course again and decided to move the preferred language question from the URLA to a separate, optional form. Although this change helps mitigate some of the risks associated with including a question on language preference on the mortgage application itself, it does not alleviate such risks completely. For example, it is still unclear what – if anything – a lender is required to do with the language-preference information it collects. And there continues to be a risk that applicants themselves will be confused or misled by the preferred language question, especially applicants with limited English proficiency. Moreover, the FHFA cannot control how other government agencies, private plaintiffs, or consumer groups may seek to use the language-preference information collected.

The deadline for mandatory use of the redesigned URLA will no longer be February 1, 2020. The new deadline for implementation has not yet been announced.

Redlining is back in the news.  Last week, the Department of Housing and Urban Development announced that it approved a settlement resolving redlining claims brought by the California Reinvestment Coalition against a California-based depository institution.

Unlike DOJ’s June redlining settlement with First Merchants Bank, which we wrote about here, this new case was not initiated by a government investigation, but rather by a CRC complaint filed with HUD.  Unfortunately, the Conciliation Agreement does not provide details about that facts underlying CRC’s concerns; it only states that CRC filed a complaint with HUD in February 2017 alleging that the bank’s “branch locations, marketing, and origination of mortgages discriminated against the residents of majority-minority neighborhoods” in the bank’s Community Reinvestment Act assessment area.

The settlement terms look similar to those found in other redlining settlements, and include a requirement that the bank open or acquire a branch in a majority-minority and low-to-moderate income census tract within the bank’s assessment area.  The bank also agreed to:

  • originate $100 million worth of owner-occupied, residential mortgage loans (within the GSE conforming loan limit) in majority-minority census tracts in its assessment area;
  • impose no minimum loan amount;
  • offer and market FHA-insured loans in all of its assessment area branches;
  • provide $5 million worth of discounts or subsidies on loans in majority-minority census tracts as part of an Affordable Home Mortgage Program;
  • provide $1million to non-profit community service organizations that provide financial literacy and other benefits in majority-minority census tracts; and
  • dedicate $1.3 million toward marketing and outreach to consumers in majority-minority census tracts.

Although this new settlement does not provide much detail about the factors that could prompt a redlining complaint, the settlement terms do provide insights about how institutions can expand credit opportunities in majority-minority communities and thus reduce their redlining risk.

While banks must be prudent and follow applicable regulations, the latest guidelines from the Office of the Comptroller of the Currency may allow banks to justify a nuanced asset dissipation or depletion underwriting program, so long as it is backed by analysis.

On July 23, 2019, the OCC issued a bulletin reminding its regulated institutions to use safe and sound banking practices when underwriting a residential mortgage loan based on the applicant’s assets. While the bulletin does not provide much satisfaction for those seeking safe harbors or any specific guidance, it provides certain hints at what the OCC will look for in an examination.

Asset dissipation underwriting (or asset amortization or depletion underwriting) is a way for mortgage lenders to calculate a stream of funds derived from an applicant’s assets that could be available for loan payments, in addition to income (if any) received from employment or other sources. The bulletin notes that while the OCC’s regulated institutions have prudently administered asset depletion models for many years, examiners have seen an uptick that is unsupported by credit risk management practices and insufficiently compliant with existing regulations and guidelines.

One such existing regulation, which the bulletin mentions in a footnote, is the Consumer Financial Protection Bureau’s Ability to Repay/Qualified Mortgage (QM) Rule, applicable to most closed-end residential mortgage loans. That Rule allows a mortgage lender to consider an applicant’s current or reasonably expected assets in determining his/her ability to repay a mortgage loan, so long as the lender verifies the assets through financial institution statements or other reliable documents. Still, mortgage lenders must – when making QMs or non-QMs – calculate a debt-to-income ratio (DTI). (Non-QM lenders could also use a residual income figure.) Accordingly, if lenders are relying on an applicant’s assets, the lenders must come up with a monthly amount available for mortgage payments. However, unlike the Rule’s Appendix Q, which regulates how lenders may consider various types of income when making general QMs, neither the Rule nor Appendix Q specifies any requirements for unacceptable types of assets, discounts of asset values based on liquidity, amortization periods, or rate-of-return estimates.

While the OCC bulletin does not directly fill in any of those blanks, it does provide some clues. Continue Reading OCC Bulletin on Asset Dissipation – The Art and Science of Underwriting

On July 25th, the CFPB announced plans to allow the temporary Qualified Mortgage (QM) status given to loans eligible for purchase by Fannie Mae or Freddie Mac (the GSEs) to expire. However, the agency stated it could allow a short extension past the January 10, 2021 expiration date, and is in any case soliciting public comments on the general QM definition, including its income and debt documentation requirements.

When the CFPB issued its Ability-to-Repay/QM Rule in response to the Dodd-Frank Act, it sought to provide some bright-line tests for loans deemed generally safe for residential mortgage borrowers. The CFPB decided that a debt-to-income ratio (DTI) that does not exceed 43% was an appropriate proxy, along with several other factors. While the CFPB believed that many consumers can afford a DTI above 43%, those consumers should be served by the non-QM market, where lenders must individually evaluate the consumers’ compensating factors. However, the CFPB recognized that it may take some time, post-crisis, for a non-QM market to develop, even for credit-worthy borrowers. Accordingly, the CFPB created a category of loans that would temporarily enjoy QM status – loans that meet the GSEs’ underwriting criteria (plus a few other requirements). The CFPB set the expiration date for the temporary QM category at five years (unless the GSEs were to emerge from conservatorship prior to that).

Now, several years later, the CFPB has found that the temporary GSE QM “patch” represents a “large and persistent” share of originations, and likely was the reason the Rule did not result in decreased access to credit for those with DTIs over 43%. Continue Reading CFPB to Rip Off the Patch?

Last month, in the first redlining matter initiated and settled under the Trump Administration, the United States Department of Justice settled redlining claims against First Merchants Bank, an Indiana-based bank regulated by the Federal Deposit Insurance Corporation (“FDIC”). The First Merchants settlement contains useful insights for institutions seeking to evaluate redlining risk.

Read more in Mayer Brown’s Legal Update.

Today, the Supreme Court returned to the lower courts the question whether a 2006 order by the Federal Communications Commission (FCC) is binding on the district court. In PDR Network, LLC v. Carlton & Harris Chiropractic, the Court held that resolution of that question may depend on the resolution of two preliminary questions: (1) whether the order is the equivalent of a “legislative rule” that has the force of law; and (2) whether the party challenging the FCC’s interpretation had a prior and adequate opportunity to seek judicial review of the order.

As background, the petitioners in the case produced a reference guide about prescription drugs, and sent healthcare providers faxes stating that the providers could reserve a free copy of the e-book version of the reference guide. One fax recipient brought a putative class action, alleging that the fax was an “unsolicited advertisement” within the meaning of the Telephone Consumer Protection Act (TCPA). The district court dismissed the case, but the Fourth Circuit reversed, concluding that the Hobbs Act—which gives courts of appeals exclusive jurisdiction to determine the validity of certain final orders by the FCC—required the district court to follow the FCC’s 2006 interpretation of the term “unsolicited advertisement” as including “any offer of a free good or service.”

In an opinion written by Justice Breyer and joined by Chief Justice Roberts and Justices Ginsburg, Sotomayor, and Kagan, the Supreme Court vacated and remanded. Continue Reading Supreme Court Declines To Answer Whether District Court Is Bound To Follow FCC’s Interpretation of TCPA