alerts & publications
Consumer Finance Newsletter - February 2013February 1, 2013
CFPB Issues Final Ability-To-Repay and Qualified Mortgage Rule
Issue: On January 10, 2013, the Consumer Financial Protection Bureau (“CFPB”) released its final rule on the definition of a “qualified mortgage” and the ability-to-repay requirements mandated by the Truth-in-Lending Act §129C, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act §§1411-1412 (“Dodd-Frank”). The CFPB has structured the rule as a safe harbor for lenders originating prime “qualified mortgages” and as a rebuttable presumption for lenders originating higher-priced “qualified mortgages.” The rule is set to take effect January 10, 2014.
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CFPB Issues Final Mortgage Servicing Regulation
On January 17, 2013, the CFPB released the final mortgage servicing regulations, implementing provisions under the Truth in Lending Act (“TILA”) and the Real Estate Settlement Procedures Act (“RESPA”). The document spans hundreds of pages, and some of these regulations differ from the previously proposed version of the regulation.
Under the authority of TILA, the CFPB mandated (a) periodic billing statements with prescribed content and form, (b) notice of pending interest rate adjustments under adjustable rate mortgages (to be provided both between 210 and 240 days prior to the due date of the first payment under the adjustment, and again 60 to 120 days prior if the rate adjustment causes the payment to change), and (c) prompt crediting of payments from borrowers on the day of receipt, with special procedures when the borrower fails to make the minimum required payment.
Under the authority of RESPA, the CFPB mandated (a) notice when servicing of the loan is transferred, (b) two notice requirements before a lender is allowed to charge a borrower for force-placed insurance (45 days, and again no earlier than 15 days, prior to charging the borrower), (c) error resolution processes, e.g., acknowledging a borrower’s notice of error within five days and responding substantively within 30 to 45 days, and (d) procedures and deadlines for responding to qualified written requests.
CFPB used its discretionary authority under RESPA to impose an additional set of regulations. The first of these requires servicers to maintain detailed “policies and procedures that are reasonably designed to achieve the objectives” of the regulation. For example, one procedure requires servicers to maintain records in a manner that allows them to create a “servicing file” in no later than five days. This file must contain a schedule of the mortgagor’s payments and debits, a copy of the security instrument, any servicing notes, and correspondence pertaining to error resolution and foreclosure mitigation. The remaining regulations generally pertain to foreclosure practices. Servicers must (a) promptly intervene when a borrower becomes delinquent by establishing contact with the borrower no later than 36 days after the delinquency and providing loss mitigation options by the 45th day, and (b) designate personnel to be a continuous contact person for the delinquent borrower. Servicers must also process loss mitigation applications within specified deadlines, and servicers must delay foreclosure sales if loss mitigation options are being explored (and the regulation restricts dual-tracking the processes). Finally, under no circumstance can servicers foreclose on a property before the borrower is 120 days delinquent. There is an exemption from most of these discretionary requirements for small servicers, those who service 5,000 or fewer mortgages that they or an affiliate own or originated. Such small servicers are also exempted from some of the requirements implemented under the authority of TILA. However, the 120-day delay in foreclosures applies to all servicers regardless of size.
Why You Should Care: The CFPB’s final mortgage servicing rules contained numerous requirements not found in the proposed regulation. Mortgage servicers will need to update their systems and train their employees to comply with these new requirements by the effective date of January 10, 2014. By the CFPB’s own stated estimates, this will require significant time and resources.
If You Want Further Information: The final mortgage servicing regulation can be found here.
If You Want Further Analysis: Contact Randall W. Edwards, firstname.lastname@example.org, or Elizabeth L. McKeen email@example.com.
Financial Institutions are Asked to Comment on Pending Guidance on the Risks Posed by Social Media
Issue: On January 22, 2013, the Federal Financial Institutions Examination Council (“FFIEC”) released proposed guidance to respond to ongoing questions from financial institutions on the management of risks posed by social media activities. The guidance addresses the applicability of federal consumer protection and compliance laws, regulations, and policies to activities conducted via social media by institutions covered by the guidance. It would apply to banks, as well as to nonbanks supervised by the CFPB; after processing the comments, final guidance will be issued jointly by federal banking regulators to the institutions they supervise. State banking regulators also will be encouraged to adopt the guidance.
Social media is interactive online communication through which users share text, images, audio and/or video, and includes the websites such as Facebook, Twitter, Yelp, Youtube, Flickr, Linkedin, Farmville and Second Life. The FFIEC identifies numerous ways that improper use of social media can violate more than a dozen federal consumer finance laws. Examples of problematic acts include (a) misleading, false or discriminatory advertising and marketing; (b) soliciting or using of information such as race, religion or sex; (c) attempting to make improper contact to specific protected categories of consumers (e.g., debtors) via social media; (d) facilitating payments via social media without providing mandatory disclosures to consumers; and (e) failing to maintain the privacy of data collected via social media. In addition to such legal and compliance risks, the FFIEC notes the potential for reputation risk, i.e., “dissatisfied consumers and/or negative publicity [that] could harm the reputation and standing of the financial institution, even if the financial institution has not violated any law,” and for operational risks like data breaches or account takeover.
The guidance recommends that institutions deal with these risks in a planned and serious manner and as part of an overall risk management program. The process starts with a governance structure with clear roles, responsibilities and strategic directives regarding the use of social media. To implement the strategic goals, the guidance asks institutions to (a) develop detailed policies; (b) create an employee training program on the policies; (c) carefully monitor social media activities to ensure ongoing compliance; and (d) provide parameters for reporting to senior management that allow management to evaluate the effectiveness of the social media program. In addition to managing its own employees, financial institutions are reminded of the need to manage risks arising from their third party service providers.
Why You Should Care: Though social media tends to be perceived as informal and collaborative, financial institutions remain susceptible to compliance, reputational and operational risks and management of those risks will be subject to regulator scrutiny. The FFIEC’s guidance articulates a large range of risks posed by social media activities. The FFIEC also notes that even financial institutions that choose not to use social media still should be prepared to address issues that arise within social media platforms and train their employees on the use of social media.
While the FFIEC asks for comments on all aspects of its guidance, it is particularly interested to know if it failed to address any potentially risky uses of social media or any potential violations of the law. The FFIEC also wishes to know if institutions face any technological or other impediments in complying with the proposed guidance.
If You Want Further Information: The FFIEC’s proposed guidance can be found here.
If You Want Further Analysis: Contact Randall W. Edwards, firstname.lastname@example.org.
President Obama Signs Bipartisan Bill Creating CFPB Privilege Protections
Issue: On December 20, 2012, President Obama signed into law important, bipartisan legislation protecting entities that submit privileged information to the CFPB from thereby waiving further claims of privilege over such information.
Public Law 112-215 (introduced as H.R. 4014) amends the Federal Deposit Insurance Act (FDIA), 12 U.S.C. § 1811 et seq., to include the CFPB among the statute’s list of covered federal regulators. Specifically, the amended statute provides protections for CFPB-supervised entities against waiver of the attorney-client privilege and work product doctrine when sharing privileged information with the CFPB, or when the CFPB shares information with other federal agencies. The CFPB had previously issued its own regulation purporting to preserve against waiver the privileged status of information obtained during its supervisory processes. Public Law 112-215 codifies these privilege protections and is intended to further ease financial industry concerns by creating a statutory protection for bank and non-bank entities subject to the CFPB’s supervisory authority.
Why You Should Care: Public Law 112-215 provides important protections to institutions subject to the CFPB’s supervision. These protections are not absolute, however, and open questions remain with respect to whether adequate safeguards exist to protect privileged information were the CFPB to share it with state agencies and law enforcement agencies not specifically provided for in the statute. The CFPB is unique among federal banking regulators because it has a specific mandate to coordinate enforcement activities with state-level enforcement agencies. For example, Section 1042 of the Dodd-Frank Act specifically gives state attorneys general the authority to enforce consumer finance laws in coordination with the CFPB. More recently, the CFPB announced that it has entered into a first-of-its-kind “information sharing” agreement with the City of Chicago.
Public Law 112-215 also does not resolve the question of whether the CFPB has the authority to compel documents protected by the attorney-client privilege and the work product doctrine. The CFPB has implicitly indicated that it believes it does have the authority to compel such information. The American Bar Association (ABA) has argued, on the other hand, that the CFPB lacks the legal authority to compel supervised entities to submit privileged information, but endorsed H.R. 4014 as a means of preventing a waiver of the privilege when banks and credit unions do submit—either voluntarily or not—such information to the CFPB.
If You Want Further Information: Public Law 112-215, as enacted, can be found here. A copy of the ABA’s April 12, 2012 letter to the CFPB can be found here.
If You Want Further Analysis: Contact Randall W. Edwards, email@example.com.
CFPB Issues the Final Escrow Regulation for “Higher-Priced Mortgage Loans”
Issue: On January 22, 2013, the CFPB issued a final rule amending Regulation Z to expand requirements that lenders establish escrow accounts for “higher-priced mortgage loans.” Such escrow accounts have historically been used by lenders to collect payments from the borrower, generally on a monthly basis, sufficient to allow the lender to pay for property taxes, premiums for mortgage-related insurance, and premiums for property insurance, as applicable. The Federal Reserve Board amended Regulation Z in 2008 to require that such accounts be established for borrowers obtaining certain “higher-priced mortgage loans” and maintained for a minimum of one year. Citing its understanding that, particularly with “higher-priced” loans, the maintenance of escrows by lenders helps reduce the risk of default, the CFPB’s amended regulation extends the requirement to maintain escrow accounts for a minimum of five years.
“Higher-priced mortgage loans” are defined in the regulation generally as mortgages with an annual percentage rate exceeding the average prime offer rate by (a) 1.5% for first lien mortgages whose principal balance does not exceed the maximum eligible for purchase by Freddie Mac (currently $417,000 for a mortgage secured by a single-family residence), (b) 2.5% for first lien mortgages whose principal balance exceeds the aforementioned threshold, or (c) 3.5% for subordinated mortgages, such as home equity loans. Implementing Dodd-Frank §1461, the final regulation exempts lenders serving predominantly “rural” or “underserved” counties from escrow requirements to the extent that originations by such lenders and their affiliates remain modest, the lenders do not already maintain escrows for other borrowers (with certain exceptions), the lender has inflation-adjusted assets below $2,000,000,000, and provided the loans are not destined for sale to others under a “forward commitment.”
When updating their systems for the CFPB’s new mortgage regulations, lenders should note that the definition of “higher-priced” as it is used in the escrow regulation  is slightly different than the definition of ‘higher-priced” as it is used in the CFPB’s ability-to-repay regulation. Both are based on the concept of “higher-priced” as it was used in the Federal Reserve Board’s 2008 amendment to Regulation Z. However, the definitions diverged due to Dodd-Frank §1461’s requirement that Freddie Mac limitations be factored into the escrow rule’s definition of “higher-priced.”
Why You Should Care: The CFPB’s escrow regulation becomes effective on June 1, 2013.
If You Want Further Information: The final escrow regulation can be found here.
If You Want Further Analysis: Contact Brian Boyle, firstname.lastname@example.org.
 See CFPB Bulletin 12-01, Re: The Bureau’s Supervision Authority and Treatment of Supervisory Information, dated January 4, 2012; 77 Fed. Reg. 39617, at 39620-21 (July 5, 2012), available at: https://www.federalregister.gov/articles/2012/07/05/2012-16247/confidential-treatment-of-privileged-information.
 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1042, 124 Stat. 1376, 2012-2014 (2010).
 See 77 Fed. Reg. 15288.
 Letter by William T. (Bill) Robinson III, President, American Bar Association, to Monica Jackson, Office of the Executive Secretary, Consumer Financial Protection Bureau, April 12, 2012, p.10.
 73 FR 44522 (July 30, 2008).
 During the preceding calendar year, the creditor and its affiliates together must have originated 500 or fewer covered transactions. To be codified in 12 CFR §1026.35(b)(2)(iii)(B).
 The small rural or underserved lender exemption was intended to relieve creditors who could not afford to maintain escrow accounts. Thus, in order to qualify, a creditor and its affiliates must not currently maintain escrow accounts. There is an exception to this requirement, however, for creditors who established escrow accounts only to comply with the Federal Reserve’s 2008 regulation, or who established escrow accounts as an accommodation to distressed borrowers. To be codified in 12 CFR §1026.35(b)(2)(iii)(D).
 To be codified in 12 CFR §1026.35(b)(2)(iii)(C).
 To be codified in 12 CFR §1026.35(b)(2)(v).
 Called “higher-priced mortgage loan[s];” definition to be codified in 12 CFR §1026.35(a)(1).
 Called “higher-priced covered transaction[s];” definition to be codified in 12 CFR §1026.43(b)(4).
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