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On June 16, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule to explain the basis for its position that the CFPB possesses the authority to “examine supervised financial institutions for risks to active duty servicemembers and their dependents (i.e. military borrowers) from conduct that violates the Military Lending Act (MLA).”

As far back as 2013, the CFPB held the position that it had the authority to examine supervised financial institutions for compliance with the MLA. According to the CFPB, “[f]rom that time until 2018, no companies disputed the CFPB’s authority to review their MLA lending practices.” Then, in 2018, under the Trump administration, it was reported that Acting Director Mick Mulvaney made the decision to cease supervisory MLA activities for lack of explicit statutory authority.

Following his appointment as the CFPB’s acting director by President Biden, Dave Uejio quickly announced that it was now “the official policy of the CFPB to supervise lenders with regard to the Military Lending Act.” Acknowledging this back and forth history, the announcement for this interpretive rule states that “[t]he current CFPB leadership does not find” the 2018 position “persuasive and the CFPB will now resume MLA-related examination activities.” To this end, the interpretive rule also outlines the reasons why the CFPB now finds unpersuasive the prior arguments that it lacked the statutory authority to conduct MLA examinations.

We will continue to monitor and report on any development related to this matter.

On June 28, the Consumer Financial Protection Bureau (CFPB) issued a final rule to amend Regulation Z’s mortgage servicing requirements in order to “establish temporary special safeguards to help ensure that borrowers have time before foreclosure to explore their options, including loan modifications and selling their homes.”

The rule, which applies to federally regulated mortgage loans secured by a principal residence, accomplishes four things:

  1. It creates “temporary special COVID-19 procedural safeguards,” which limit the situations where a servicer can “mak[e] the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after December 31, 2021.”
  1. It allows servicers to offer borrowers experiencing COVID-19-related hardships streamlined loan modification options based on an incomplete application, so long as the modification options meet certain criteria.
  1. It amends Regulation Z’s “early intervention requirements” by requiring servicers until October 1, 2022 to discuss with certain delinquent borrowers COVID-19-related information at specific points of live contact.
  1. It clarifies “more precisely when the servicer must renew reasonable diligence efforts” when a borrower is in a short-term payment forbearance program for a COVID-19 hardship based on an incomplete application.

While the rule’s “procedural safeguards” are narrower than the original foreclosure prohibition discussed in the proposed rule issued in April, it will still limit servicers’ ability to initiate foreclosures. Further, servicers will need to exercise due diligence and recordkeeping to satisfy the rule when moving forward with the few types of foreclosures permitted prior to January 1, 2022. Servicers will also need to assess their current borrower outreach programs to ensure compliance with the rule’s early intervention requirements.

Although this rule does not go into effect until August 31, both Fannie Mae and Freddie Mac have issued policies that prohibit servicers between July 31 to August 31 from initiating any foreclosure activities that would violate the rule. Between the practical challenges to implement it and the focus the CFPB will undoubtably give it during its future supervision and enforcement activities, this rule will require significant compliance efforts from servicers in the days to come.

On July 1, the Consumer Financial Protection Bureau (CFPB or Bureau) released a FCRA Tenant Screening Enforcement Compliance Bulletin, outlining its enforcement focus areas as the country transitions to a post-pandemic rental market. The Bureau states that it “intends to look carefully at the accuracy and dispute-handling practices of [consumer reporting agencies “CRAs”] that report rental information, including whether their procedures to match information to consumers are reasonable; whether they report eviction information that is inaccurate, incomplete, or misleading (such as may result from a failure to have reasonable procedures to report information about the disposition of an eviction filing, to prevent the inclusion of multiple entries for the same eviction action in the same consumer report, or to prevent the inclusion of eviction information that has been sealed or expunged); and whether they conduct timely and reasonable investigations of consumer disputes[.]”

The bulletin takes the view that tenants are at an increased risk due to the impact of the COVID-19 pandemic and that the “economic recovery of renters and their ability to secure new rental housing should not be impeded by noncompliance with the law.” The CFPB is “concerned that that existing problems with the accuracy of tenant-screening and other consumer reports will be exacerbated” by a wave of evictions.

The CFPB says it is “particularly concerned” that “the procedures that some tenant-screening companies use to match public records […] to specific consumers may create a high risk that inaccurate data will be included in tenant-screening reports” and that the “risk of mismatching” may fall heaviest on “Hispanic, Black, and Asian individuals because there is less surname diversity than among the white population.” (p. 12). The Bureau cites that “[t]wenty-six surnames cover a quarter of the Hispanic population and 16 percent of Hispanic people reported one of the top 10 Hispanic names. The pattern is similar for Asians and [B]lacks.” Without providing any specific detail, the bulletin says the CFPB will “pay particular attention” to whether CRAs are “using a sufficient number of identifiers to match consumer report information to the consumer, […] including whether CRAs are using name-matching procedures or limited identifiers likely to heighten the risk of inaccurate matching.”

The CFPB also says that CRAs may be reporting eviction public records “without having reasonable procedures to report information about the disposition of the eviction filing” or to “exclude from consumer reports eviction information that has been sealed or expunged,” and that the CFPB “will hold CRAs and furnishers accountable for failing to comply with the FCRA and Regulation V” and “will take appropriate enforcement action to address violations and seek all appropriate corrective measures, including remediation of harm to consumers.”

The Bureau then detailed what it will focus on for CRAs engaged in reporting rental information. “For CRAs Reporting Rental Information:

  1. Whether CRAs are reporting accurate rental information.
  2. Whether CRAs are using a sufficient number of identifiers to match consumer report information to the consumer who is the report’s subject, including whether CRAs are using name-matching procedures or limited identifiers likely to heighten the risk of inaccurate matching.
  3. Whether CRAs are reporting eviction information that is inaccurate, incomplete, or misleading (such as may result from a failure to have reasonable procedures to report information about the disposition of an eviction filing, to prevent the inclusion of multiple entries for the same eviction action in the same consumer report, or to prevent the inclusion of eviction information that has been sealed or expunged).
  4. Whether CRAs comply with their obligations to investigate disputed information in a consumer report, including whether they are conducting timely and reasonable investigations.”

This bulletin demonstrates the CFPB’s continued interest in CRAs, and especially matching issues. CRAs reporting rental history information should review the bulletin with care and consult with compliance counsel about best practices for matching those records, which often contain limited personal identifiers. The bulletin seems to foreshadow enforcement actions against CRAs reporting such information, particularly as COVID-19 national eviction bans expire.

On June 4, the Consumer Financial Protection Bureau (CFPB) issued a frequently asked question and answer guide. Regulation E, in part, establishes limitations on a consumer’s liability and requires investigations of consumers’ claims of unauthorized electronic fund transfers. This FAQ concerns unauthorized transfers governed by Regulation E.

The first and second questions deal with a third party fraudulently inducing a consumer to make an electronic fund transfer and share account access information, respectively. The first answer confirms that if a third party fraudulently induces a consumer to give out his/her information, this is an unauthorized funds transfer, and the consumer’s liability is limited. The second answer states that a consumer who provides account access information to a bad actor is not considered to have furnished an access device under Regulation E. The third FAQ reaffirms that a financial institution cannot consider a consumer’s negligence in determining liability for an unauthorized funds transfer, which is already stated in Regulation E, 12 CFR § 1005.6; Comment 6(b)-2.

Moreover, the fourth and fifth answers state that a financial institution cannot modify or waive the consumer’s liability via agreement as Regulation E has an anti-waiver provision, and private card network rules can only enhance consumer protections, not lessen any protections.

The sixth and seventh FAQs state that a financial institution cannot require a consumer to file a police report as a condition before conducting an investigation nor can it require the consumer to contact the merchant before an investigation may begin.

The final FAQ asks how a financial institution determines the consumer’s liability, if any. The CFPB answers this question by referring to sections within Regulation E and stating that if a consumer provides timely notice and the financial institution determines that the transaction is an unauthorized fund transfer, the liability protections for the consumer would apply. However, the consumer may have some liability depending if he/she timely reported the unauthorized transfer within the constructs of Regulation E.

In a June 22 letter to the inspector general of the Federal Reserve Board and Consumer Financial Protection Bureau, Subcommittee on Government Operations Ranking Member and House Representative Jody Hice (R-GA) called for an urgent investigation into reports that the Biden administration is targeting certain career CFPB employees from the Trump administration to replace them with new hires. Senator Pat Toomey (R-PA), the ranking member of the Senate Banking Committee, called for a similar investigation a week prior.

In a published report, the CFPB was accused of offering some senior employees incentives to leave early, such as early retirement packages allowing them to access their full pensions, and investigating other senior employees to find grounds for termination or inducing them to leave voluntarily. Such actions run contrary to both Biden’s original promise to empower the government workforce and civil service protections outlined in the Civil Service Reform Act of 1978, 5 U.S.C. § 1101 et seq., which establishes the mechanism of permanent federal employment based on merit rather than on political affiliation.

Such dilemmas with career staff are not new to the CFPB. Recently created during the Obama administration in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act in response to the Great Recession, its original employees were legally hired by circumventing some of the normal federal requirements. Mick Mulvaney, who temporarily led the CFPB during the Trump administration, distrusted these staffers hired by the Obama administration, and thus installed new political appointees to whom these staff members would have to answer. Similar to what’s happening on Capitol Hill today, this led to backlash from lawmakers, as well as to original executive-level CFPB staffers stepping down, allowing Mulvaney and his successor to install more Trump-friendly staffers.

Former Representative Barney Frank (D-MA), after whom the Dodd-Frank Act is named, stated the CFPB is “an unusual agency in that Trump was entirely hostile to its mission and its purpose,” and he would “not be surprised if the [Biden administration] felt it needed to make changes.”

Although some current CFPB employees were not sympathetic to Trump’s vision for a less aggressive CFPB, they are confused as to why the Biden administration is taking such actions. One such employee stated that the Biden administration is ruining the careers of “quality people” with decades of experience at other agencies, raising concerns about the loss of institutional knowledge at a relatively new agency. Another employee who voted for Biden believes he or she is “getting ousted because I was hired by the [Trump administration],” which runs contrary to Biden’s promise during his first week in office to allow agency staffers to work without White House interference.

These actions may raise concerns of more congressional members. “It would be very concerning if the administration were to politicize the CFPB by removing senior career employees and replacing them with handpicked activists as alleged,” said Amanda Thompson, spokesperson for Republicans on the Senate Banking Committee.

The CFPB has yet to comment on the report. We will continue to monitor and report on any development related to this matter.

Wednesday, July 21 • 11:00 a.m. – 4:00 p.m. ET

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This webinar will be a comprehensive look at Regulation F and how to prepare your business. The webinar will be held on July 21 from 11 a.m. – 4 p.m. (eastern time).

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On April 27, the Bureau of Consumer Financial Protection (CFPB) issued a final rule to delay the mandatory compliance date for the General QM Final Rule until October 1, 2022. The CFPB stated that it issued the rule “to help ensure access to responsible, affordable mortgage credit and to preserve flexibility for consumers affected by the COVID-19 pandemic and its economic effects.” The mandatory compliance was originally set for July 1.

The General QM Final Rule was created to address the expiration of the GSE patch, which permits certain mortgage loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac (GSEs) to qualify as QM loans despite not meeting all requirements of the general QM loan definition. Details concerning the new General QM Final Rule can be found here.

As a result of the new rule, lenders can continue to originate QM loans using the old general QM loan definition for loans with an application received date before October 1, 2022. Additionally, the GSE patch will continue to exist until October 1, 2022.

This rule, however, may prove of little effect. As explained by Fannie Mae in Lender Letter LL-2021-09 and Freddie Mac in Bulletin 2021-13, the GSEs will generally only purchase loans originated on or after July 1 if they conform to the requirements of the General QM Final Rule. Furthermore, because loans must conform to the new General QM Final Rule to be eligible for purchase by the GSEs, the GSE patch will effectively cease on July 1 to provide an alternative means for lenders to originate a QM loan.

Considering the CFPB’s announcement in February that it intended to review the General QM Final Rule, there has been speculation that the CFPB may be buying time to amend or repeal the General QM Final Rule, which was issued under the Trump administration. Regardless, lenders should continue to monitor both the actions of the GSEs and the CFPB for future developments regarding the General QM Final Rule.

On May 17, the Consumer Financial Protection Bureau (CFPB) announced a settlement with DMB Financial LLC, a Massachusetts-based debt-settlement company.

In its complaint, the CFPB alleged that DMB Financial violated the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act of 2010 (CFPA) by charging illegal fees and misleading consumers about its business practices. Specifically, the CFPB alleged that DMB Financial:

  • Violated the TSR by requesting and receiving fees before it performed its promised debt-relief services and before consumers made any debt-settlement payments; by charging fees based on the increased debt amounts after enrollment rather than based on the amount of each debt at the time of enrollment; and by failing to properly disclose when, and under what conditions, it would make a bona fide settlement offer to each creditor or debt collector;
  • Violated the CFPA by misleading consumers about when it would charge fees and how it would calculate its fees.

The CFPB’s settlement agreement prohibits DMB Financial from engaging in the illegal practices described above, and it also requires the company to pay $5,400,000 in consumer redress.

“DMB Financial preyed on consumers who were struggling financially, charging millions of dollars in illegal upfront fees and hiding the true cost of its services,” said CFPB Acting Director Dave Uejio. “Charging upfront fees for debt settlement is a violation of federal law, and the CFPB will continue to act decisively when we see companies taking advantage of consumers in this way.”

On April 5, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking (NPR) to amend Regulation Z, specifically to “prevent avoidable foreclosures” due to the COVID-19 pandemic “as the emergency federal foreclosure protections expire.”

The NPR mainly would do three things for loans secured by a borrower’s principal residence:

  1. “[G]enerally prohibit servicers from making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process until after December 31, 2021.” The CFPB is, however, considering whether to include exceptions to this broad foreclosure ban, which would permit a servicer in certain situations to initiate a foreclosure prior to December 31.
  1. Allow servicers to offer borrowers experiencing COVID-19-related hardships streamlined loan modification options based on an incomplete application. Any offered streamlined loan modification would need to satisfy specific criteria regarding the length of term, interest on deferred funds, preexisting delinquencies, and fees.
  1. Amend Regulation Z’s “early intervention requirements” by requiring servicers to discuss with certain delinquent borrowers specific COVID-19-related information at two specific times. First, at an initial live contact if the borrower is not yet in a forbearance program and the owner or assignee of the loan offers a COVID-19 hardship forbearance program. Second, at the last live contact prior to the end of the forbearance period if the borrower is in a COVID-19-related hardship forbearance program. These live contact requirements would sunset on August 31, 2022.

In addition to the above, the NPR would clarify that when a borrower is in a short-term payment forbearance program for a COVID-19 hardship based on an incomplete application, a servicer’s reasonable diligence obligations require it to contact the borrower “no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation.” If the borrower responds affirmatively, then the “servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.” The NPR would also define a “financial hardship due, directly or indirectly, to the COVID-19 emergency” as a COVID-19-related emergency. The CFPB will accept comments on the NPR that are submitted prior to May 11.

The NPR came just days after the CFPB issued a bulletin on April 1, warning servicers that they must “take all necessary steps now to prevent a wave of avoidable foreclosures” and that being unprepared to address such foreclosures is “unacceptable.” The bulletin identifies eight specific areas where the CFPB will “pay particular attention” to how well servicers engage in loss mitigation activities with consumers. The CFPB bluntly states that “companies that are unable to adequately manage loss mitigation can expect the [CFPB] to take enforcement or supervisory action to address violations under its Regulation X, CFPA, or other authorities.”

The CFPB under the Biden administration is proving itself a proactive player in consumer financial industries. Consequently, servicers are urged to pay close attention to these developments and begin developing rigorous compliance strategies to address them.

In Consumer Fin. Prot. Bureau v. Nat’l Collegiate Master Student Loan Trust, the District of Delaware dismissed a lawsuit brought by the Consumer Financial Protection Bureau (CFPB), alleging that a group of trusts that hold more than 800,000 private student loans engaged in unfair and deceptive practices. The District Court held that the CFPB’s attempt to ratify its prosecution was untimely and, therefore, constitutionally flawed in light of the Supreme Court’s decision in Seila Law LLC v. Consumer Financial Protection Bureau.

In 2017, the trusts entered into a consent judgment with the CFPB, which the court denied due to a lack of authority by the trusts’ counsel. Several entities with financial interests in the loans held by the trusts intervened, arguing that the court lacked subject matter jurisdiction or alternatively that the CFPB’s action was now untimely.

Definition of “Covered Persons”

The intervenors argued that as “paper entities” with no employees or management, the trusts were not “covered persons” within the meaning of the Consumer Financial Protection Act (CFPA), thus the court did not have jurisdiction to hear the CFPB’s complaint. In rejecting this argument, the court held that even if the trusts were not “covered persons,” such a deficiency would not be jurisdictional. The court applied a bright line test to determine whether it had jurisdiction: “whether Congress has clearly stated that the rule is jurisdictional.” The sole section in the CFPA addressing subject matter jurisdiction simply states that “an action or adjudication proceeding brought under Federal consumer financial law.” The court also noted “covered persons” appears throughout the statute, and nowhere is jurisdiction referenced.

The court did hint that it may agree with the intervenors’ argument that the trusts were not “covered persons” within the meaning of the CFPA. However, it ultimately determined that whether the trusts are “covered persons” was not a jurisdictional requirement.

Ratification

The intervenors also argued that in light of the Supreme Court’s decision in Seila Law, the CFPB’s attempt to ratify the complaint was untimely. The District Court agreed.

In Seila Law, the Supreme Court held that the structure of the CFPB, which provides that the president may only remove its director for inefficiency, neglect, or malfeasance — and not at will — violated the separation of powers under the U.S. Constitution. However, the Supreme Court also noted that an enforcement action that the CFPB had filed while its structure was unconstitutional may still be enforceable, if it was later ratified.

In assessing whether the CFPB properly ratified the enforcement action against the trusts, the court applied Third Circuit precedent requiring that (1) “the ratifier must, at the time of ratification, still have the authority to take the action to be ratified”; (2) “the ratifier must have full knowledge of the decision to be ratified”; and (3) “the ratifier must make a detached and considered affirmation of the earlier decision.” The court keyed on the first requirement.

The court disagreed with the CFPB’s argument that its ratification after the Seila Law decision was effective, even though the statute of limitations had run, because the initial filing of the complaint satisfied the purpose of encouraging plaintiffs to diligently pursue their rights. The court reasoned that if an agency was allowed to ratify unauthorized action after the statute of limitations had run, it “would have the unilateral power to extend the … statutory period for filing by days, weeks, or as in this case, even longer.”

Likewise, the court also rejected the CFPB’s request to equitably toll the statute of limitations because the CFPB “could not identify a single act that it took to preserve its rights in this case in anticipation of the constitutional challenges.”

Conclusion

This decision may influence other pending CFPB enforcement actions where the statute of limitations has expired. What may be more noteworthy is whether passive securitization entities could be deemed “covered persons” under the CFPA and potentially liable for third-party misconduct, which could have enormous impact on the securitization industry. While the District Court did ultimately punt on the issue, it did say that it “harbors some doubt” as to whether “covered persons” applies to such trusts.