presented by: gregory hanthorn - jones day webinar.pdf · litigation and arbitration, and thus...

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Presented by: Gregory Hanthorn

Jeremy Cole Chip MacDonald

Al Rota

October 9, 2013

Topics • Risk Management and Compliance in the Consumer

Arena • QMs/QRMs • Role of the Board

• Communicating with the CFPB • Portal and Complaint Responses • Document Demands

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Topics • Arbitration Clauses

• Proposed CFPB Telephone Survey and Industry Reactions

• Trends and Recent Decisions • Mortgage Servicing Minefield

• Examinations • CMS • Compensation

• Fair Credit Reporting Act and the “Furnisher”

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Risk Management & Compliance in the Consumer Arena

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Qualified Mortgage and Ability to Repay Rules

General • Required by TILA Section 129C (added by the Dodd-Frank

Act, Sections 1411, 1412 and 1414) o Ability to Repay (“ATR”) – Requires creditors generally to

“make a reasonable, good faith determination of a consumer’s ability to repay a mortgage loan and mortgage related obligations, such as insurance and taxes”

o Qualified Mortgage (“QM”) – QMs are presumed to comply with the ATR requirements

• Final CFPB Rule 78 F.R. 6407 (Jan. 30, 2013) • Final CFPB Rule and Official Interpretation 78 F.R. 35429

(June 12, 2013) • Amendment to the 2013 Mortgage Rules (Sept. 13, 2013) • Effective Date: January 10, 2014

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Qualified Mortgage and Ability to Repay Rules (cont’d)

ATR Rule; CFPB Regs. § 1026.43 • Applies to any consumer credit secured by a dwelling, except

open-end credit, timeshare plan, reverse mortgage or temporary loan

• Minimum, nonexclusive standards for ATR compliance: o Current or reasonably expected income or assets; o Current employment status; o Monthly mortgage payment; o Monthly payment or any simultaneous loan; o Monthly payments of mortgage-related loans; o Current debt obligations; o Monthly debt-to-income ratio; and o Credit history.

• Each creditor must verify information relied upon using reasonably reliable third-party records.

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QMs, CFPB Regs. § 1026.43(e)(2) • General Safe Harbor for Non-Higher Priced Transactions

o A creditor or an assignee of a QM (other than a higher-priced covered transaction) is deemed to comply with the ATR requirements

• QM defined o Regular periodic payments that are substantially equal, except

for ARM changes in interest rates that do not: Increase the principal balance; Allow consumer deferrals of interest; or Result in a balloon payment (subject to exceptions).

o Loan term < 30 years 8


o Total points and fees do not exceed those permissible under §1026.43(e)(3) (i.e., not more than 3% of total amount for loans > $100,000

o Creditor underwriting takes into account the monthly payment for mortgage-related obligations

o Creditor verifies Reasonably expected income or assets (other than the dwelling’s

value); Borrower’s current debt obligations, alimony and child support

obligations; and Borrower’s total monthly debt to total monthly income at loan

consummation does not exceed 43%. o Temporary exception for loans eligible for purchase or

guarantee by FNMA, FHLMC, HUD, VA, Department of Agriculture or Rural Housing Service

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• Consequences of the ATR and QM Rules o Mortgage lending has been one of the prime drivers of bank earnings

since the credit crisis o Safer lending with less systemic risk? o Increased costs of changes to lender systems, processes and

underwriting requirements o Less judgment and more reliance on specified rule factors o Less mortgage credit, especially for first time home buyers o Higher compliance costs o Disparate impact? o More outsourcing of mortgage originations, especially by small

institutions. o Less competition o Effects on HMDA data

CFPB’s “big data” project. See Buskirk and Pry, “Automated Compliance” ABA Bank Compliance (July/Aug. 2013)

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• Other Effects of ATR and QM Rules with Other Rules

o The bank and holding capital rules adopted by the bank safety and soundness regulators proposed risk-weighting residential mortgages in 2 categories. This was not adopted and “prudently underwritten” residential mortgages will continue to have a 50% risk weighting

o The Federal Reserve indicated it may revisit this area, however o Risk retention rules (Aug. 28, 2013) and Qualified Residential

Mortgages (“QRMs”) Generally QRMs = QMs QRMs are exempt from the requirement that securitizers retain

not less than 5% of the credit risk of assets collateralizing asset backed securities

Implements Dodd-Frank Act, Section 941

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• Other Recent Hot Topics in Consumer Finance o Vendor management and Bank and Bank Board

Responsibility for Vendors o Areas of CFPB and Bank Regulator Scrutiny and Protection

Efforts: Elders Students Service members Low and moderate income Payday lenders, advance deposit products, overdrafts Other third party providers, such as mortgage brokers and auto

dealers Debt collectors Credit reporting agencies and error correction

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o The interplay between compliance, operational processes and risk management

o “Zero tolerance” by the OCC and safety and soundness regulators for AML/BSA and consumer compliance matters

o Revisions to the Federal Reserve’s consumer compliance / examination processes

• FIRREA Section 951 and Payday and Similar Lending o Section 951 authorizes CMPs of up to $1 million per day / $5 million

in total for violations of 13 sections of Title 18 and in 15 U.S.C. 645 (fraud in connection with SBA loans)

o Being used to attack bank deposit and loan relationships with payday lenders, even in jurisdictions where payday loans are lawful

o NY AG attacks on Native American and online payday lenders o “J.P. Morgan to Cull Business Clients,” The Wall Street Journal (Oct.

8, 2013)

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• Board of Directors’ Responsibilities o The safety and soundness regulators state that the banks and their

boards of directors are responsible for compliance with laws, including CFPB requirements, outsourcing and vendor management

o Boards need to be informed o Compliance has strategic implications: Product expansion Geographic expansion Mergers

o Fines and penalties; earnings effects o Adequacy of compliance and enterprise risk management o Safety and soundness obligations. See, e.g. FDI Act Section 8; and

“Interagency Guidelines Establishing Standards for Safety and Soundness”

o Board responsibilities for compensation that does not encourage undue risk taking

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Communicating with the CFPB

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• The CFPB “Portal” • Flip side of “Consumer” Portal • Variety of products and companies • CFPB “Guidance” as of August 2013

http://www.cfpbmonitor.com/files/2013/08/guidance-from-cfpb-re-responding-to-complaints-2.pdf

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http://www.consumerfinance.gov/company-signup/


• http://www.consumerfinance.gov/company-signup/

• Basic information • Company information • Point of contact

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Why Sign Up?

• Tight response timeframes • Generally 10 days • Avoid “wrong desk”

• No “one size fits all” • Involve legal

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Why Sign Up?

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Performance goal 2.1.2: Facilitate the timely response to consumer complaints by companies. The CFPB facilitates timely response to consumer complaints by using a dedicated company portal to route complaints to companies for response. Once routed, complaints appear in real time in company portals where companies can review and respond to the complaint, triggering communications to consumers about the company’s response to their complaints.

CFPB Expectation

CFPB Strategic Plan FY 2013 - FY 2017 http://www.consumerfinance.gov/strategic-plan/

CFPB Trial Disclosure Language

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Trial Disclosure Language

• October 3, 2013 Announcement • http://www.consumerfinance.gov/blog/discl

osures-a-new-avenue-for-improvement/ • Policy itself

• http://files.consumerfinance.gov/f/201310_cfpb_1032e-trial-disclosure-policy.pdf

• Caution

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Arbitration Clauses

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Arbitration Clauses • Update on CFPB Study

• June 2013: CFPB proposed telephone survey of 1,000 credit card holders

• Mixed reaction from industry and consumer groups o “We urge the Bureau not to proceed with the proposed survey.

As designed, the survey is inconsistent with the Consumer Financial Protection Act (‘CFPA’) mandate and is flawed in concept and execution. Instead, we urge the Bureau to conduct rigorous and sound peer-reviewed research comparing the various methods of consumer dispute resolution, notably, litigation and arbitration, and thus satisfy the Congressional mandate articulated in Sec. 1028 of the CFPA.” (Comments from The Financial Services Roundtable, the Consumer Bankers Association, and the American Bankers Association, 8/6/13)

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Arbitration Clauses

• Consumer groups were less critical: • “The CFPB is well positioned to examine the issue of consumer

awareness and comprehension of forced arbitration clauses in financial contracts, and [we] fully support its efforts to do so. We expect that the CFPB’s study and a clearly drafted and carefully executed consumer telephone survey will confirm what the available empirical research already demonstrates: that not only are forced arbitration clauses harmful to consumers and designed to immunize corporations, but very few consumers are actually aware of and meaningfully agree to forced arbitration clauses. We hope that once the CFPB has gathered and studied all the empirical evidence available, it will take concrete action to protect consumers from the harm caused by forced arbitration in consumer financial contracts.” (Comments from National Ass’n of Consumer Advocates, 8/6/13)

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Recent Trends and Decisions Post - Oxford Health Plans

• FTC amicus brief in Jackson v. PayDay Financial LLC, No. 12-2617 (7th Cir.), filed 9/13/13

• Southern Communications Services v. Thomas, 720 F.3d 1352 (11th Cir. 2013)

• Kovachev v. Pizza Hut, Inc., 2013 WL 4401373 (N.D. Ill. Aug. 15, 2013)

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Mortgage Servicing Minefield

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CFPB Supervisory Highlights (Summer 2013)

• Issues discovered regarding mortgage servicing supervision: 1. Servicing Transfers

– Failure to provide RESPA disclosures – Lack of controls for the review and handling of “key

documents” (e.g., loan modification documents) 2. Payment Processing

– CFPB raised “several issues” related to the processing loan payments

– Mostly described specific incidents rather than widespread problems with any one issue

– E.g., delaying escrow payments and changing payment address without notice 29


• Issues discovered regarding mortgage servicing supervision (cont.): 3. Loss mitigation

– Cumbersome procedures make it “difficult for consumers to provide correct documentation”

– Conflicting instructions for loss mitigation processes – Long application review periods – Records management (missing denial notices,

disorganized files) – Inconsistent procedures (e.g., waiving fees for some

borrowers but not others)

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• Compliance Management Systems (“CMS”) • CFPB found deficient CMSs at several institutions • “[N]onbanks are more likely to lack a robust

[Compliance Management System] …” o In some instances, the CFPB noted a lack of “a CMS

structure altogether” • Decentralized CMS

o CFPB noticed that nonbanks were handling complaints in isolation

o “[I]ncreases the risk” that issues will not be treated the same across all business lines

o Prevents ability to determine “root cause”

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Compliance Management Systems: CFPB Expectations

• Four Components to Compliance Management System • Board / Management Oversight – Involvement in the

entire process (creation, implementation, and review) • Compliance Program – Independent of business lines;

include policies, training, monitoring, and corrective action • Consumer Complaint Management Program • Compliance Audits – Independent of compliance and

business functions; direct report to board of directors

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Consumer Complaint Management Program: CFPB Expectations

• Centralized function • Proper and timely resolution of complaints

• Track resolution response time by complaint type o Differentiate high risk complaints from others

• “[R]ecordation, categorization, and analysis of complaints and inquiries”

• Root cause analysis • Active, ongoing review of complaints for possible

consumer financial law violations and UDAAP

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1. Update tracking to tie complaint back to statute, rule, or regulation at issue – especially for the new mortgage servicing rules • CFPB wants/needs to test effectiveness of rules • Tests compliance with rules

2. Monitor social media and consumer advocacy websites • CFPB monitors consumer advocacy sites • Identify potential CFPB focus during exam

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Complaint Management & Examination Prep:

Five Steps for Servicers

3. Analyze complaints; identify problematic issues; ensure they were resolved • Identify problematic issues before the exam • “Least sophisticated consumer”?

4. Compare your institution to its peers • Download CFPB data from complaint database • Analyze internal data compared to institutions to

identify trends

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5. Identify individual(s) who will interface with CFPB regarding complaint management and specific complaints • Avoid disconnect between complaint

management/policy and substantive issues • We’ve suggested a team approach

– Individual responsible for complaint management team and best understands details of complaint policy; and

– Individual responsible for substantive issue (e.g., foreclosure manager)

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CFPB Enforcement – Loan Officer Compensation

• CFPB has stated that it is primarily concerned with the interaction between companies and consumers

• But, this includes more than just the “consumer experience”

• CFPB v. Castle & Cooke Mortgage (D. Utah filed July 23, 2013) • Defendant Company: $1.3 billion in mortgage loans in 2012

– Senior managers also named as defendants • Allegations that Defendants paid loan officers more in

commission for higher interest rates – Reg. Z prohibits compensation tied to a mortgage term

• CFPB alleges that Defendant’s “quarterly bonus program” improperly incentivized loan officers

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The Fair Credit Reporting Act and “Furnishers” or “Suppliers”

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Fair Credit Reporting Act

• Receiving information and investigating disputes. . . • Providing investigation results: Furnishers must report

the results of the investigation to the consumer reporting company that sent the dispute originally.

• Correcting inaccurate information. . .

Sept 4, 2013 CFPB Bulletin 2013-09 http://files.consumerfinance.gov/f/201309_cfpb_bull

etin_furnishers.pdf

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Fair Credit Reporting Act

• FTC filed what it dubbed its first enforcement action against a furnisher of information (Certegy Check Services) on August 15, 2013

• $3.5 million settlement • Coincidence???

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List of Resources

• http://www.cfpbmonitor.com/files/2013/08/guidance-from-cfpb-re-responding-to-complaints-2.pdf

• http://www.consumerfinance.gov/regulations/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z/

• http://www.ftc.gov/os/2013/09/130913paydayfinancialbrief.pdf

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List of Resources (cont’d) • http://files.consumerfinance.gov/f/201301_cfp

b_final-rule_loan-originator-compensation-amendments.pdf

• http://www.law360.com/publicpolicy/articles/475243?nl_pk=0f7cd5c6-46bd-4bbf-b709-8c2d74184806&utm_source=newsletter&utm_medium=email&utm_campaign=publicpolicy

• http://www.aba.com/Advocacy/commentletters/Documents/clJointConsumerAwarenessSurvey2013Aug.pdf

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List of Resources (cont’d)

• http://files.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf

• http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf

• http://www.consumerfinance.gov/blog/disclosures-a-new-avenue-for-improvement/

• http://files.consumerfinance.gov/f/201310_cfpb_1032e-trial-disclosure-policy.pdf

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Contact Information Greg Hanthorn Jeremy Cole [email protected] [email protected] 404-581-8425 312-269-4093

Chip MacDonald Albert Rota [email protected] [email protected] 404-581-8622 214-969-3698

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Questions?

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