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Legal Counsel to the Financial Services Industry

Presented by:

Jonice Gray Tucker

Valerie L. Hletko

Benjamin K. Olson

What Trumps at the CFPB? Regulatory Outlook for 2017

February 13, 2017

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CFPB Structure and Leadership in the Wake of PHH and Political Changes

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CFPB Reform by Executive Action

• President’s ability to dictate CFPB actions is limited by the Dodd-Frank Act – Independent agency

– Director has 5-year term

• Trump administration actions on regulatory reform – “Regulatory freeze” memorandum (new v. issued)

– “2 for 1” executive order

– Dodd-Frank Act executive order

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CFPB Reform by Executive Action

• President Trump may seek to force near-term change by removing Director Richard Cordray – “Personnel is policy” – “For cause” under the Dodd-Frank Act (i.e., for inefficiency, neglect of

duty, or malfeasance in office) – “At will” under the holding in CFPB v. PHH Corp.

• Candidates to replace Director Cordray include vocal CFPB critics – Brian Brooks, General Counsel for Fannie Mae – Retired Congressman Randy Neugebauer (R-TX) – Professor Todd Zywicki, George Mason University Scalia Law School

and the Mercatus Center – Professor Howard Beales, George Washington University School of

Business

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• In October 2015, a majority of a D.C. Circuit panel concluded that the structure of the CFPB violated the Constitution’s separation of powers – Majority remedied defect by making the CFPB Director

subject to “at will” removal by the President, effectively converting the CFPB from an independent agency to an executive agency

– Opinion indicates that this change does not affect the validity of the CFPB’s past actions

– Judge Henderson dissented on the grounds that it was not necessary to reach the Constitutional issue because the CFPB’s misinterpretation of RESPA was sufficient grounds for reversal

CFPB v. PHH Corp.: The Panel Decision

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• CFPB has filed a petition for rehearing en banc

– Panel decision is stayed until full D.C. Circuit rules on the motion

– Briefing appears to be complete

– Granting petition would vacate panel decision

– Obama administration Solicitor General suggested following Judge Henderson’s approach and reversing on RESPA issue

• Supreme Court review

– CFPB cannot appeal to the Supreme Court without the support of the Attorney General

– D.C. Circuit denied motions to intervene by Democratic attorneys general and member of Congress, consumer advocates

CFPB v. PHH Corp.: Current Status

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Impact of New Director

• Final rules not yet effective – Prepaid Accounts Rule – Mortgage Servicing Amendments – HMDA Amendments

• Proposed rules – Arbitration – Payday lending

• Pre-proposal rulemakings – Debt collection – Overdrafts – Larger participants in installment lending – Small business data collection

• “No Action” letters & Project Catalyst

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CFPB Reform by Legislation

• The Congressional Review Act – Congress has 60 session days from the issuance of a

“major rule” to override it by joint resolution signed by the President

– Major rules have an annual impact on the economy of $1 million dollars or more

– Candidates:

• Prepaid Account Rule (already introduced)

• Mortgage Servicing Amendments

• HMDA Amendments

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CFPB Reform by Legislation

• The CHOICE Act

– Replace the single Director with a five-member bi-partisan commission called the “Consumer Financial Opportunity Commission”

– Congressional appropriations

– Separate Inspector General

– Exempt banks, savings associations, and credit unions with >$50B in assets

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CFPB Reform by Legislation

• The CHOICE Act (cont’d)

– CFPB rulemakings subject to Congressional approval and additional cost-benefit analyses

– Removal of judicial deference to CFPB guidance

– Nullify indirect auto guidance

– Limit or repeal authority over payday loans, arbitration, “abusive” practices

– Require complaints be verified before made public

– Court oversight of CID modifications

– Removal of administrative actions to federal court

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CFPB Enforcement in Early 2017

• Full speed ahead? – CFPB continues to engage in aggressive enforcement activity

• Lawsuits on eve of inauguration – Navient (student loan servicing)

– TCF (overdraft)

• Additional post-inauguration activity – Howard/Williamson (debt collection)

– RD Legal (legal receivables)

– Woodridge Gold & Pawn (small dollar loans)

– Mastercard/Unirush (prepaid cards)

– Prospect (mortgage referrals)

– Citi (mortgage servicing)

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Beyond PHH: CFPB Litigation Challenges

• CFPB actions facing scrutiny in a number of other active lawsuits – Judicial “reputation” hanging in the balance? – Corporate entities more likely to push back going forward?

• ACICS (college accreditor) – April 2016 (DDC): ruling in favor of ACICS regarding deficiencies in

authority to issue CID – February 2017 (DC Circuit): Continued scrutiny on appeal, including

questions regarding sufficiency of “notification of purpose”

• RD Financial (legal receivables) – January 2017(SDNY): Lawsuit seeking declaratory and injunctive relief;

alleges jurisdictional overreaching

• Nationwide Biweekly (mortgage payment structuring) – February 2017 (ND Cal.): CFPB motion for summary judgment denied;

CFPB’s claims “intrinsically factual” in nature and must be proved at trial for CFPB to prevail

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Supervision and Enforcement Trends

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Mortgage Servicing

• Servicing Rules missteps can be both technical violations of the underlying regulation, as well as UDAAPs

– Statutes, guidance and exam procedures provide illustrative examples of unfair, deceptive and abusive acts and practices, but enforcement is fact-specific and conducted on a case-by-case basis

– A company may be fully compliant with other consumer protection laws and still violate UDAAP laws

– Dual UDAAP authority with federal and state enforcement authorities presents possibility of parallel or joint investigations notwithstanding MOUs

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Mortgage Servicing

• CFPB supervision and enforcement are both highly active in the loss mitigation area. Areas of focus include: – Compliance with timing requirements (particularly foreclosure)

– Soliciting applications from ineligible borrowers

– Requesting inapplicable or previously submitted documents

– Loss mitigation correspondence that is confusing

– Consistent identification of complete applications and timely and accurate notification to borrowers when application is incomplete

– Prematurely denying applications

– Not evaluating applications for all options for which borrowers may be eligible

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Mortgage Servicing

– Inappropriate steering of borrowers into certain alternatives – Properly underwriting the application, particularly income – The terms of the modifications offered, with a focus on

temporary and interest-only modifications – Oral applications – Communications with borrowers in bankruptcy – Failing to honor terms of trial modifications after servicing

transfer – Timely conversion of trial modifications – Waiver of rights when entering into loss mitigation agreement – Not sharing among appropriate personnel accurate and current

information regarding application and/or foreclosure status – Maintaining adequate policies, procedures, and training

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Incentive Compensation

• September 8, 2016 settlement with CFPB, Los Angeles city attorney’s office, and OCC for $185 million. CFPB and OCC findings include: – Employees engaged in improper sales practices to satisfy sales goals

and earn rewards – Employees opened deposit accounts without customers’ consent or

knowledge – Employees submitted applications and obtained credit cards for

customers – Employees used fake email accounts to enroll customers in online

banking services without the customers’ knowledge or consent – Employees requested debit cards and created PINs to activate the

cards without the customers’ knowledge or consent – Incentive compensation program was not aligned with local branch

traffic, customer demand, or staff turnover – Insufficient oversight system for employees and sales practices – Failure to maintain a comprehensive customer complaint monitoring

system

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Incentive Compensation

• Regulators under pressure from Congress

– Accused of being “asleep at the switch”

• Horizontal reviews (OCC, FINRA, Fed)

– Agencies not fundamentally opposed to incentive programs, but concerned about appropriate supervision and oversight

– Increased focus on self-identification and self-reporting by institutions

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Incentive Compensation

• OCC added retail sales practices to the list of risks it monitors in Semiannual Risk Perspective released January 5, 2017

– Overall risk environment relatively stable

– “Control breakdowns over the governance of retail product sales practices can erode trust in the banking system. Effective systems to detect and address fraud and possible unfair or deceptive practices in a timely manner, including effective complaint management systems, are critical”

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Student Lending in Focus

• Issues related to lending to student borrowers have been top of mind for the CFPB since it opened its doors

– Wide variety of topics and myriad industry players

– Steady flow of reports and other information regarding the CFPB’s observations

– Enforcement activity (investigations, lawsuits, consent orders)

– Supervisory activity

– Requests for Information to Industry

– Rulemaking contemplated as part of longer-term agenda

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Recent Enforcement Hot Topics

• For-Profit Schools

– Significant regulatory attention on many aspects of education finance as related to for-profit schools

• Value against cost

• Disclosures

• Finance charges

• Collections

– Regulatory action has involved CFPB, SEC, Department of Education, State Attorneys General, among others

– Traditional boundaries tested to this point, but potential for dissipating focus in future

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Recent Enforcement Hot Topics

• Education Accreditation – CFPB attempt to investigate accreditor of for-profit schools

garnered substantial attention (Congress, media)

– CFPB lost effort to enforce CID (D.D.C.) and scrutiny continuing on appeal (D.C. Cir.)

– Illustrative of expansive view of jurisdiction that may shift in future

• Student Loan Debt Relief – Numerous investigations of entities providing assistance to

students struggling with student loan debt • Lawsuits and consent orders

– Fact patterns that have given rise to enforcement action less controversial

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Recent Enforcement Hot Topics

• Student Loan Servicing – In past two years, myriad investigations and settlements involving

CFPB, DOJ, and FDIC among others – Requests for information, regulatory reports and industry studies

signal priorities

• CFPB issued Student Loan Servicing Report in September 2015 covering numerous aspects of student loan servicing, including: – Co-signer policies – Repayment options and plan recertification – Servicing transfers – Customer service and error resolution – Payment processing – Practices affecting military borrowers and older consumers

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Recent Enforcement Hot Topics

• In January 2017, on eve of inauguration, CFPB sued largest servicer of federal and private student loans (M.D. Pa.)

• Complaint alleges violations of UDAAP, FCRA, and FDCPA relating to servicing and collection of student loans, including: – Payment allocation and application errors – Steering to forbearance rather than repayment plans – Unfair and deceptive procedures in connection with repayment plan

renewal – Deceptive practices in connection with co-signer release – Errors in credit reporting for student loan borrowers who had a total and

permanent discharge

• Myriad issues of interest – Attempt at regulation by enforcement action – New standards made retroactively applicable? – Focus on single servicer

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Fair Lending

• What Might Change? – Under Sessions, the Civil Rights division of the DOJ might be less

active and might refuse referrals from prudential regulators

– Different legal theories might be used

– Possible changes at the CFPB

– More activity from state attorneys general and public-interest organizations

• What Might Stay the Same – The underlying laws (ECOA and FHA)

– Professional staff and leadership at prudential regulators

– Cordray – “[B]usiness as usual until they shut the lights off”

– Community Reinvestment Act evaluations

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Fair Lending Enforcement Shifts

• Disparate Impact – Likely will not disappear but may be deemphasized

• Redlining – Possible change in the definition – Reasonably Expected Market Area

• Small Business Fair Lending – The CFPB will likely continue to implement a system of monitoring

credit for small businesses, women-owned businesses, and minority-owned businesses as mandated by Dodd-Frank

• Auto Lending – The CFPB seems to be moving away from controversial proxy analysis

• Statistical Analysis – Possible less aggressive interpretation of statistics

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Questions

Jonice Gray Tucker Partner

202.349.8005 jtucker@buckleysandler.com

buckleysandler.com | infobytesblog.com

Benjamin K. Olson Partner

202.349.7924 bolson@buckleysandler.com

Valerie L. Hletko Partner

202.349.8054 vhletko@buckleysandler.com