Tuesday, June 20, 2017

CFPB report helps consumers plan for retirement

By Thomas G. Wolfe, J.D.
As part of its stated mission to “empower consumers to take more control over their financial lives,” the Consumer Financial Protection Bureau has issued a report, titled “Consumer insights on managing funds at the time of retirement.” As the June 2017 report explains, the CFPB commissioned research to better understand solutions to some of the challenges that consumers face in planning for their retirement and in spending their funds during those retirement years. In reporting the results of its research, the CFPB aims to “help consumers more effectively plan for retirement and manage personal retirement accounts.”
In her blog post about the research study, the CFPB’s Irene Skricki notes that the bureau recognizes that when people approach retirement age, “they have to make many difficult, often irreversible choices.” Accordingly, the CFPB “tested ways to help people better visualize the results of their retirement choices and plan ahead for significant decisions.”
Report highlights. According to the CFPB’s report:
  • 40 percent of “late baby boomers” are approaching retirement with limited or no savings and “are projected to face a savings shortfall;”
  • more than 50 percent of consumers have indicated that they “worry about running out of money” in retirement;
  • about 62 percent of workers between the ages of 55 and 64 have accumulated, during the course of their working lives, less than one year’s worth of income in retirement savings;
  • when making decisions about retirement at or before age 55, consumers generally reported an interest in “an advance planning tool;” and
  • when making decisions about retirement after age 55, consumers generally reported a preference for receiving information about retirement accounts, including “simplified forms” for managing the accounts.

In addition to the research results, the CFPB’s report promotes “optimal choices” for consumers through two approaches: simplification and pre-commitment. The report encourages consumers to overcome “common biases and challenges in the decision context.” Further, the CFPB indicates that its research findings “can be used by a wide variety of participants in retirement financial decisions, services, and products, including employers, retirement plan administrators, financial educators, and others who help consumers with retirement choices.”
For more information about reports issued by the Consumer Financial Protection Bureau, subscribe to the Banking and Finance Law Daily.

Friday, June 16, 2017

Two flood insurance bills pass Financial Services Committee

By J. Preston Carter, J.D., LL.M.

The House Financial Services Committee passed two bills to reform and reauthorize the National Flood Insurance Program (NFIP), which is set to expire on Sept. 30, 2017—the National Flood Insurance Program Policyholder Protection Act of 2017 (H.R. 2868) and the 21st Century Flood Reform Act of 2017 (H.R. 2874). The Committee will reconvene on June 21, 2017, to consider an additional four measures to reauthorize the NFIP.

H.R. 2868, sponsored by Rep. Lee Zeldin (R-NY), would protect NFIP policyholders from unreasonable premium rates and require the Federal Emergency Management Agency to conduct a study to analyze the unique characteristics of flood insurance coverage of urban properties. The bill passed the Committee by a vote of 53-0.

H.R. 2874, sponsored by Rep. Sean Duffy (R-Wis), would improve the financial stability of the NFIP, enhance the development of more accurate estimates of flood risk through new technology and better maps, increase the role of private markets in the management of flood insurance risks, and provide for alternative methods to insure against flood peril. The bill passed the Committee by a vote of 30-26.

Hensarling opposes program bailout. In the Committee press release, Chairman Jeb Hensarling (R-Texas) said, “We cannot continue to call on the American taxpayer to bailout a program that is currently drowning in $25 billion of red ink and suffers a $1.4 billion annual actuarial deficit. These bills put the National Flood Insurance Program on a path toward actuarial soundness where all will be protected, no one will be denied a policy, all will benefit from competition, the NFIP will be sustainable, and the national debt clock will spin a little less rapidly.” In his opening statement, Hensarling said he opposed a permanent taxpayer subsidy. “[P]eople should gradually—gradually—be expected to pay actuarial rates.”

Waters promises amendments.
In her opening statement at the Committee markup, Rep. Maxine Waters (D-Calif) expressed concern that “in many respects the package of bills would actually make matters worse by restricting coverage, increasing costs, and opening the door to cherry-picking by the private sector.” She added that “Democrats will offer amendments to provide the reauthorization language needed to keep the NFIP’s doors open and keep the real estate market from spiraling out of control.”

Committee members Reps. Carolyn B. Maloney (D-NY) and Lee Zeldin (R-NY) praised passage of the NFIP Policyholder Protection Act, stating that it would result in a credit to homeowners with NFIP policies who invest in mitigation activities, such as elevating their homes, adding porous foundations, or moving boilers to a higher floor, which would result in lower premiums and help reduce the cost to homeowners.

ABA’s grave concerns. In its memorandum to the Committee, the American Bankers Association expressed “grave concerns” over a section of the 21st Century Flood Reform Act of 2017 that would “provide for the elimination of coverage for properties with excessive lifetime claims, defined in the bill as claims exceeding twice the replacement cost of the property.” The ABA stated that “Cutting off such properties from NFIP coverage will likely lead to significant hardship for homeowners, lenders and communities.” The association also opposes the bill’s increase in penalties for lender non-compliance from $2,000 to $5,000.

FSR applauds package. The Financial Services Roundtable applauded the Committee’s legislative package of “reforms to improve the consumer experience and increase private sector involvement.” The FSR stated that many reforms will better enable the Write-Your-Own insurance program to deliver insurance coverage to consumers.

For more information about flood insurance reforms, subscribe to the Banking and Finance Law Daily.

Thursday, June 15, 2017

CFPB turns attention to credit card promotions, debt collection

By Andrew A. Turner, J.D.
The Consumer Financial Protection Bureau has sent a number of letters to retail credit card companies, encouraging them to consider using more transparent promotions. Many of these retailers offer credit cards with no interest over a set period if the promotional balance is paid in full by the end of the term. The letters outline bureau concerns that these promotions may surprise consumers with high, retroactive interest charges after the promotional period ends. Therefore, the CFPB has suggested that companies consider using a zero-percent-interest promotion that is more transparent and carries less risk for consumers.
“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” said CFPB Director Richard Cordray. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.” Turning his attention to another topic, Cordray affirmed the bureau's intention to move forward on debt collection regulation.
Retail cards. These credits are typically offered through retail stores to allow consumers to finance large purchases such as appliances, furniture, and medical or dental services, and pay the cost over time. Under a deferred-interest plan, the consumer pays no interest if the purchase amount is paid off within a set period, typically six to 12 months. If any promotional balance remains when the promotional period ends, consumers are charged accrued interest, usually 25 percent, on the promotional balance from the time of purchase.
The bureau has urged these retailers to use a more straightforward zero-percent-interest promotion where consumers are charged interest only on the balance that remains. 
Consumer tips. The CFPB has published consumer tips to help individuals understand the different credit card interest-rate promotions. According to the bureau, consumers should be aware of factors that determine the cost of borrowing, which include:
  • length of the promotional period;
  • interest rate after the promotional period; and
  • payment each month needed to pay off the purchase during the promotional period
Debt collection rules. The CFPB intends to adopt rules to regulate debt collections by both debt collectors and first-party creditors, according to CFPB Director Richard Cordray. In remarks prepared for a Consumer Advisory Board meeting, Cordray said that the bureau has changed its plan to adopt separate rules for debt collectors and creditors and now intends to write what he termed a right consumer, right amount” rule that will apply across the debt collection market.
According to Cordray, the debt collection industry and consumer advocates agree that updated FDCPA interpretations are needed due to changes in technology and the growth of debt buying since the Act was passed in 1977. The bureau outlined its initial plans for debt collection rules last July, addressing debt information integrity, disclosures, limits on communications, and debt disputes. Initially, the intent was to adopt a rule that would have applied only to companies who were covered by the Fair Debt Collection Practices Act, with creditors collecting their own debts to be addressed separately.
However, the bureau’s analysis of the comments it has received on the July 2016 proposal has revealed that separating the debt information integrity issues into different rules for debt collectors and creditors was problematic, the director said. Creditors create the data and then pass it on to debt collectors; however, all companies that collect debts need to have complete and accurate data. That will be better addressed by a single regulation, he said.
For more information about actions taken and planned by the CFPB, subscribe to the Banking and Finance Law Daily.

Tuesday, June 13, 2017

Debt buyer is not debt collector under federal consumer debt collection law

By Richard Roth

Companies that buy debts originated by others and then collect the debts for themselves are not debt collectors under the Fair Debt Collection Practices Act and therefore are not required to comply with the FDCPA’s consumer protection provisions, according to the Supreme Court. The unanimous opinion in Henson v. Santander Consumer USA Inc.—the first opinion attributed to Justice Gorsuch—affirmed a decision by the U.S. Court of Appeals for the Fourth Circuit (Henson v. Santander Consumer USA Inc.).

According to the Supreme Court opinion, Santander Consumer USA bought defaulted auto loans from CitiFinancial Auto, the original lender. Santander then attempted to collect the loans without complying with the FDCPA’s requirements. The question was whether buying the debts made Santander a company that “regularly collects or attempts to collect . . . debts owed or due” someone else, i.e. whether it made Santander a debt collector (15 U.S.C. §1692a(6)).

The text of the FDCPA makes clear that “All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another’,” the opinion said. How the debt owner came to own the debt, whether by origination or by purchase, is irrelevant.

Parsing the text. The consumers attempted to rely on the FDCPA’s use of “owed . . . another,” which they argued covered any debts that previously were owed to someone other than the current owner. If Congress intended to exclude debt buyers from the definition of debt collectors, the act would have referred to debts “owing . . . another.”

The Court rejected that argument as contrary to both proper grammar and common understanding. After all, the FDCPA actually refers to debts “owed or due . . . another,” the opinion pointed out. Accepting the consumers’ argument would require that to mean “debts that were owed or are due another.” “[S]upposing such a surreptitious subphrasal shift in time seems to us a bit much,” Gorsuch wrote.

The words used elsewhere in the FDCPA did not support the consumers’ position, the opinion added. Congress was able to distinguish between debt originators and debt buyers when it wanted to.

Significance of default. It is true that the FDCPA excludes from its debt collector definition those who buy debts that are not in default, the opinion conceded. However, that did not imply that anyone who bought a debt after default was a debt collector.

Assuming for the sake of argument that a company must be either a debt collector or a creditor, and not both, with respect to a specific debt, there was no reason that a debt buyer like Santander could not be a creditor, the opinion added.

Public policy. The court believed that the consumers preferred to rely on their public policy argument—the FDCPA was intended to protect consumers from improper tactics by independent debt collectors, and furthering that purpose required applying the act to debt buyers. However, the consumers also conceded that debt buying arose after the FDCPA was enacted, the opinion observed, which meant that Congress never had the opportunity to consider whether the practice should be covered.

“[I]t is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced,” Gorsuch wrote. Regardless of the public policy argument urged by the consumers, it had to be presumed that the FDCPA text meant what it said.

Excluded questions. Gorsuch’s opinion also noted that two related issues were not being considered. The Court was not addressing whether Santander should be considered a debt collector because, regardless of the ownership of these debts, it does regularly collect debts owned by other persons. Neither was it addressing whether the company was a debt collector because it was engaged in a business that had debt collection as its principal purpose.

For more information about fair debt collection, subscribe to the Banking and Finance Law Daily.

Thursday, June 8, 2017

CFPB debt-relief suit survives challenge under practice-of-law exclusion

By Katalina M. Bianco, J.D.
Law firms and attorneys engaged in providing consumer debt relief services were unable to convince a U.S. district judge that the Consumer Financial Protection Act practice-of-law exclusion required the dismissal of the Consumer Financial Protection Bureau’s enforcement suit. The bureau’s suit claiming violations of the Federal Trade Commission’s Telemarketing Sales Rule also survived several other arguments for dismissal raised by the attorneys (CFPB v. Howard, May 26, 2017, Staton, J.).
According to the CFPB, the attorneys and their law firms continued the illegal debt-relief business of Morgan Drexen after the bureau essentially forced the company into bankruptcy. The attorneys’ financial arrangements with clients included what was termed an "upfront engagement fee" of between $1,000 and $3,250, as well as an administrative fee. While the CFPB claims these fees constituted advance fees that are prohibited by the Telemarketing Sales Rule provisions on debt relief services, the attorneys claim they were fees for bankruptcy case legal services that actually were performed.
Legal provisions. The TSR, adopted by the FTC under the Telemarketing and Consumer Fraud and Abuse Prevention Act, prohibits debt relief service providers from seeking or accepting any payments until at least one of the consumer’s debts has been renegotiated and the consumer has made at least one payment. Any fee charged must be proportionate to either the consumer’s total debt or the amount the debt renegotiation saved the consumer (16 CFR §310.4(a)).
Debt relief services fall under the CFPB’s general enforcement authority under the CFPA. The Act says that the bureau has no enforcement authority over a licensed attorney’s activities that are part of the practice of law (15 U.S.C. §5517(e)). However, the CFPA adds a limitation on that exclusion—the exclusion does not apply to the activities of an attorney who is "otherwise subject to any of the enumerated consumer laws" that the bureau is to enforce.
The Telemarketing and Consumer Fraud and Abuse Prevention Act is one of those enumerated consumer laws when consumer financial products or services are involved, the judge pointed out. Moreover, the FTC considered including an exclusion in the TSR for attorneys but declined to do so.
Practice of law exclusion. The attorneys claimed that the limitation on the exclusion simply meant that an attorney engaged in activities that are not part of the practice of law is subject to the CFPB’s authority. The judge disagreed, saying that this interpretation would make the limitation unnecessary. The CFPA denies the bureau the authority to regulate the practice of law under its general enforcement authority but allows the bureau to act against legal practices that are subject to other consumer financial protection statutes, she said.
The judge also disagreed with the attorneys’ assertion that the upfront fees were permitted by the Bankruptcy Code and thus not banned by the TSR. The bureau claimed that the bankruptcy services contracts had been created to evade the TSR upfront-fee ban, and that was enough to prevent the dismissal of the suit.
Other arguments. Other arguments for dismissal that were raised by the attorneys were disposed of quickly:
  • The CFPB could seek an injunction even though the attorneys had ceased the challenged conduct because the attorneys could easily resume it.
  • The bureau’s complaint was not subject to the Federal Rules of Civil Procedure heightened pleading standards for fraud complaints because the bureau’s claim that the attorneys had facilitated Morgan Drexen’s conduct "does not sound in fraud." The attorneys could have facilitated Morgan Drexen’s fraud without themselves making any fraudulent statements.
  • The bureau’s choice to proceed separately and first against Morgan Drexen did not, under theories of estoppel or issue preclusion, prevent its subsequent enforcement action against the attorneys.
For more information about the CFPB and practice of law exclusion, subscribe to the Banking and Finance Law Daily.

Tuesday, June 6, 2017

Florida, Nevada senators urge Administration to protect seniors under reverse mortgage program

By Thomas G. Wolfe, J.D.

Expressing their concern that President Donald Trump’s fiscal-year 2018 budget would “remove protections for widows and widowers facing eviction under the reverse mortgage program,” Senators Catherine Cortez Masto (D-Nev) and Marco Rubio (R-Fla) have jointly submitted a letter to the Secretary of the Department of Housing and Urban Development and the Director of the Office of Management and Budget. The May 31, 2017, letter asks the HUD Secretary and OMB Director to provide a written response “outlining the rationale underlying this proposed change.”

Both legislators are members of the Senate Special Committee on Aging. While seeking to address a nationwide concern, the letter observes that Rubio’s home state of Florida has the “largest percentage of seniors in the country and countless retirement communities,” and Cortez Masto’s home state of Nevada has a “booming elderly population” with unique housing challenges.

Concerns. The two senators note that while reverse mortgages “can provide an important source of financial security,” a significant concern arises “when a homeowner dies, and is survived by a spouse that was not an original borrower on the reverse mortgage.” Under previous Home Equity Conversion Mortgage (HECM) rules, such a surviving spouse often faced having to pay the loan balance in full or face eviction at a time when he or she was already grieving the loss of a spouse.

While Rubio and Cortez Masto observe that, in recent years, HUD has taken action to “reform the HECM program, protect consumers, and shield taxpayers from the risk posed to the FHA’s insurance fund,” the senators discern a different trend under the Trump Administration. “It appears that the President’s FY 2018 budget seeks to make a change to the reverse mortgage program,” they state. In particular, the senators point out that a “portion of the HUD budget seeks to amend language in the National Housing Act pertaining to safeguards which protect widows and widowers from displacement.”

Request. Accordingly, Cortez Masto and Rubio request additional information about the President’s budget impacting the ability of seniors to stay in their homes after the death of a spouse. Moreover, the letter asks HUD and the OMB to provide the rationale for the apparent policy change.

For more information about reverse mortgages, subscribe to the Banking and Finance Law Daily.

Thursday, June 1, 2017

CFPB begins assessment of mortgage rules

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau is conducting an assessment of the Ability-to-Repay/Qualified Mortgage rule (ATR/QM rule) and mortgage servicing rule with a request for recommendations and information. The Dodd-Frank Act requires the CFPB to review some of its rules within five years after they take effect to assess effectiveness. The rules being assessed were adopted in Jan. 2013 and took effect in Jan. 2014.
The CFPB is asking for comments on the assessment plan for the ATR/QM rule under the Truth in Lending Act (Regulation Z) by July 31, 2017. The comment date on the assessment plan for the mortgage servicing rule under the Real Estate Settlement Procedures Act (Regulation X) expires on July 10, 2017. The CFPB intends to issue the assessment reports by January 2019. 
In the Dodd-Frank Act, Congress established new standards for mortgage lending that, among other things, required lenders to assess consumers’ ability to repay. The Dodd-Frank Act also provided for a class of “qualified mortgage” loans that cannot have certain risky product features and are presumed to comply with the ATR requirement. The ATR-QM rules require lenders to consider and verify a number of different underwriting factors, such as a mortgage applicant’s assets or income, debt load, and credit history, and make a reasonable determination that a borrower will be able to pay back the loan.
The RESPA servicing rule requires mortgage servicers to provide disclosures to borrowers related to force-placed insurance, respond to errors asserted by borrowers in a timely manner, and follow procedures related to loss mitigation applications and communications with borrowers. For example, servicers generally must acknowledge written notices of error within five days and investigate and respond to the borrower in writing within 30 days.
Specific research activities. The CFPB will examine the impact of major provisions of the ATR/QM rule on a set of consumer outcomes, including: mortgage cost; origination volumes; approval rates; and subsequent loan performance. In addition to these measurable outcomes, the bureau will also consider changes in creditors’ underwriting policies and procedures which might affect consumer outcomes.
The CFPB plans to conduct or has begun conducting several research activities in connection with the assessment of the ATR/QM rule:
  • quantitative research on loan originations, rejection rates, and loan performance, using available mortgage data;
  • analysis of cost of credit before and after the rule, as well as recent trends;
  • interviews with creditors regarding their activities undertaken to comply with the requirements of the ATR/QM Rule; and
  • consultations with government regulatory agencies, government-sponsored enterprises, and private market participants.
To assess the effectiveness of the 2013 RESPA servicing rule, the CFPB also plans to analyze a variety of metrics and data to the extent feasible. Feasibility will depend on the availability of data and the cost to obtain any new data.
Issues for comment. In particular, the CFPB invites the public, to submit the following:
  • comments on the feasibility and effectiveness of the plans, as well as the outcomes, metrics, baselines, and analytical methods for assessing the rules:
  • data and other factual information that may be useful;
  • recommendations to improve the assessment plan, as well as data, other factual information, and sources of data that would be useful;
  • data and other factual information about the benefits and costs of the rules for consumers, creditors, and other stakeholders in the mortgage industry; and about the impacts of the rules on transparency, efficiency, access, and innovation in the mortgage market;
  • data and other factual information about the rules' effectiveness in meeting Dodd-Frank Act objectives; and
  • recommendations for modifying, expanding, or eliminating the rules.
For more information about CFPB mortgage lending requirements, subscribe to the Banking and Finance Law Daily.