Consumer financial services at a crossroads

[Pages:44]Consumer financial services at a crossroads

Key developments, possible impacts

DRAFT 16 April 2018

Overview

1

CFPB structural changes

3

Mortgage origination and servicing 8

Small-dollar loans

13

Student loans

17

Auto finance

22

Marketplace lending

26

Payment processors

30

Consumer lending

34

Cases to watch

36

Timeline

38

Overview

During 2017 and early 2018, the consumer financial services (CFS) regulatory landscape has undergone seismic shifts.

As the Trump Administration, Congress and the courts, in varying ways and to various degrees, rethink and reshape the Consumer Financial Protection Bureau's (CFPB or Bureau) structure, agenda and approach, companies-- notwithstanding the overall deregulatory trend of such activity--likely will experience continued uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions navigate today's rapidly evolving regulatory environment, we present a concise retrospective and guide for what likely lies ahead. Amidst so much change, and in an environment redolent with deregulatory rhetoric, it is important to take an intermediate and even long view toward compliance as the ramifications of many decisions made today might not become apparent for years. Thus, as always, a commitment to best practices, a strong compliance culture, and a firm grasp on enduring requirements will serve CFS market participants well.

The shifting landscape

Despite a contentious legal battle over the CFPB's leadership, Acting Director Mick Mulvaney has pressed forward with significant changes to the Bureau's organization and priorities. For the time being, it appears that the Bureau has recused itself from certain aspects of overseeing the CFS industry, a stark departure from former Director Richard Cordray's approach.

In less than six months, the new leadership has announced several political appointments to key CFPB positions, and issued no fewer than ten requests for information (RFIs), asking the public to weigh in on nearly every aspect of the Bureau--enforcement, supervision, rulemaking, market monitoring and education activities, among others. In addition to a comprehensive review of all CFPB rules, the Bureau has specifically focused on rolling back requirements under its payday, prepaid card and HMDArelated rules.

Congress too has joined the fray, striking down the CFPB's arbitration rule in November 2017. Bills have been introduced to subject the Bureau to Congressional appropriations--a proposal the Trump Administration adopted in its 2019 budget, which Acting Director Mulvaney also underscored as part of his proposed reforms. Other proposals would reconstitute the Bureau as a multi-member, bipartisan commission.

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Overview (continued)

Separately, as our collective memory of the financial crisis fades and as they have become more accustomed to the CFPB as litigant, some courts appear to be less deferential to the CFPB's enforcement efforts. Companies and institutions are increasingly challenging the Bureau's civil and administrative actions, rather than swiftly settling.

The current CFPB leadership has also signaled a new approach to enforcement that includes the use of more traditional legal theories, de-emphasizing the broad and aggressive use of the Bureau's UDAAP authority as an enforcement tool. Among other actions, the CFPB's decision to remove its fair lending unit from the supervision and enforcement division, as well as its call for local enforcement of consumer protection laws likely will cause states to increase their enforcement activities. Indeed, several state attorneys general (AGs) have already signaled that they will use their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many ready to draw on or otherwise forming special consumer units. Beyond enforcement of law, state AGs, regulators and legislators also seem poised to revisit existing laws and regulations and issue guidance, as appropriate--all in the name of filling any void the CFPB might leave in its wake. Multistate coordination among these players remains possible, if not probable, in many instances.

A note on new technologies

Concurrent federal deregulation and increasing state oversight may pose unique challenges for tech, fintech and regtech companies as well as incumbent financial institutions leveraging new technologies. Although the Bureau's Project Catalyst was designed and has the potential to balance oversight with the need to foster consumer-friendly innovation, the current CFPB leadership has yet to take a position on whether it will revamp this initiative, and if so how--regardless of how it will otherwise address fintech solutions in the CFS market.

Other federal agencies, including the federal banking regulators, have yet to demonstrate how they will strike this balance and manage tech innovation in the CFS sector. States, meanwhile, may seek to clarify and enforce timetested laws and regulations, while also possibly offering a multiplicity of differing responses. All CFS market participants using or offering innovative approaches and products are thus encouraged to navigate this shifting landscape carefully by ensuring a sound understanding of new technologies, an ability to manage their risks, and an ability to communicate their risk management approach, when and as appropriate, to regulators.

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CFPB structural changes

The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau's structure and how it operates.

Through a series of swift moves, Acting Director Mulvaney has brought in several political appointees to serve in key positions, including as his chief of staff, senior advisors and communications Director. He has also solicited applications for membership on its Consumer Advisory Board and its Credit Union Advisory Council. In addition, Acting Director Mulvaney has announced that the Office of Fair Lending and Equal Opportunity will be transferred from the Division of Supervision, Enforcement & Fair Lending, to the Office of the Director. The Office of Fair Lending and Equal Opportunity will no longer have fair lending supervisory authority, but rather will focus on advocacy, coordination and education. Most recently, Acting Director Mulvaney called for four major reforms to the CFPB: subjecting it to Congressional appropriations; giving the President more oversight of the Bureau; creating a dedicated CFPB inspector general; and subjecting all major new CFPB rules to Congressional approval.

"[W]e need structural and legislative change to the way this place is being run."

"I request that Congress make four changes to the law to establish meaningful accountability for the Bureau: (1) [f]und the Bureau through Congressional appropriations; (2) [r]equire legislative approval of major Bureau rules; (3) [e]nsure that the Director answers to the President in the exercise of executive authority; and (4) [c]reate an independent Inspector General for the Bureau"

CFPB Acting Director Mick Mulvaney

CFS 3

CFPB structural changes (continued)

Enforcement

According to Acting Director Mulvaney, the CFPB will no longer "push the envelope" and will dial down its previously aggressive enforcement approach. Instead, AGs are expected to take the lead in enforcing consumer financial protection laws locally, while the Bureau generally focuses on supervision and education of consumers as to their financial protection rights. Relying primarily on consumer complaint data, the CFPB will limit its enforcement efforts to quantifiable and unavoidable harm to consumers. In addition, the Bureau will no longer rely on broad UDAAP interpretations as an enforcement tool, nor will it pursue actions under expansive and novel legal theories. The reassignment of the Office of Fair Lending and Equal Opportunity and Mulvaney's decision to tap the CFPB's reserves (instead of requesting funding) also appear to demonstrate a dialing down of the Bureau's enforcement efforts. The new CFPB leadership could use the Bureau's other initiatives, such as Project Catalyst and its No-Action Letter policy, to afford companies regulatory and enforcement relief--though Acting Director Mulvaney has not yet signaled such a move.

Rulemaking

According to its new mission statement, the CFPB will now seek to reduce the regulatory burden for CFS-related activities, particularly rules introduced by the previous CFPB leadership under the Bureau's discretionary authority. To that end, the Bureau intends to open new rulemakings to reconsider its payday, prepaid card and HMDA-related rules. The new CFPB leadership may also seek to revisit the Bureau's previous significant rules as part of its five-year "look-back" assessments mandated by the Dodd-Frank Act. The Bureau is nevertheless expected to release a long-anticipated debt collection rule, given the sheer volume of collections complaints and the new leadership's focus on that metric.

Legislation

Changes to the CFPB's structure and supervisory authority are also looming, as lawmakers have sought to revamp the Bureau through the legislative process as well as subject its funding to Congressional appropriation. In December 2017, the Government Accountability Office (GAO) nullified a previous CFPB bulletin targeting dealer markups using disparate impact theories. Other proposed bills, currently in the House or Senate, would impact many of the CFPB's core functions if passed, including its oversight of small-dollar loans, mortgage-related entities and consumer lending generally. Notably, the proposed Home Mortgage Disclosure Adjustment Act would exempt community banks, small credit unions and nonbank mortgage lenders from the expanded HMDA disclosure requirements. Bipartisan joint resolutions in the House and Senate are also aiming to repeal the CFPB's Payday Rule under the Congressional Review Act (CRA). Lawmakers have also been actively trying to enable banks to issue high-interest payday loans (EQUAL Act), as well as to legislatively overturn the Second Circuit's decision in Madden v. Midland Funding to allow lenders to circumvent state interest caps. Finally, the Accountability of Wall Street Executives Act, introduced by certain Democrats, if passed, would permit state AGs to issue subpoenas to investigate national banks. Other pending proposals have sought to revamp the Bureau's leadership structure by transforming it into a multi-member, bipartisan commission--an undercurrent present in recent, key federal cases.

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Core functions and processes

Acting Director Mulvaney has also ordered a comprehensive review of the Bureau, seeking public feedback on ways to improve the CFPB's oversight of regulated entities and enhance consumer pro-tection. The below timeline chronologically reflects the areas subject to such ongoing review:

Requests for information 1 Civil Investigative Demands 2 Administrative adjudications 3 Enforcement processes 4 Supervisory processes 5 External engagements 6 Consumer complaint reporting 7 Rulemaking processes 8 Rules adopted by the CFPB 9 Rules inherited by the CFPB 10 Guidance and implementation 11 Consumer education 12 Consumer inquiries

Publication (2018) Jan. 26 Feb. 5 Feb. 12 Feb. 20 Feb. 26 Mar. 6 Mar. 9 Mar. 21 Mar. 26 Apr. 2 Apr. 9 Apr. 16

*Comments extended by 30 days

Close of comments (2018) Apr. 26* May 7*

May 14* May 21 May 29 Jun. 4 Jun. 7 Jun. 19 Jun. 25 Jul. 2 Jul. 9 Jul. 16

CFS 5

CFPB structural changes (continued)

Overview of comments received

Requests for Information

1

Civil Investigative

Demands

Comments

Provide increased details about CID scope and purpose Limit relevant time period to minimize undue burden Simplify instructions for providing electronically stored data Increase CFPB's response time Limit costs associated with answering a CID (IT standards, volume

of information, legal fees) Make CIDs part of the supervisory process instead of an independent

enforcement initiative to improve scope, focus and include CIDs in routine supervision Require the CFPB to adjudicate a petition to set aside a CID

2

Administrative

adjudications

Resolve enforcement action through federal courts only to increase efficiency

Improve CFPB's enforcement power of CFPB through cease-and-desist orders

Remove bias within the CFPB's administrative adjudication process by resolving contested matters through federal courts only

3

Enforcement

processes

Ensure regulated parties have adequate notice of and an opportunity to comment on relevant rules

Engage in more rulemaking, including notice-and-comment rulemaking

4

Supervisory processes Provide written responses to regulated entities' inquiries instead of

informal answers

Address flaws of TRID rule, including "black hole," zero tolerance on appraisal and credit report fee disclosure

Simplify loan processing requirements

5

External engagements

Provide concrete follow-up to consumer complaints

6 White & Case

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