Posts filed under ‘Advocacy’
In today’s blog I come not to criticize the CFPB, but to praise it.
Earlier this week, it proposed further amendments to its Integrated Disclosure requirements that take effect August 2015. These Dodd-Frank mandated amendments replace the erstwhile Good Faith Estimate with a Loan Estimate. The amendments proposed this week are not big deals. They are tweaks that won’t keep you from cursing Dodd- Frank; but the very fact that the amendments are being proposed speaks volumes about the good side of the CFPB.
Does the CFPB have too much power? You bet It does. Does the Bureau That Never Sleeps pay too little attention to the burdens it is imposing on industry? Absolutely. But a good regulator is like a good umpire: You might disagree with the dimensions of his strike zone but a good umpire like a good regulator approaches regulations and their enforcement in a consistent manner so that everyone knows when they have missed the strike zone. By this standard, the CFPB is doing a great job.
Under the integrated disclosure requirements that take effect in August 2015-remember, they combine the separate disclosures currently mandated under TILA and RESPA-lenders are permitted to redisclose Loan Estimates when a mortgage interest rate is locked. For the redisclosure to be valid, the regulation currently provides that it has to be made “on the day the interest rate is locked.”
When the integrated mortgage proposal was put forward the rate-lock provision did not get all that much attention; the Bureau assumed that requiring same day redisclosure was not a big deal for lenders because they knew the rate they were going to charge. The CFPB could have obstinately refused to reconsider the regulation after it issued them in final form. Instead, it continued to listen to affected industry participants, was convinced that the requirement would be more difficult for lenders to comply with than it originally assumed and is now proposing to amend the final regulation to authorize a revised Loan Estimate to be issued no later than the next business day after the rate is locked.
A second proposed revision announced this week is targeted towards new construction loans. It permits creditors who reasonably expect settlements to occur more than 60 calendar days after initial disclosures have been issued to state on Loan Estimates that they may issue new disclosures.
The political environment is so weighed down with justified cynicism that the CFPB often catches the institutions it regulates off guard by remaining true to its mission. Before it changes a regulation its primary question is: will the change benefit, or at least not diminish, consumer protections? For example, in the preamble to these proposed amendments the CFPB argues that giving lenders until the next business day to redisclose loan estimates will benefit consumers by giving them more time to accept loan offers.
Then there is the intangible benefit of dealing with a regulator that writes and explains regulations more clearly than any other. You may not agree with its mortgage regulations but it has provided material designed to help even the smallest lender comply with them.
I apologize but I am still thinking about the Kansas City Royals crashing into over and under walls to make catches and I can’t get baseball metaphors out of my head. The bottom line is that the CFPB has a consistent strike zone. Its overriding mission is to protect consumers. When commenting on one of its proposals, it is incumbent on industry participants to quantify regulatory burdens with concrete operational examples and to suggest alternatives that will not diminish consumer protections. I will continue to disagree with the parameters of the Bureau’s strike zone but also give it much-deserved credit for the consistency and diligence with which it is carrying out its mission. Here is a link to the proposal which also includes other technical changes..
When I saw that the CFPB was holding a conference on the use of account screening companies by credit unions and banks, I thought I had a slam-dunk for today’s blog. First, I could provide you with news you needed to know to start your day and second, I had a strong opinion as to whether or not the CFPB was engaging in appropriate use of its time, energy and resources. The news is still important, but the issues CFPB raised aren’t as clear-cut as I first thought.
First, the part you need to know. The CFPB is zeroing in on the use by banks and credit unions of what it describes as specialty consumer reporting agencies to determine whether or not to open a checking account or provide membership. As many credit unions know, these companies provide information on a consumer’s check writing and account history. According to Director Cordray:
First, we are concerned about the information accuracy of these reports. Second, we are concerned about people’s ability to access these reports and dispute any incorrect information they may find. Third, we are concerned about the ways in which these reports are being used.
The way the CFPB works, you can assume that regulations and or legal actions will be forthcoming, imposing greater consumer access to these reports and scrutinizing the accuracy of the information provided by these companies.
Here’s why I originally thought the opinion part of this blog was going to be a slam dunk. The CFPB is coming dangerously close to crossing the line between deterring illegal and/or deceptive practices that harm consumers and instead substituting its judgment for that of banks and credit unions. Banks are in business to make money and there is nothing wrong with that. Credit unions are not-for-profit institutions operating in a free market system. They have an obligation to maintain and grow assets if they are going to be around to meet member needs. Contrary to popular belief, accounts cost institutions money. This is why legislators should consider secondary capital reform and why regulators need to be careful with risk-based capital regulations, but those are blogs for other days. In an era when fees are being restricted, a strong argument can be made that it is prudent business practice for financial institutions to figure out if someone can handle an account responsibly before extending the opportunity.
But here is why I am so conflicted about today’s blog. Most importantly, credit unions have a unique ethical and legal obligation to extend banking services to employees and community members looking for access to financial services. The industry must never lose sight of the fact that its creation on the federal level was a direct reflection of the fact that Depression ravaged consumers, first and second generation immigrants and Dust-Belt migrants from rural communities were being intentionally excluded from the financial system. We aren’t in a Great Depression today, but as the CFPB press release noted, there are 10 million people without access to a banking account (this is probably a very conservative estimate).
In addition, whenever I tried to distinguish a community credit union from its banking counterpart down the street, to me, the difference comes down to the extent to which the credit union and its employees are willing to give people a second chance and more affordable products that they may not get at other financial institutions. This does not mean that someone should automatically be given access to loans simply because they have joined a credit union. In addition, credit unions have the authority, and they should use it, to restrict the privileges of a member who has caused them a loss. In the end, all members are entitled to is a share and a vote. But, if the Director is correct, and a substantial number of credit unions are effectively pre-screening individuals for membership, what they are doing runs counter to the very purpose that the credit union charter was created for in the first place.
How can these two conflicted views be reconciled? First, the CFPB prides itself on being a data-driven organization. Let’s find out how widespread the use of these account screening services are and, more importantly, how large a role they are playing in keeping people unbanked. My guess is that these services play a miniscule role in keeping people from opening bank accounts or becoming credit union members. Second, those credit unions that see the need for these services should establish criteria through which they weed out only those individuals who have a history of chronically abusing membership services. I don’t know where exactly this line would be drawn, but common sense tells you there is a distinction between the individual who bounced checks prior to declaring bankruptcy three years ago and the individual who has opened two previous accounts with other credit unions only to close them down after causing those institutions losses that had to be born by the membership.
On that conflicted note, I am going to be taking a long weekend, so I will see you back in the blogosphere on Tuesday. Remember, the views I express are mine alone.
Kudos to the trades. According to the Politico website, assertions made by NAFCU and CUNA have “hit a nerve with merchant associations.” I’ve just been on the retail website and hitting a nerve is a bit of an understatement. The hyperbole being used by the retailers is more analogous to a person getting root canal without anesthetic.
From a tactical standpoint, I respect what the merchants are doing. After all, there a times when a good offense really is a good defense. Consequently, no one should be surprised by suggestions that merchants would somehow all be using EMV technology today but for credit unions that have been reluctant to adopt the technology. Nor should anyone be surprised by the suggestion that merchants already face more than enough liability. No need to point fingers here, we’re victims, too, they argue.
Now for reality. The HomeDepot data breach is the latest example of merchants investing less in consumer protection than they could have to prevent foreseeable harm. According to press reports, employees within the company put their supervisors on notice that the company was vulnerable to cyber attacks, but precious little was done in response to these concerns. The reality is that given the current state of the law, liability for card issuing credit unions and banks is clear cut. Under Regulation E, credit unions have long been strictly liable for any unauthorized consumer debit transactions. In addition, financial institutions have long made consumers whole for unauthorized credit card transactions. When it comes to the maintenance of business accounts, the UCC has been interpreted as imposing an obligation on the part of financial institutions to exercise reasonable care to protect against data breaches caused by electronic transfers.
in contrast, courts have been reluctant to impose liability on merchants for the negligent protection of consumer data. Although there are some recent cases suggesting that this may be changing (See Lone Star Nat. Bank, N.A. v. Heartland Payment Sys., Inc., 729 F.3d 421 (5th Cir. 2013), the reality is that if I’m HomeDepot or a small merchant down the street, when I do the cost-benefit analysis of investing in greater technology to protect consumer privacy or putting that money toward the bottom-line, the arithmetic still says to put it toward the latter.
To be clear, no merchant wants to see their consumer’s data stolen. And it is impossible to say how many data breaches would be prevented if merchants faced greater liability for their lack of due diligence. What is clear is that is that our legal system works best when it places the cost of accidents on the party best positioned to prevent losses from occurring. Right now there is no balance between merchant and bank liability and this has to change.
Does New York need a state level export/import bank? Governor Cuomo thinks so. In a speech yesterday, he proposed creating a state level bank modeled after its controversial federal counterpart. It would provide credit and grants to foreign corporations that want to move to New York and New York companies looking for assistance to increase their exports to foreign markets. Assuming the Governor is re-elected, this proposal will be featured prominently in next year’s Executive Budget proposal.
Well, it’s opening day for legal junkies. The first Monday in October the Supreme Court starts hearing cases it will decide over the 2014-2015 term that ends in June. With the caveat that there may be cases added in the coming weeks and months, here is a look at the cases on the Court’s docket that will have an impact on your operations.
Perez v. Mortgage Bankers Association, No. 13-1041, 134 S. Ct. 2820 (2014).
This case is important to credit unions for two reasons. First, if you employ mortgage originators, then you have been caught in a whirlwind of conflicting administrative rulings in recent years regarding whether your mortgage originators are entitled to overtime pay under the Fair Labor Standards Act. Under the FLSA, so-called non-exempt employees are entitled to overtime when they work more than 40 hours a week. However, there are several exceptions to this requirement. In 2006, the Department of Labor issued an opinion letter stating that mortgage loan originators were exempt from the overtime requirement. In 2010, the DOL issued an “administrative interpretation” reversing that 2006 opinion letter and mandating that employers pay overtime to loan originators.
In this case, the Court will decide at what point an agency’s administrative interpretation has effective become a Rule that can only be changed through the regulatory process by issuing a new rule replete with a comment period. As a result, the Court’s decision in this case will provide further guidance to those of you who employ mortgage originators.
For those of you who don’t employ mortgage originators, the case will provide important guidance about how legally binding those NCUA guidance letters are on your credit unions.
EEOC v. Abercrombie and Fitch Stores, 731 F. 3d 1106 (10th Circuit 2013).
Under Title 7, if you have 15 or more employees, you must agree to reasonable accommodations for employees’ religious beliefs, providing that doing so does not pose an undue hardship on your business. This means, for example, that a teller at your credit union with a sincerely held religious belief is entitled to wear a head scarf even if doing so mandates an exception to your dress code. However, does Title 7 apply where an applicant or employee never informs an employer that she needs a religious accommodation? This is the question that the Court will grapple with in this case. It deals with a Muslim applicant for a sales position who was denied employment because the head scarf she wished to wear for religious reasons conflicted with “the look” that the company wishes to project for its sales people. What makes the case interesting is that the applicant never told the employer that she had to wear the scarf for religious reasons. Your HR people are going to want to pay particular attention to this case since best practice currently dictates that employers not ask about the religious beliefs of applicants during an interview.
Jesinoski v. Countrywide Home Loans, 13-604.
We all know that the Truth in Lending Act grants homeowners a three-day right of rescission on mortgage transactions. Where such a notice is not provided, a borrower has three years “after the date of consummation of the transaction” to bring a lawsuit cancelling the mortgage. This case deals with a narrow but important question: does a borrower exercise his right to rescind the transaction by notifying the creditor in writing within three years of the consummation of the transaction or must he file a lawsuit within three years of the transaction? This may not seem like a big deal, but the Circuit courts have been all over the map on this one.
Young v. United Parcel Service, 12-1226.
Federal law prohibits discrimination against employees because they are pregnant. But, are you discriminating against a pregnant employee by refusing to provide her an accommodation? In this case, the Court will determine if UPS acted properly when it refused to accommodate a pregnant driver’s request that she not be made to lift heavier packages. This case isn’t as clear cut as it sounds. Whereas federal law requires companies to provide reasonable accommodations to disabled persons, the company argues that since pregnant women are not considered disabled, it is not allowed to provide accommodations for pregnancy that would result in pregnant women being treated differently than their non-pregnant peers.
I will, of course, be keeping an eye on this and other cases in the coming months. In the meantime, for those of you who want additional information about the upcoming Court term, a great source of information is the SCOTUS blog.
There are some things we just instinctively know don’t happen. Like we know that a lunatic can’t jump the white house fence with the ease of a drunk teenager diving into a neighbor’s pool and that the same lunatic couldn’t procede to run for more yards on White House than Tom Brady passes for in a Monday Night Football game. Similarly, we know instinctively that credit unions don’t make subprime loans. As a result I’ve seen otherwise studious compliance professionals daydream when the presenter starts talking about subprime lending disclosure requirements.
So you may have been a little surprised by yesterday’s CU Times article suggesting that Navy Federal Credit Union may be setting itself up for Fair Housing examination scrutiny by offering No- Money-Down mortgages with 5% interest rates . The article exemplifies a simmering problem in mortgage regulation: Everyone is against sub prime lending but there is no set definition of what makes a subprime loan a subprime loan. With interest rates continuing near record lows all credit unions and banks for that matter, should double-check if they are making loans that regulators could single out for greater scrutiny.
So what exactly is a subprime loan? First let’s keep in mind that almost all statutes and regulations now tie subprime loans to the APOR. The APOR is generally an average index of comparable loans. As interest rates go down so do the subprime trip wires.
First grab some more coffee. Then here are some of the differing definitions of a subprime loan,
Regulation Z defines a higher-priced mortgage loan as follows:
Higher-priced covered transaction Higher-priced covered transaction means a covered transaction with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, other than a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; by 3.5 or more percentage points for a first-lien covered transaction that is a qualified mortgage under paragraph (e)(5), (e)(6), or (f) of this section; or by 3.5 or more percentage points for a subordinate-lien covered transaction
12 C.F.R. § 1026.43
High-Cost Mortgage which regulation Z defines as The annual percentage rate applicable to the transaction, will exceed the average prime offer rate, as defined in), for a comparable transaction by more than:
(A) 6.5 percentage points for a first-lien transaction,
(B) 8.5 percentage points for a first-lien transaction if the dwelling is personal property and the loan amount is less than $50,00012 C.F.R. § 1026.32
But wait there’s More…The state of course has its own definitions for what constitutes a High Cost Loan in 6-L of the Banking Law and a Sub Prime loan in 6-M.
There are many more examples with which I could sedate you; Keep in mind that each one of these definitions comes with its own disclosure requirements and penalties for noncompliance, and it quickly becomes apparent that what started as a genuine attempt to rein in abusive lending practices has morphed into a regulatory minefield more analogous to a speed trap then a legitimate regulatory framework. While it is true that none of this would matter much but for the fact that interest rates are so low they are, and now a bank or credit union making a 5% mortgage can be scrutinized for making a subprime loan.
Clearly something should be done. Congress could come up with a definition that preempts competing state requirements. Conversely, states could streamline their own subprime definitions so that they are defined in reference to federal law.
Of course, I’ve given up on commonsense changes at least on the federal level, so my suggestion to you is to take a quick look at your mortgage interest rates this morning. You may be making “subprime loans” without even knowing it…
Speaking of subprime loans the New York Times is continuing to sound the alarm against the tactics used by used car dealers to qualify individuals for auto loans, they can’t afford. This morning, it is reporting that: “some of the same dynamics-including the seemingly insatiable demand for loans as the market heats up and the dwindling pool of qualified borrowers that helped precipitate the 2008 mortgage crisis are now playing out, albeit on a smaller scale in the auto loan market”
The paper is reporting this morning that prosecutors in New York, Alabama and Texas are zeroing in on used car dealerships and have discovered hundreds of fraudulent loans given to people with inadequate credit. If you do indirect lending now would be a good time to double check the credit union’s underwriting policies and to make sure that you can document adequate oversight over the dealerships with which you have a relationship..
Today’s blog provides a good example of how well-intentioned people can end up doing more harm than good. The Department of Defense recently proposed expanding the coverage of consumer protection laws that currently apply to pay-day loans, refund anticipation loans and vehicle title loans to most consumer loans covered by the Truth in Lending Act. It would not apply to loans to purchase a vehicle or a home. If the DOD isn’t careful, it will dry up the swamp of creditors who prey on our service members, which of course is a good thing, but do so in a way that will make it more difficult for members of the armed forces to get access to consumer credit, especially from credit unions. Here’s why.
Back in 2007, responding to wide spread reports of predatory lending activities targeting the military, Congress passed the Military Lending Act. The Act empowered the Department of Defense to define and regulate consumer credit products provided to active duty members of the armed forces and their dependents. It gave the military wide discretion in determining what products would be subject to the enhanced regulatory restrictions. Under the regulations promulgated by the DOD, a 36% interest rate cap was placed on refund anticipation loans, pay-day loans, and vehicle title loans. In addition, the cap is calculated based on the Military Annual Percentage Rate (MAPR), which is succinctly summarized by the CFPB to include interest, fees, credit service charges, credit renewal charges, credit insurance premiums and other fees related to credit products sold in connection with the loan. Creditors selling these loans have to provide enhanced disclosures, as well as take affirmative steps to identify eligible consumers.
At the time the legislation was enacted, credit unions and other financial institutions were concerned that if regulations were written too broadly, they would require the wide-spread adoption of two types of consumer loan products: one for the military and one for civilians. However, the final regulations were narrow enough in scope so that they didn’t impact the vast majority of credit unions, most of which would have no desire to offer these types of products in the first place, even if located in states where they were permitted to do so.
The statute as it has been implemented by the DOD made sense, at least until last Friday. The DOD is proposing regulations that would expand the definition of products covered under the statute to include credit cards and other consumer loans covered under the Truth in Lending Act. As a result, credit cards offered to members of the military and their dependents would be subject to a 36% cap calculated by a refined MAPR. To be fair, the military recognizes that a poorly drafted regulation runs the risk of denying mainstream credit to members of the armed forces, so it is refining the MAPR to, for example, exclude customary and reasonable fees. But the calculation of an MAPR would still differ for members of the military and civilians. Furthermore, by expanding the reach of the MLA to most consumer loans except home mortgages and car loans, the military will make it more difficult for credit unions to provide legitimate loans to service members.
In fact, the proposal is such a bad idea that NCUA took the highly unusual step of issuing a statement critical of the proposal the same day it was announced. It pointed out that NCUA’s pay-day lending alternative was designed specifically to fit within the Department’s existing regulations.
Current NCUA regulations allow federal credit unions to offer payday alternative loans with an interest rate of up to 28 percent and an application fee of up to $20. Under the Military Lending Act regulations, consumer credit to covered borrowers is subject to a 36 percent cap on the military annual percentage rate, or military APR, which includes application fees. If these regulations are revised to cover payday alternative loans, the rate and fee for many payday alternative loans would be higher than the military APR cap.
Conversely, our good friends at the bureau that never sleeps, the CFPB, thinks the Department’s proposal is a swell idea. Proponents of the DOD’s approach point out that it is extremely easy to avoid compliance with the MLA. For example, a loan with a 91-day repayment period isn’t classified as a pay-day loan under the regulations, but a 90-day loan could be. They argue that by expanding the size of the jurisdictional net, it will be easier to catch those creditors who prey on members of our armed forces. The problem with larger fishing nets, of course, is that they scoop up everything in their wake, including fish that no one wants to catch in the first place.
Perhaps DOD should consider expanding the definition of the existing products covered under the MLA rather than grabbing everything into its jurisdiction. Another alternative, which it notes in the preamble that it is open to considering, is to exempt certain types of institutions from coverage of the expanded regulations. Considering that federal credit unions are already subject to an interest rate cap on loans and that the vast majority of credit unions are places that members of the military looking for a fair deal should be encouraged to patronize, an exemption makes sense to me.