July 2016 Newsletters

Quarterly Legislative Update

CFPB Targets Auto Loans, Debt Collection, Mortgages, Small-Dollar Lending, and Fair Lending in its Latest Edition of Supervisory Highlights

Where Does the Annual Privacy Notice Requirement Currently Stand?

Quarterly Legislative Update

While it may seem that congress is at a standstill, there are still House and Senate members trying to push through bills – some of which may impact community bankers. Below are some highlights on legislative action in the last quarter:

H.R. 2121: Summaries for the SAFE Transitional Licensing Act of 2015

Provides a temporary license of 120 days to registered loan originator moving from a financial institution to a state-licensed non-bank originator or moving interstate to a state-licensed loan originator in another bank.

Will allow an MLO who is moving from one state to another a grace period in which to obtain registration before acting as an MLO in the new state. This will provide some flexibility for community bankers hiring.

Community Bank Impact: Low

Passed the House on May 23, 2016

H.R. 2901: Flood Insurance Market Parity and Modernization Act

Yes, yet another flood bill. This bill would make technical corrections to the Flood Disaster Protection Act. In particular, it would incorporate a definition of “private flood insurance” as well as make flood insurance requirements applicable to US territories.

Community Bank Impact: Low

Passed House on April 28, 2016

H.R. 3791: To raise the consolidated assets threshold under the small bank holding company policy statement, and for other purposes.

This bill will provide some regulatory relief for smaller bank holding companies. The legislation raises the consolidated asset threshold under Regulation Y from $1 billion to $5 billion. The bill exempts from the leverage and risk-based capital requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act any bank holding company or savings and loan holding company that is subject to the application of such Statement. As a consequence, many more small holding companies would be exempt from the Basel III requirements. (Though Basel III would still apply to bank subsidiaries).

Community Bank Impact: Moderate to High (specifically for holding companies)

Passed House on April 14, 2016

H.R. 1486: TABS Act of 2016

To amend the Consumer Financial Protection Act of 2010 to bring the Bureau of Consumer Financial Protection into the regular appropriations process, and for other purposes. This will make the CFPB more directly accountable to congress and the appropriation process. As of now, the CFPB is not funded through appropriations.

Community Bank Impact: Moderate

Reported by Committee on April 13, 2016

S. 2995: Portfolio Lending and Mortgage Access Act

A bill to amend the Truth in Lending Act to provide a safe harbor from certain requirements related to qualified mortgages for residential mortgage loans held on an originating depository institution's portfolio, and for other purposes. In sum, you would have a QM safe harbor for all portfolio loans held in house so long as they comply with the prepayment penalty limitations. The loan would lose QM status if transferred to another institution.

Community Bank Impact: High

Introduced on May 26, 2016.

S. 2760: SAFE Lending Act of 2016

Amends the EFTA to declare that a remotely created check may only be issued by a person specifically designated in writing by the consumer to the insured deposit institution at which the consumer maintains the account from which the account is drawn. This is aimed at preventing fraud due to unauthorized remotely created checks.

Additionally, TILA would be amended to require registration with the SFPB by a small dollar lender that facilitates, brokers, arranges, or gathers applications for small-dollar consumer credit (of up to $5,000, adjusted for inflation) extended pursuant to an open-end, non-open-end, or other CFPB-determined credit plan meeting specified criteria.

Finally, the EFTA would be amended to prohibit OD fees on general-use prepaid cards as well as authorize the CFPB to prohibit fees for declined transactions involving the card.

Community Banking Impact: Moderate-High

Introduced on April 7, 2016

CFPB Targets Auto Loans, Debt Collection, Mortgages, Small-Dollar Lending, and Fair Lending in its Latest Edition of Supervisory Highlights

The CFPB has released its Summer 2016 Supervisory Highlights report, and while it is mostly based on supervisory activity completed between January 2016 and April 2016, it covers a range of areas, from Small-Dollar Lending to Fair Lending. Here are some of the notable findings:
Automobile Origination
CFPB examiners found that lenders deceptively advertised the benefits of gap coverage by implying that it would fully cover the remaining balance in the event of loss when, in fact, it would only cover amounts below certain LTVs. Examiners also found that telephone scripts regarding loan deferrals failed to disclose that subsequent payments would be applied first to interest earned, which could possibly result in the consumer having to pay more finance charges than originally disclosed.
Debt Collection

The CFPB determined that debt sellers, because of widespread coding errors, sold thousands of debts that did not show that: (1) the accounts were in bankruptcy, (2) the debt sellers had concluded the debts resulted from fraud, or (3) the accounts had already been settled in full. Unsurprisingly, the Bureau deemed this practice to be “unfair.”
In the context of debt collection, examiners found that collectors falsely represented to consumers that a down payment or a checking account was required for a repayment arrangement, when there were no such requirements in the collectors’ policies and procedures.
Mortgage Origination
While the CFPB reports that it found “general compliance” in this area, it did note several areas of concern.
First, at least one institution incorrectly calculated the amount financed on loans with discount credits, resulting in a negative finance charge and an amount financed that ended up exceeding the stated loan amount.
Switching gears to RESPA Section 8, examiners found that institutions had affiliated business arrangements that did not meet RESPA requirements, including requiring the use of an affiliated provider for flood determination and tax services, which is not allowed.
Another common error that was cited in the report is the failure to state all required information in FCRA adverse action notices, which includes: (1) the name, address, and phone number of the credit reporting agency (CRA); (2) a statement that the CRA did not make the decision to take the adverse action; (3) the consumer’s right to obtain a free copy of a consumer report; and (4) the consumer’s right to dispute with the CRA the accuracy or completeness of information.
Finally, Reg. Z requires that the amounts applied to principal and interest be disclosed on interest-only loans, but examiners found creditors who failed to disclose accurately the interest payment because the creditors were including in the principal balance part of the monthly payment that should have been applied to fees financed.
Small-Dollar Lending
When the amount of a preauthorized EFT is going to be different from the prior EFT, Reg. E requires that the payee provide notice of this before the transfer. There’s also an alternative requirement that allows the consumer to choose to be notified only when the transfer differs by more than a certain amount or falls outside a specified range, but the range must be one that could be “anticipated by the consumer.” The CFPB found that some installment loan agreements taking this alternative approach failed to set out acceptable ranges. Examiners determined that the ranges could not be anticipated by the consumer because the descriptions “contained ambiguous or undefined terms” in describing the ranges’ upper and lower limits.
Fair Lending
We often receive questions about which “action taken” to report for conditional approvals, so it’s not surprising that the CFPB found institutions that were not accurately reporting it. For example, examiners found that when applicants withdrew their applications before the credit decision, institutions incorrectly reported as “Application denied” or “File closed for incompleteness” instead of “Application withdrawn.” In other cases, examiners found that institutions were reporting “Application approved but not accepted” instead of “Application denied” when applicants failed to respond to a conditional approval subject to underwriting conditions, and when the institution had not sent either a notice of incompleteness or an adverse action notice under Reg. B.
The prescribed corrective actions varied in some cases, but generally consisted of ceasing the practice in question, increasing training, and revising policies and procedures. Read the full Summer 2016 Supervisory Highlights here.

Where Does the Annual Privacy Notice Requirement Currently Stand?

Now that the CFPB has proposed to amend Reg. P, we’ve gotten another surge of hotline questions on where the law currently stands—do we follow the FAST Act or the Reg. P proposed rule? Do we have to wait until the proposed rule is final? Do we still have to comply with the alternative delivery requirements? When will the proposed rule become final?

By way of background, the Fixing America’s Surface Transportation Act (FAST Act) was signed into law on December 5, 2015 and provided an exemption from the annual privacy notice if two requirements are met:

The bank is not required to provide an opt-out under Reg. P; and
The bank has not made changes to its privacy policy and practices.

Generally speaking, federal law supersedes federal regulations, so the FAST Act trumped Reg. P when it became effective. Now that the CFPB has proposed to amend the Reg. P so that it reflects the new exemption in the FAST Act, there’s less of a risk that examiners will have differing opinions on whether the notice is currently required. Even so, we still recommend you take the conservative approach and contact your regulator to verify what its expectations are with regard to the annual notice. We’ve had at least one member report that their regulator would continue to expect the annual disclosure until the Regulation has been amended.

Another common question is whether the Proposal will eliminate the alternative delivery method that currently exists under Reg. P and the answer is yes. Basically, if the bank could meet the requirements to qualify for the alternative delivery method, it would also meet the requirements under the FAST Act. The CFPB went with a common sense approach and came to the conclusion that if the bank were given the choice, it would choose not to provide the notice at all.

A less common question is whether the bank would be allowed to continue to provide its privacy notice, even if not required, and that’s also a yes. The Proposal indicates that banks may still choose to post privacy notices on their websites or deliver them to customers who request them and, notably, doing this will not affect whether the bank qualifies for the new exception currently or in the future.

A few questions have also come up with regard to timing. The proposed rule actually does make a slight change to the regulation that was not a part of the FAST Act—it establishes certain deadlines by which banks that are exempt from providing the annual notice, but subsequently change their privacy policies, must then provide an updated disclosure to reflect any such privacy changes. This deadline requirement is a bit confusing in its current form and can be found in §1016.5(e)(2) of the proposed rule change. We anticipate its impact will be minimal and the finer points will be ironed out by the time the rule is finalized and made effective.

As for when exactly the rule will be effective, the deadline for comments on the proposed rule is August 11, 2016 and a final rule wouldn’t be effective until 30 days after publication in the Federal Register. So the earliest possible effective date would be sometime in September of this year. 

We’ve recently published a summary on the new Reg. P amendments here. You can also read the full Proposal here.